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Podcasts from Confluence Investment Management LLC, featuring the periodic Confluence of Ideas series, two bi-weekly series: the Asset Allocation Bi-Weekly and the Bi-Weekly Geopolitical Report (new episodes posted on alternating Mondays), and a new monthly Q&A format called the Confluence Mailbag.
Hello, and welcome to the tenth episode of the Confluence Mailbag Podcast. I'm Bill O'Grady, advisory director at Confluence Investment Management. And joining me today, as always, Mark Keller, CEO and CIO of Confluence. We're recording this podcast on May 19. The idea behind this podcast is to replicate question and answer sessions Mark and I have participated in for the past twenty five years.
Bill O'Grady:If you'd like to submit a question, email us at mailbag@Confluenceim.com. Each month, we select four to five the most common provocative and interesting questions we receive. Mark and I will address them. So without further ado, let's tackle the first one. I know Confluence has been forecasting an end to US hegemony, but what does this really mean?
Bill O'Grady:Can you elaborate on what scenarios you see developing? Well, we feel pretty confident and have felt confident for a while that the American way of hegemony that was practiced after the second World War was becoming politically impossible to maintain, and even to some extent becoming physically impossible to maintain. But what's unknown is what follows. And for a long time, I thought we would end up with a what Ian Bremmer refers to as a g zero world where no one's in charge and it becomes kind of a free for all. I'm not entirely sure that's what we're going to see.
Bill O'Grady:One element of this is is that The US may, on a relative basis, be in decline, but on an absolute basis, it's still formidable power, both financially and militarily and economically. One scenario that we saw maybe develop out of The US China talks of last week was a new bipolar g two type world. The problem is is that I just don't think China's interested in global responsibilities. It pretty much just wants to take and and not give. The other thing is is that other nations may not be inclined to pair off.
Bill O'Grady:You know, the Cold War had an ideological element where, you know, if you sided with the communists, you had a certain view of human nature. And if you sided with democratic capitalism, you had another view of human nature. This one really doesn't lend itself to that. This is really more of a nineteenth century type world and not and a non ideological one. And and so one of the problems has developed if you're, you know, a middle power is is Mark Carney, the prime minister of Canada, remarked at Davos, neither side is really all that attractive and nor appears incentivized to make themselves attractive.
Bill O'Grady:You know? So we were there's a big shock in the way president Trump behaves toward allies, but but the reality is is that this would not have shocked someone prior to the second World War. What the anomaly was was the American way of hegemony after the second World War. So we could end up with a multiple polar world. You know, Mark Carney talked about a middle powers coalition.
Bill O'Grady:I just don't know how much that's possible. It's not gonna be obvious who's gonna protect the sea lanes and who's gonna provide the the reserve asset for global financial markets, and and that's what we're watching. But if we have multipolarity, it's a much smaller, regionalized world and with higher levels of prices.
Mark Keller:Well, you stole my line when you said nineteenth century
Bill O'Grady:because that's Being a member of that, I
Mark Keller:can understand. Yeah. Yeah. Exactly. Some of my friends say I was born in the wrong century.
Mark Keller:It is it's a very nineteenth century situation. Yeah. Non ideological people, that is countries striving for economic power and economic dominance. In this case, you know, The US is Great Britain, you know, China is Germany. And as this is not an original thought, by the way, the next thing that's coming, but the EU is the Austria Austro Hungarian Empire.
Mark Keller:And I often thought, what would have happened if, you know, Prince Ips had not shot the archduke and and we never had a war, we'd have we'd have competing economic powers. And we still I think Austria, Hungarian empire still would have broken up because it
Bill O'Grady:was just Yeah. It was it was a patchwork.
Mark Keller:It was it was a patchwork.
Bill O'Grady:Or it would have gotten bigger.
Mark Keller:Terribly uncoordinated. It's possible
Bill O'Grady:that they would absorbed Serbia and be become That's true. Much more reliable power. I mean
Mark Keller:And and the EU could do something like that too, although it's in its present form terribly unwieldy. But I I kind of I mean, I'm in your camp here that that that this is very nineteenth century, but doesn't necessarily have to end in the war, the so called Thucydides trap, which, you know, apparently
Bill O'Grady:Well, the the one
Mark Keller:thing folks are are are worried about even,
Bill O'Grady:even Xi Jinping. So but but it's it seems to me that it doesn't have to end that way. In a world with thermonuclear weapons, it's really difficult to end wars because you can't make, you know, the other side capitulate. You can't force them to capitulate. I mean, we won the Cold War basically because the Soviet Union imploded on itself.
