Full Transcript: Weekly Wrap on AI, Semis, and 250 Years of US Markets
Warren Pies, Meb Faber, Kai Wu, and Ritavan on Markets and Moats
Jack: Welcome to the Excess Returns Weekly Wrap, the show that I’m told by our YouTube commenters has the biggest hair differential between the hosts of anything out there. So—
Matt: We’re a relative hairs trade.
Jack: I am—
Matt: This is terrible. Did they actually say that? Is that actually—
Jack: They did. There was something in there. I am, I’m Jack Forehand, otherwise known as the bald guy to the YouTube commenters, and—
Matt: Better than Jack Forehead. Sorry. I’m really sorry. Didn’t mean to—
Jack: I’m, I’m joined by a man who — I don’t think his barber probably could not pick him out of a lineup at this point, I would say. It’s probably been a while since you’ve been there is what it looks like from these comments.
Matt: You know, you look over those thumbnails. We’re a little bit shorter on the collar in the last week, I’m just saying.
Jack: Oh, you did. You did a trim.
Matt: I did a trim. Okay. Did I tell you what my frigging doctor told me on the annual check-in?
Jack: No.
Matt: I walk into my doctor in whatever, the winter early this year, for the annual physical and the whole thing, and he basically does one of these, like, the look at you. Like, this type of deal. And he’s like, “Well, Matt, I can see from your chart you’ve gained some weight, and I can tell you it’s not just because your hair is longer.” It’s like, you bastard. I didn’t come here to get burned by you. Tell me something good.
Jack: That is good stuff.
Matt: All right. Well, that’s for the hair differential crowd. It is. We...
Jack: Yeah, we’ve probably given them enough. It is funny though — whenever I do your YouTube thumbnail, I still got, like, your headshot from your investment advisor thing. And I think people are like, “Is that the person that’s in the video, or is that not the person that’s in the video?”
Matt: That’s all right. I like keeping people on their toes. That’s what we’re aiming for here. That’s what we’re aiming to do.
Jack: So we should probably get into the clips here. As you can see down the side, we’ve got some really good stuff here. You just completed an interview with Warren Pies. Warren is awesome. Like, I like... I always like listening to our podcast, but it’s like I look forward to the editing when I get this, ‘cause I get to see your interviews with Warren before everyone else. So we’ve got Warren, we’ve got Meb Faber, his great book that’s coming out on July 4th about the history of the American economy and markets.
Matt: Great hats and swag too. A lot of great hats and swag with that Meb.
Jack: Yeah, yeah, yeah. You always know it’s coming. He may or may not be sending us a hat. We’ll see, we’ll see how that plays out. Did you hear — so I don’t wanna derail this too much, but did you hear a story about the book and the guy that, that he sent it to all his podcast guests?
Matt: Not only did I see that, I... He said it, and then they started popping up online. Have you seen people sharing the book in delight and surprise?
Jack: Yeah. Well, no, the story is basically he sent it to all the guests on his podcast. And then he noticed that on Amazon there was one for sale when his book’s not out yet.
Matt: Oh, no.
Jack: And basically he’s like, he’s like, “I’m not gonna name names, but it was one of my VC-based guests.” And then so what he did, which is awesome, like exactly what you or I would’ve done — he bought the book back to shame the person for selling it. So like Meb has reacquired his book, which is — that’s just a great story. I had to get that one in.
Matt: That belongs as a footnote to a chapter for next time Toby writes a book. Toby needs to do like aggressive greenmail and buyback strategies with a footnote to the time Meb bought his own book back. I’m putting that on the list, Toby. Add it for the next one.
Jack: So now that people have heard enough from us, let’s get into the clips. AI is probably the topic everybody’s talking about right now. It’s been driving the market. And Warren has an interesting take on AI. So here’s Warren talking about that.
Warren: So we’re in this middle, the — in the midst of really thinking through what I would say is the open source panic. We really wanted to get to the bottom of that. Some of the charts that we’ve seen floating around within more traditional macro. Our read on that, and we can talk about it, is that that’s not really something to worry about. That’s not an existential threat at this moment in time. The data and analytics that people are pulling from, really when you dig into them, aren’t too worrisome, and so that’s not a worry.
I think if you ask me, the biggest concern is regulatory. What happens — I do think that the messaging around data centers — you could call it the horseshoe effect, you could call it whatever you want — or, you know, like you’re seeing both the left and the right start to say, “Why are we building data centers?” And I mean, I’m somewhat sympathetic to that. I mean, every... My son actually asked me that this weekend. He’s 15, and he was like, “Dad, do you think we should be building data centers?” So I mean, this is becoming an issue. It’s becoming something people are really talking about.