Bill O'Grady:And the lesson learned from the Chinese Communist Party was Gorbachev was a fool. And if he'd had just been brutal, it hung together. And that was why the Chinese acted as they did at Tiananmen Square. We are in a in a nineteenth century world, and we have lots of countries and people in those countries that frankly benefited from American hegemony as it was practiced after the Second World War, and they don't want to see it go away. And I don't blame them.
Mark Keller:No. No. Who would want that to go away where someone else is basically keeping the peace and greasing the skids for economic development and all you gotta do is, you know, promote exports. Yep. I mean, it's it's a great world.
Mark Keller:It it's not going to be as easy to pull that off. I'll I'll point out something else. Both The US and China, the two major players, are currently run by leaders who like to throw their weight around, both internally, but especially externally. And so we're talking about hegemony here. And both were preceded by quite a few leaders who did not throw their weight around the same way, tried to work within established norms.
Mark Keller:What's gonna be interesting to me is after both of these two strongmen type of leaders leave the stage, he's being a strong man in his own way, you know, in his own culture, of course. But once they leave the stage, you know, it seems hard to believe that we go all the way back to kind of the so called rules based order that everyone enjoyed before then. But we probably are somewhere between that and kind of this extraordinary throwing your weight around that that we've been experiencing. I I think it's gonna we're gonna have a different sort of a character, I think, than what we've got now. And I'm just I I think the end of the day is you just end up with this multipolarity world.
Mark Keller:And as as you pointed out, that's a higher inflation world from an investment perspective, higher cost world, potentially higher risk premia across the investment spectrum. And, you know, that's a fancy way of saying lower multiples, folks. I just you know, still opportunities for growth, certainly, but there's gonna be competitive growth. We're already seeing this, you know, in the AI race, for instance. You know?
Mark Keller:The US and China are following different paths. You know? China's being restricted from buying certain types of chips, but they seem to be doing just fine without them. So I think it's gonna be a very interesting world from an investment perspective. Yeah.
Mark Keller:Not as easy. Oh, well, let's just put it that way. Not as easy to call winners and losers. You might be having rising earnings and compressing PEs, which is always a challenge. So it's just gonna be oh, you know, and rising interest rates too.
Bill O'Grady:Yep. Or you could end up with interest rates that get capped. Countries use financial repression, and then it becomes a race to the bottom in exchange rates. You know, it it I I think the one thing to take away from this is that no one knows for sure what the playbook's going to look like. And I listen to at least two hours a day of financial geopolitical type podcasting.
Bill O'Grady:And there's a lot of people expressing certainty. And on some facets of it, they're probably right. But there's gonna be surprises here, and you you just have to be aware of that. It's a little bit like, in the movie Bull Durham when the old catcher comes out and says, hit the bull. You know?
Bill O'Grady:You're you're living in a world where you don't wanna dig in because you can get plunked and believing that you've discovered fire or have, you know, cornered the intellectual market on on the way the world's going to evolve can be extremely dangerous. Doesn't mean you don't have convictions, but end up with that great Groucho Marx line. You know? I have principles. If you don't like them, I got other ones.
Bill O'Grady:You know?
Mark Keller:I mean,
Bill O'Grady:it's but it is. It it's we've had a a structure that has given us a certainty of how things go. And when I read people, you know, in financial and academic papers talking about, well, this is the way it is. It's like, well, no. It that's just what you're assuming.
Bill O'Grady:And you can end up with grave changes in those assumptions. And we've been through this before. Mhmm. When we saw the shift to markets in the Thatcher Reagan revolution, you broke a lot of, you know, norms that people thought were just unthinkable to break. And and we did.
Bill O'Grady:And if you figured that out early, you did really well. And that's that's really what we're aspiring toward.