And so I think the messaging — and the guys who run the labs are horrible, horrible spokesmen for this, for this world. They’re not the marketers for a reason. Not at all. And so, you know, if our fate, if the AI fate is left in the hands of Dario and Sam, we’re all screwed, in my opinion, just because they give off a vibe of... Their messaging is objectively scary. Like Dario just says, “You know, we’re just gonna lose a lot of jobs and be ready and hand-wring and be nervous.” And Sam is — I think most people find him to be kind of shady and not trustworthy. And so to me, both of those guys are kind of nice figureheads for this problem out here, the regulatory problem.
I don’t think it’s a today issue. I think it looms out in the future, like that 2028 deadline is kind of important. What kind of progress do we make between then and now? What kind of messaging changes between now and then? Those are all important things, so that’s a big deal.
And then just, I think, market sentiment — but this is usually something that’s... ‘Cause market sentiment sounds so general, but we do... There is a large degree of financing when it comes to the labs and their training budgets and things like that. And so if market sentiment was to sour for some reason, then you could see progress stall out. And I think model progress, as we’ve said, is really the lifeblood of the bull market today, is you need to see models improve, and if models improve, you can envision deeper adoption, enterprise adoption that flows into compute demand.
Jack: What I thought was good about this is everybody’s talking about, you know, what percentage of people are using the best tokens versus the lower tokens, or open source versus closed source. And I think what he said is the issue right now. I think this political thing is the issue. And the way that it’s perceived and the data centers — and I know you know this through your work with Ben and Pershing — like, this is exactly what’s going to determine the future of this, and I think sometimes the rest of us are getting lost in maybe all this other minutiae when that is the thing that we need to be worried about.
Matt: This is the story of can we keep selling this? Can we keep selling these prices, these valuations, all this to the American public? Because if they decide to turn on data centers, we have a different problem. And you brought this up — I think this is in our month-end show too — where we’re talking about how efficiency is going to drive what we do with all this high-priced memory, all this high-priced usage.
So you’re seeing this narrow in now on we know it’s expensive, we’re seeing company investment, we’re seeing them chase it, and we’re also seeing this public pushback. This blowback is mounting. It’s on both sides of the aisle. If we end up capped here with how much memory is out there, how much of this stuff is available, it’s going to be all about efficiency. It’s gonna be about mapping that model progress determining everything for where this is going. It probably doesn’t reach ahead and just go hard one way or the other. We’re gonna just settle in on some balance that we’re not predicting right now, but man, when Warren says, “My 15-year-old comes to me and asks me about this,” this is real.
Jack: Yeah, and you can understand both sides of it. Like, AI is going to exacerbate wealth inequality. I think—
Matt: It already has. All technology has.
Jack: It already has. Yeah. It’s gonna keep doing that, but by the same token, AI is going to be a positive thing for your average person. And so those two things, like, sitting out there — like, this one is gonna make people hate data centers, and this one people are gonna realize, “I can do stuff with this.” And, like, just figuring out the balance between that, ‘cause AI is losing the PR battle right now. There’s no doubt about it. Like, your average person does not see the benefits of this. They don’t like the data centers. Like, this is being lost right now. And like he mentioned, Sam, you know, Dario — these are not the people that should be trying to help you win the PR war.
Matt: Sam, Dario, and Elon are the ones we are now banking on winning the PR battle to sell this narrative.
Jack: Right, and they’re trying to, like, get regulatory capture by making fears worse than they are. They’re trying to do all kinds of other things, and, like, they’re not doing a good job as the PR people. But I think Warren’s point is so important. I think this is what’s gonna determine what happens with AI.
Matt: What’s fascinating about what Warren also said here is he sees more of this playing out still 2027, I think he said. Might have been 2028. Still a little bit in the future. That’s different from what we’ve been seeing and what Ben Hunt’s been talking about as this story’s coming home to roost in the midterms. Now, the layover effect might not be that it really starts to affect us until we’re well into next year, but the reality is these stories are through the roof. I’ve been writing about it. I’ve got a couple things on Panoptica about this, too, where it’s this pushback is real. It’s probably louder than most investors think if they’re just looking at the stock charts.
Jack: So let’s bring in the positivity here. 250 years of America, incredible economic growth, incredible performing stock market. Here’s Meb Faber talking about some of that.