Mark Keller:Yes. The you know, we're in a world that has that is changing, and you see it when you read the op eds, whether a left wing or right wing or centrist newspaper or whatever, everyone's kinda hairs on fire. And and it's because the world they've lived in their whole lives, political and geopolitical landscape, is shifting beneath their feet. The big mistake most of them make is to point to the personalities involved, whether it's mister Trump or mister Xi, and think, it's all their fault. And once they're gone, thank goodness we'll get back to normalcy.
Mark Keller:And that is not what is going to happen in our opinion. These big figures are symptoms, not causes. It's going to be a different world. Yeah. Read European history between 1870 and 1910, think, if you wanna kinda find your best analog in the last few centuries.
Bill O'Grady:Yep. And one of the things I I got about halfway through a book I borrowed from the library on this topic, And one of the other things that was apparent in the book was that there was enormous political dissension within countries. You know, it often gets character history is written by the winners, so it gets characterized, well, everybody was behind this. Like, no. Actually, they weren't.
Bill O'Grady:There was there was all kinds of uncertainty, and that uncertainty breeds political dissension. Mhmm. Let's move on to the second question. So the Iran stalemate continues. What do you make of things at this juncture?
Bill O'Grady:Well, one of the things that I think we're seeing is The US is facing the problem it's faced with several post World War two conflicts, which is you've got no clear strategic objectives, and thus you end up at in forever wars. And, really, the the biggest conflict we had that had a clear objective was the Gulf War. We're just gonna push Iraq out of Kuwait and stop, and then, a later Bush came along and decided to do whatever a lot of people thought should have been done was to march on Baghdad, and we found out that the elder Bush actually did a pretty good job figuring that out. I think from a tactical perspective, it's hard to argue that The US and Israel have lost. A lot's been destroyed.
Bill O'Grady:Iran suffered massive destruction. You know, they've lost at least two tiers of leadership. The problem is strategy. What do you want at the end of this? Well, if if it's regime change, that's pretty hard.
Bill O'Grady:If it's to get rid of nuclear weapons, that's pretty hard too. And now Iran feeling, you know, existentially threatened has actually done the one thing that we all worried about for decades was closing the Strait Of Hormuz. And now that it controls it, we're trying to figure out how we're gonna get them to uncontroll it. That's still evolving. I don't think we we've finished that chapter at all.
Bill O'Grady:You know, Doomberg has made the argument that we'll be seeing the People's Liberation Army Navy patrolling the Strait Of Hormuz to get it open for the world. And, he could be right. It would be a act of hegemonic grace that I, to date, haven't seen China willing to to do. But, Iran is taking the argue or taking the position that The US wants out, and it's demanding harsh terms, and it's frankly doing everything it can to to force escalation. You know, it's attacking neighbors in the region.
Bill O'Grady:It's attacked US bases. Probably the one thing it hasn't successfully done yet, but it's tried, is to attack a US naval vessel. If that happens, it it almost guarantees a return to the active conflict. Right now, we've seen the markets recover on the belief that the president won't won't escalate this thing. And I don't think he wants to.
Bill O'Grady:The the trick is is that can he be prevented from doing so? In other words, will the Iranians push this to the point where he feels like he has no no other option?
Mark Keller:Yeah. The defenders of the of the president's actions here would say that, you know, the the goal here is to get rid of their nuclear weapons Iran's nuclear weapons. And as you pointed out, that's really hard to do. It's it's hard for folks sitting here in The US, here in the flatlands of the Midwest, to understand how difficult it is to defeat an Iranian army. You know, my background is a history, but ancient history, you know, 3,000 ago.
Mark Keller:And and let me tell you, Iran was then Persia was, you know, just an unconquerable fortress. People left him alone because it's very mountainous. You know, for for an inland nation, it it is is extraordinarily well protected by both mountains and water. And it's really land warfare is really tough on it. It wasn't till a fellow by the name of Alexander the Great came along that that
Bill O'Grady:Hence the name.
Mark Keller:Hence the name. Hence the name. And and, you know, there's just it is really tough to do. And I just don't see it. I don't see The US going into there with a land invasion.
Mark Keller:The the cost, I think, would be outweigh the benefits.
Bill O'Grady:And and again, cost to what end? You know? China's still your primary rival, and it just doesn't make any sense. I think The US believed that if it was a decapitation strike, that it would work. And it didn't.