Meb: I really wanted to add a postscript to the book and be like, you know, “PS,” end notes like, “Well, just to point out, I don’t wanna mark the top of this cycle by putting out this very patriotic and optimistic book.” You know, look, it’s no secret that we believe that the broad US stock market is very expensive. Doesn’t mean it can’t keep going up. There’s plenty of other great assets around the world — global stocks, REITs, bonds, you know, real assets like TIPS and commodities. But also, other stocks within the US look great. You don’t have to pick market cap weighted, right? But that’s the long history, and I think it’s a feature, not a bug, right?
You know, how many of us look around the last couple years, the last decade, we’re like, “Man, look at this just dumb stuff people are doing with their money.” They’re buying a bunch of NFTs. They’re, you know, buying stocks that trade at 100 times revenue. All these things that which on average you see during these romping, stomping bull markets. You know, bear markets help to clean that out quite a bit, you know? People tend to pull in the reins a bit and stop doing really speculative, dumb stuff when they’ve lost half their money. You know, it’s time to get serious, right? It feels like when you got a mortgage, you got some kids, and, oh, by the way, there’s a recession and you lost your job, on and on. You know, people tend to stop YOLOing a little more when that happens.
But as you mentioned, it’s been a long time, you know. We wrote one of my favorite papers the last few years ago was “The Bear Market in Diversification,” just talking about how special this period has been for US stocks since 2009. And we started to see a shift in the last couple years. We’ve seen a lot of other ideas start to really accelerate and start to perform. So I think there’s nothing to be afraid of bear markets. I think if you’re young, hey, that’s the best thing that happened to you. Get a nice fat 50% decline. Good for you if you’re in your 20s, 30s, even your 40s. If you’re probably 80, 90, you know, maybe not so much. But I think it’s a natural part of it, and it’s the cycle of, you know, the cycle of life.
Jack: What was interesting about this clip is this is the balance between sort of this long term — the US has been amazing, you know, all the innovation, the US economy has been amazing — and valuation. So that’s why I brought this clip in, because all of that, those great things we would expect to continue, at least for the foreseeable future. But you do have this other part of the equation, which is valuations do matter over... I mean, obviously we’re not looking at a 250-year timeframe when we’re investing. So valuations do matter.
Matt: They matter, and they’re coming home. They’re coming home to roost at some point where they’re gonna matter for a chunk of your life. The other part of this that he says that I absolutely love — the planner hat on me just gets all excited — and it’s this idea that your biggest drawdown, he doesn’t say this specifically here, but your biggest drawdown is always in front of you if you’re doing this right. And the problem is when you lay that over your timeline.
So if you’ve been invested since 1980 and you’ve had drawdowns, it sucked a couple times. But if you were, you know, 40 years old in the ‘80s, where you are now, it’s probably a good time to take some risk off the table. And if you’re 20 or you’re 30 or you’re 40 years old now and you’re accumulating assets, you wanna be smart, because when these valuation resets happen, they take time, they clear stuff out, and you get the benefit of it on the other side. What you don’t want is to be 80 years old after this run, you know, and just assuming that this is what you have. I don’t know what even you’re doing with it if you’ve accumulated all this wealth or you’re piling it all up. You have some plan for it. You don’t wanna see that get cut in half. Don’t be dumb about this.
Jack: But my big challenge here, Matt, is how do I come up with a negative YouTube thumbnail for 250 years of prosperity? You know, we gotta get people to click on this thing.
Matt: Well, you say, “Did 250 years of prosperity just end?” Or we have to like—
Jack: Yeah, yeah. I was thinking—
Matt: The bull’s running off the cliff. Like, you know?
Jack: I was thinking like “your children will pay for your prosperity” is a good way to go.
Matt: Oh, there you go.
Jack: Yeah. Yeah. Like, take that angle. Like, you know, take it and reverse it. Like, the price will be paid down the road for all this prosperity. I don’t know. I gotta figure it out. I may just have to. I mean, we’re literally releasing it on July the 4th, so I think I’m gonna have to just go positive with the YouTube thumbnail and not try to dig some negative story out of this. I don’t know.
Matt: I don’t know.
Jack: I’m going full American flag.
Matt: Go full American flag. Yeah. Let’s go all the way. Let’s, um... I mean, you wanna just fly down to the White House, and we’ll record a live banner there that we can put out. What do you think?
Jack: We’ll be, like, taken away by security from the White House, which is probably, probably not what we—
Matt: You wanna climb a skyscraper with a banner? See those people—
Jack: I saw that today, yeah. Did you see the guy — the guy proposed, too. Like, they came down to the lower part, then he proposed, like, in the... So, I mean, this obviously ends badly for them, but it’s quite a show they’re putting on.
Matt: The order of experience I had with this event was seeing it online, and I think it was Tony Greer basically tweeting out, like, “Oh, they just beat me to it. I was gonna do that,” something like that. And then my wife’s reaction was, “Who would do that in this heat?” ‘Cause it’s very hot. And then everybody’s like, “Oh, they got engaged. That’s adorable. I hope security wasn’t too mean to them.” Still don’t know how they got up there. But don’t know how markets got to these valuations either, but here we are. Maybe somebody writes a book about this, too.
Jack: So on to semis. And semis has been the talk of investing right now because the returns have been ridiculous. People are arguing it’s a cyclical industry, it’s not a cyclical industry — what’s going on here? So here’s Warren Pies talking about that.
Warren: And that’s like the big question, and I’m not smart enough to answer it. But I am smart enough to acknowledge that there are some things happening under the surface of the market that suggest the way these things are being priced — suggests that investors are treating them as at least less cyclical than they’ve been historically. And this is a big deal for me in the way the overall market gets valued.
So we came into the year bullish. We’re bullish. We’ve been bullish, and one of the big bear arguments to talk about things that create anxiety has been valuations, and we’ve talked about this at — I don’t know if I talked on this broadcast. I think I might have. But one of the reasons we have not seen overvaluation in this market is that we have massive margin expansion out of non-cyclical pockets of the market. And when you get margin expansion from non-cyclical pockets of the market, you should expect to see multiples expand. And when we adjust for everything, the market has been pretty rational in how it’s done that.
The semi case is maybe the first bit of exuberance that we’re seeing, though. So semis, traditionally the most cyclical tech industry. Therefore, when margins expand — if you look at a historic chart of margins for the semi group in price to sales multiple, when margins hit a cycle peak, price to sales starts going down to a cycle trough. You don’t wanna pay up for peak cycle margins in this cyclical type of group. That tendency has totally broken down. We’ve had margins explode, obviously, out of the semi group. You can see Micron. You can see Nvidia. You can see all these companies where bottlenecks or whatever have exploded margins. And instead of getting like price to sales for the group going way down, you know, to one or two times, price to sales has exploded.
So for us, this is one of those things where how do we factor this into the overall market valuation? ‘Cause semis are like twenty percent of the market now, and it’s not a small factor when you’re trying to do your overall top-down analysis. So they are priced right now — the answer to the question is they are priced right now like they won’t be cyclical. So I think there’s a knee-jerk kind of feeling, because of history and everything I laid out, to fade, say this is a bubble — probably is the beginning of a bubble in some spots for sure, in this very specific part of our market. I don’t think the overall market’s a bubble, but there’s always air pockets of exuberance, and I think this is one.
But again, going back to the ‘90s, I don’t think we’re... This cycle is going to be long. It’s gonna be the longest cycle we’ve ever seen. And so there is... I’m not buying into the sci-fi world where semis are just no longer cyclical, but I’m also not buying the idea that this is close to a cycle top, and that we should be expecting margin growth to slow down anytime soon.
Jack: This is the interesting thing about this — it’s the interesting thing to some degree about all cyclical industries — is typically, and people don’t... It’s counterintuitive to people, but typically in history when margins are expanding and valuations are low, you don’t wanna own. And that, like, that makes no sense to anybody, because they’re like, “Wait a second. Margins are expanding, or margins are good, valuations look really cheap, and you don’t wanna own them.” And that’s because you typically are at the peak at that point. So the question with semis is, is the world changed and that’s not the case anymore? Or is this just a cyclical industry that’s at a cyclical top?
Matt: This whole idea with any cyclical industries — and I think it’s the Molodovsky effect — where it’s basically you wanna pay for them when they’re at really rich, insane PEs, which is usually in the trough, and you wanna sell them when they’re at really attractive low PEs and growth is booming, because it usually means they’re at the peak. And there’s a counter-rational adjustment that you have to make for these companies when you think of them.
The other part that Warren says inside of this interview as it relates to it — and this is the part that I’m scared of, because I’m in the camp that these are still cyclical industries. They just have a different type of growth-oriented moat that’s around them that’s at least temporary. Maybe it matters forever. But it’s just they’ve re-rated higher. I’m giving them that. I’m conceding that, but I still think they’re cyclical to a degree. He talked about the ‘90s. Did you hear the month count stat that he threw out with semis in the ‘90s?
Jack: I did, but I can’t repeat it.
Matt: That’s okay. I’m gonna say I might have this slightly off ‘cause it was... it’s from the interview itself. 63 months is the run in the ‘90s that we go through where we experience this. We’re 30-something months into this, and there were some big declines in the ‘90s. There was some other stuff. It’s not to say the historical analog is perfect. It’s just to say this painting of semis as not being cyclical, of having growth as the moat, of being able to do this — it feels crazy now. We’re about half the duration of we got in a prior bubble with this stuff, and it’s really hard to hold that thought in your head when you’re seeing some of the prices and valuations right now and trying to map this growth rate forward.
Jack: And the next logical progression from semis is obviously the Ottoman Empire. So we’re gonna get this clip from Kai Wu and Ritavan, where we discuss the Ottoman Empire.
Matt: Before you play this clip — not only do we discuss the Ottoman Empire, but what’s fascinating about Ritavan and this new book that he has out is it’s all about corporate strategy in this environment, and, I mean, this goes hand-in-hand especially with the stuff Warren’s talking about here.
Jack: He’s really good. Like, his stuff is really... Like, this is an excellent, excellent episode.
Matt: Yeah...
Jack: It goes beyond investing, which we don’t do that much, but it’s an excellent, excellent episode. It’s really good.
Matt: Listen to the episode, because we take what he learned from his first book called Data Impact, which was all about basically what businesses do in an age of data — almost like a chapter or something about what to do with AI. That became the focal point of all the speeches and other things that he gave when he presented on the book. Turns into this entire book that’s about corporate strategy for companies grappling with this stuff. So yeah. What do you say, Jack? Let’s roll that clip.
Jack: So let’s play the clip, and then I’m gonna punt, and Matt’s gonna explain what’s going on with the Ottoman Empire.
Kai: What I’m thinking about is this, which is the moat — go back to that analogy — the moat is, you know, is dependent on the game you’re playing, right? So in a certain setting, for example, code can be a moat, right? If you’re the only person who possesses the ability to code, then you have a moat, or you as a company have a moat. You know, the obvious analogy today is that, you know, the world has shifted to a world where AI can write code very cheaply and quickly. And so anyone can vibe code or has access to advanced coding tools. So the game has changed, and so perhaps that moat is no longer a moat in the world of AI.
And so I think, you know, as we step back just from this one particular case, you know, you have to be very thoughtful about what game are you playing. In other words, what system, to take your language, Ritavan, is currently the dominant paradigm. And then the question becoming is what is a scarce asset? What are the, you know, the moats in that setting? And I think the context matters a lot. And so I think what’s really interesting about your work is, you know, is it kind of forces you as an investor to think through, you know, how is the world changing and what other systems are available to businesses, you know, both through the technology and other factors.
And then you ask the second order question, which is for each company, as you kind of go through the list, what assets do they possess today? Are they optimized for the system A or system B? Because obviously as an investor, you’re looking to kind of front run change and look for companies that, you know, might be priced based on, you know, the past paradigm where — but other investors in the market might be missing, you know, how their assets can actually be quite valuable in the future, right?
So like, you know, we saw the other day, like, I think it was Getty, right? Their stock rerated because, you know, they made a deal, I think, with one of the AI labs. But the idea just being that, hey, look, proprietary data could be really valuable for training, right? So that’s information that was, of course, available and valuable in the past, but perhaps is even more valuable in a world of AI where it can be used as an input to an AI model. So I think looking for analogies like that, situations like that, could be a helpful, like, framework for investors.
Ritavan: Yeah. Let me actually just jump in with a historical example, because, you know, the moat word obviously comes from fortresses and protecting a, you know, a physical fort. And there is this interesting historical setting where — this is during the Ottoman Empire. There’s an Albanian prince who’s been, you know, taken young, Gjergj Kastrioti, and he’s sort of, you know, trained by the Ottomans, becomes a cavalry commander. They give him a Turkish title, which is Iskender Beg. And then at some point they send him back to run that part of what was then — you know, what is now Albania, but that region back then. And at some point he figures out, “Okay, I think I’d rather fight for my folks,” and, you know, breaks away from the Ottomans.
And, you know, that region and all the regions around what was the Ottoman Empire then really struggled with the Ottomans, because they just had these vast armies, and they were able to marshal these resources, and people could — you know, you couldn’t sort of hold out against that.
And what Skanderbeg then does interestingly is he’s got his main fortress. The Ottomans send a massive army. They lay siege to that fortress. And now comes the paradigm change, because it’s the same fortress, the same armies — everything is the same, right? So if you go by your checklist, you’ve ticked all your boxes, and actually the outcome is very clear, which is the Ottomans eventually, you know, have a successful siege and they take over the fortress.
What Skanderbeg does now is suddenly invert the paradigm, right, in some ways. So he says the fortress was seen to be — like it had to have a big moat, tall walls, et cetera, and the idea was you lock yourself in the fortress, you let the army lay siege, and you try to outlast the siege. Skanderbeg instead leaves a very small garrison inside the fort, gets the hell out before the Ottomans arrive, and hides in nearby forests and hills. The Ottomans now lay siege, and now suddenly the vast Ottoman army that can actually be modularized and moved around, et cetera, on an open battlefield is fixed around the fort, and then he just keeps harassing them night after night after night.
And I think this is exactly my point, which is, if you have a checklist, a checklist is a list of binary items that has been abstracted out from a causal model of how reality is supposed to function. If you change that causal model, right — if you change the rules of the game, if you change the game itself — that checklist per se is useless, because the checklist is just an artifact.
Jack: So Matt, as I said here, I’m gonna let you take the lead on this one ‘cause I don’t have too many insights on the Ottoman Empire, but I will have some stuff, so I’ll let you go first.
Matt: I have very few insights on the Ottoman Empire. I do know that Türkiye beat the USA in the last stage of the group match, and, you know, anybody near the Ottoman Empire is on my, you know, nasty list right now for this stage of the game.
Jack: I didn’t know the Türkiye thing. When did that change? Do we know?
Matt: I did end up looking it up online ‘cause I wanted to know. Same thing with, you know, the Democratic Republic of the Congo, or whatever the DR stands for, that everybody’s calling it DR Congo, and I’m going, “Is that okay to say?” Probably not, but the announcers are all saying it, so I’m going, “Ah, I don’t really know.” It feels wrong. I feel like I shouldn’t be now saying it on YouTube.
But this is the idea from Ritavan’s book, is that you basically move, as industries progress, from playing one game to a next game. And so it’s kinda like I’m playing checkers with you, then I realize, oh, there’s a chess game over there. I’ve gotten more advanced. Now I’m playing chess. Then I realize there’s a Go game over there. Now I leave and I’m playing that. And who you’re competing with, they might still be playing the old game, and you have to be aware of this. So the idea of the system gambit is sometimes you have to sacrifice in the game you’re currently playing to go play at the new game.
And with this AI adoption cycle that he sees us as we’re in right now, he lays out in the book a number of systems using examples, many of them historical, many of them from things like conflicts, where somebody plays a type of move to go, “Oh, I’m not playing the same game that I started off playing right here.” And how do corporations shift that strategy in a dynamic environment like what we’re in right now?
So what’s really cool inside of this piece, and what Kai’s talking about, is how this is that code is the moat idea that Kai’s been talking about, where you start to realize the actual thing you do as a business, what can AI do to make that smarter, and then all of a sudden stop treating your business the way you were treating it before AI. You now have to treat it in a totally different way. I know you can relate to this with all the stuff we’re doing with Excess Returns especially.
Jack: Yeah, it’s interesting. I was just thinking about the castle thing, and I’m obviously gonna analyze this completely wrong, but, like, the idea that basically they were in the castle and the castle was a weakness, and then they got out of the castle and they turned it... They basically flipped it. And I was thinking about that, ‘cause I’ve had to build some investment strategies with AI recently. I had to take some stuff we had and, like, carry it to a different universe. And one of the things I realized in that is, like, I was worried. Like, basically as someone who can construct investment strategies, like, code is just gonna do all that. You’re just gonna say, “Build the investment strategy,” and it’s done.
But that’s not the way it’s worked out at all. Like, it’s worked where code has become — is flipped basically, and has become leverage to make me better at what I’m doing. Because if you just said, like, at the beginning, if you just say to the AI, “Take this thing and regenerate it,” like, there’s all kinds of problems with that. And those are the types of problems you don’t understand unless you’ve been doing this for a really, really long period of time. And so I’ve been able to flip this now where, like, I can add value to it, but I can leverage myself dramatically by the ability for it to take the value and turn it into, like, quick results. So I have no idea if that’s anything to do with the clip, but it’s just something that I’ve been seeing recently that I think is relevant.
Matt: Well, it does, because the gambit in this becomes your knowledge of the thing you were doing previously. You realize to just say, “Hey, help me copy/paste this to a new location,” is actually more problematic than you seeing, “I need to — you to leverage what I understand and what you’re capable of doing before we go to the next place.” Because if I just try to order you on what to do, it’s actually counterproductive to the whole process.
And in the analogy, what he literally says is they’re being invaded, they know they can’t defend the walls of the fortress, so they go and they hide in the hills. They let the fortress be overtaken, or the castle be overtaken, pretty easily without much resistance, but then guerrilla warfare from outside in the woods where now they have an advantage. A lot like the Colonel Blotto problem that Mauboussin writes about. There’s a lot of stuff like this where you just need to pick your battles in the right domain.
But the example you gave is actually kind of perfect, because you’re saying with this new tool set, I need to not... Like, I was playing checkers before, now I’m playing chess. My opponents might not realize that we’ve shifted games. That creates the opportunity. That step function has moved several times, even in the last 18 months here, and it’s pretty wild.
Jack: Yeah. Hopefully we’re doing the same thing with the podcast as well in terms of the way we’re thinking this through.
So let’s go to the last clip here, ‘cause we are running out of time, as we — you and I always go over. This is a really interesting one. This is US versus international. And this is talking about the greatness of the US, and it’s interesting how far this chart just goes back. I think it goes back to 1800. So here’s Meb talking about that.
Meb: Hindsight bias. No. Look, I mean, the reality is you gotta remember, like even at the start of the 20th century, you look at where the US was — I don’t think it was preordained that this is guaranteed to happen. And if you were to, like, if you were to horse race and were to place your bets on countries that, you know, “Hey, this is where I’m putting my money for the next 100 years,” you know, there’s probably a dozen choices that might’ve been interesting.
And even during the 20th century — like this is the crazy part I love talking about — the US didn’t hold the crown, right? You had Japan being the largest stock market. You told someone in Japan in the ‘80s like, “Hey, we’re gonna teleport 50 years in the future, and your stock market’s gonna go from the largest in the world to 5% of the world,” they would be like, “You’re crazy.” And likewise, if you were to tell people — if you were having a pint in a pub in the UK with a bunch of Brits and say, “Hey guys, this Korean War that just ended, you know, they’re gonna chop the country in half, and the bottom half is gonna be bigger than your stock market in 50 years,” they’d be like, “You’ve lost your mind,” right? Like, what? But both of these things have happened.
And so, you know, I think if you look at the long history of markets and countries, you know, it’s tough. It’s tough to pick the right horse. I mean, look, the US has all the tailwinds and has had all of them for a long time. I mean, just you go down the list and check. But it’s not guaranteed that that will always be in place forever. You know, it’s been a special place. It’s had a ton going for it. I think it’s unique. I think it’s the best country in the world, on and on. But, you know, there’s a lot of billions of people around the world that would also like to be where we are, right? It’s still the number one — despite all the, you know, political discourse we read, it’s still by far the number one country that everyone wants to move to, for a lot of reasons.
And so if you look at a lot of the, you know, metrics — number of Nobel laureates, R&D spend, you know, on and on — you know, the US is definitely still numero uno. VC money — it just... Like, some of the stats on VC investing, also things like market cap of companies in the US versus places like Europe, and you’re just like, “Euro bros, what the hell are you guys doing? Like, how are you guys falling so far behind? Like, what is happening?” Like, great that we’re... And maybe we’re wasting it, but everything — energy production, on and on.
And so, that all having been said, you know, as a percentage of world GDP, US is only a quarter. You know, so there is quite a big disconnect between US and, um... But if you were to like go out 50 years and say, “Hey, Matt, do you think the US is gonna be two-thirds world market cap?” I would say no. I would fully expect countries like China and India to, you know, accelerate and get a bigger piece of the pie. Like, how could they not? But, you know, would I expect the US to go from two-thirds world market cap to five like Japan did? No. No, I wouldn’t. So still really bullish over the long term, but you can’t muck it up, you know, that’s for sure. And we’re — who knows? We’ll see.
Jack: This is interesting because, first of all, it just shows how great, like, an economic engine the US has been. The stock market, like everything about the US, the innovation — it just shows the result of all that stuff. And to be honest, I have no idea how you build a chart of that in 1800, so I can’t... You know, what’s in that chart for US, what’s in that chart for international — like, I can’t evaluate that. Whether it’s someone in the comments is gonna be like, “There was only this and this is... You can’t even, like, you can’t evaluate this based on this.” But the idea is the US has done very, very, very well.
And I... This made me think — like, we think about that US versus international in short-term timeframes, and I even mean like decades by that. But it also made me like broaden that out, and he said like it was not preordained that this would happen to the US. And I kinda think about that in the future, and it’s not preordained now that, you know, the next 100-plus years will be dominated by the US. And I just think about like what that means in terms of other countries and what we’re doing and how things are changing. I don’t have any great answers on it, but it just put it in like a context of — you know, most investors think in like a one-year timeframe. Like, quants like us think in a decades timeframe, but this is like a completely different timeframe to think it through.
Matt: It makes me think of Rupert Mitchell and his chart of truth, ‘cause he’s always tacking back to this on the shorter gyrations on this stat.
Jack: This is like the chart of truth since 1800 or something.
Matt: This is the ultimate chart of truth. This is the chart of truths. I can’t wait. I want... Rupert, you’re coming back on. We’re talking about this and we’re talking about that just to straight up—
Jack: The problem is if Rupert’s waiting for that international line to cross the US one in this one, he’s not gonna see a signal for a while, I don’t think.
Matt: Okay. And to your point, this is the second thing here — so I’m in full agreement. Basically from 1800 to 1950, I don’t really know what to do with what even is there. I’m scared to ask. But we touch on this in the interview, in the conversation with Meb on this. There’s kind of this amazing thing that from the advent and the invention of the joint stock companies, what happens is trade and industrialization starts to expand around the globe. America kind of becomes this weird sandbox for all these new entities. And structure’s the same, but America becomes a sandbox for these new entities, new ventures, both as we expand the territory, but then as we expand the global footprint. And of course, that takes us right up to, like, the Bretton Woods stuff. That takes us right up to the world wars and settling global trade, and all the things that have set the scope for globalization post, you know, mid-1940s on.
So what’s interesting — and what I hate that this puts in my head is the damn SpaceX thing, or the damn space and time. And I start to think about, yeah, this might... So this goes, maybe this goes for the rest of our lifetime in whatever gyrations, but the next great advancement on the expanse of this thing is like, well, where else do we look? Where are the... Where are we taking these structures and implying them somewhere? Maybe it’s virtual. Maybe this is where the LLMs and crypto and everything else takes over, and we invent a new space to do this. It’s digital real estate, and we’re all buying skins in whatever Fortnite universe hellscape that I’m gonna find myself in when I’m 80 years old.
Jack: Well, the good news is, first of all, in 250 years, obviously we’re all gonna be alive now due to all these advancements in AI. That seems obvious at this point.
Matt: But 300 years, I’ll be on this show with you. We’ll be talking about the look then.
Jack: Even beyond that, I think we’ll probably be looking at the Earth-Mars chart at that point and talking about, like, the dominance of Earth over Mars or Mars over Earth, you know, and how that relationship’s gonna be. I think it’s gonna be the other way, right?
Matt: That’s the way this is supposed to go. It’s gonna be Mars that’s dominating. Well, yeah, because—
Jack: It’ll be the upstart.
Matt: Yeah, it’s gotta be the upstart, and that’s what... This whole thing has me thinking of where’s the next upstart, and not in the pure VC way. But where’s the new place where we go to innovate on the next round of ideas? Because I think that’s what humans keep doing.
Jack: Can you imagine if international diversification becomes Earth versus Mars?
Matt: I’m like, “This is where this is going.” That’s the direction you’re heading. Like, right?
Jack: With clients. Like—
Matt: This is the poor advisor of the future. Which is why in all the great sci-fi novels it becomes an AI or something else, right? Like in Ender’s Game, it becomes the computer. It’s all series, and inside of that is the investment advisor is running the money separately and whatever. But this is where this goes. All the venture goes into space. It’s very strange. It’s very speculative. The Wild West era, gonna be completely bonkers. New snake oil. Can’t wait.
Jack: So on that note, I’m in a third floor office and didn’t realize that the AC vents are closed.
Matt: Oh, no.
Jack: So the sweat has been increasing dramatically throughout this. I mean, it’s gotta be 100 up here, I think, at this point or something. But I’m gonna let you bring us home, so I’m gonna go jump in a lake or something.
Matt: Please go jump in a cool lake. At least take a cold shower or something. For those of you watching along who have made it through another... I’m sure this was a 30-minute episode by the time we edit the clips in. Clearly we hit our mark we set out. Go to the Substack, get signed up. Can’t stress enough. We’re putting so much cool stuff over there. You wanna get in on it. Wherever you’re watching this, thank you very much. Like, comment, subscribe, all the things below. We’re out.