Mark Keller:And I think that's exactly what the thought was, is that decapitating the leadership would lead quickly to regime change and a friendlier regime would would bargain away the the nuclear arsenal. But, you know, the the problem we've got right now is that if we were to just leave, Iran is in tactically a better position than they were before the war because they've the Strait Of Hormuz right now is essentially an Iranian toll road, and and that's that's not a good place to be. The blockade is probably the the really only strategy outside of just leaving and putting the world now, you know, basically get giving them a a toll road option on, you know, about a quarter of the world's trade. Blockading is about the only thing you I think that's effective. And and that's my expectation is that this lasts quite a bit longer, and we continue to blockade them until they finally believe that they don't have as much leverage on us as Right.
Mark Keller:They think we do. But, unfortunately, that means probably more pain for for the world economically. And I'm not sure this is reflected in markets at all. I know. I I'm I'm just I'm kinda stunned because it's I mean
Bill O'Grady:Well, one of the things that the president has done a remarkably good job on is that every time it looks like, you know, the financial markets are starting to price in a much more adverse outcome. He comes out with statements saying, yeah, we're making progress on talks. And and so if you took, like, long positions in in crude oil, you've been whipsawed several times now. And I mean painful whips aws. And after a while, you're just like, you know what?
Bill O'Grady:I don't need this. You know? This is more fun than I can stand. And and and so it's kept the markets calm. It's been a, you know, kind of an oral intervention that has worked, I think, exceedingly well.
Bill O'Grady:Now the problem that is caused, though, know, the thing about economics is that there are really there there's almost no there's nothing you can do that doesn't have an adverse effect on something at some point. He's preventing the financial markets from doing the proper signaling to the world economy of what needs to be done, which is you gotta start building pipelines away from the Strait Of Hormuz, and you need to, you know, I think China's all of the above energy policy has proven to be remarkably resilient. That's what the world needs to do. It needs to start stockpiling, it starts, every electron, every molecule is something you need to get your arms on and hold it. We're seeing the incentive to go out and do that has been dampened to a great extent because you look at the backward curve of the oil market, for example, yeah, it's $80 $90 but it's not catastrophic.
Bill O'Grady:But, you know, like I said, when I listened to the commodity podcast guests, you know, they're they're all pretty much got their hair on fire. They're all looking at this and saying, oh my god. You know, we're we're gonna planes are gonna stop flying. Crops are gonna be stunted. I mean and the thing about it is is that in the ag markets, we're probably a year away from this showing up as a real problem.
Bill O'Grady:You know? In in the energy markets, you're you're getting spot problems. Like, jet fuels become really scarce. You're starting to see diesel prices in The US rising to areas that are frankly concerning. I mean, $4 a gallon makes people mad.
Bill O'Grady:$5.50 a gallon on diesel is a problem. Mhmm. You know, in a world where we have gotten used to Amazon delivering things to us within a day, this will be really hard to maintain.
Mark Keller:Yeah. We we won't have shortages here in The US except perhaps California.
Bill O'Grady:Yes. Which is its own country.
Mark Keller:Which is its own country when it comes to energy and fuel in particular. But we will have higher prices. Now we are beginning to see shortages in Asia, particularly for jet fuel, propane, even diesel. Those are, you know, And prices are up, but there's know, you can you can't get as much as you used to. And I think this is on the fuel side, I think we're gonna see, you know, by the end of the summer, I think we're gonna see if this is not resolved in a favorable way, we're gonna see real problems on the fuel and feedstock side.
Mark Keller:But I agree with you on, it's gonna take about a year before this flows through on the ag side.
Bill O'Grady:And we haven't even really seen, you know, what it's gonna do for metals, You know, the loss of sulfur affecting sulfuric acid production.
Mark Keller:Yeah. It's not well known, but about half the world's sulfur passes through the strait. And, yeah, you you you can't refine and or smelt minerals, you know, hard minerals without it. And that has not hit yet. Not not at all.
Mark Keller:But, yeah, I I I think that's probably also, you know, six to twelve months before that starts hitting. So, yeah, the the the risks are uncomfortably high and it just I'm I'm really kinda surprised the the markets are not reflecting it in in the least.
Bill O'Grady:And I the only way this makes sense is that if you work from the assumption that the the president is just not going to escalate this thing.
Mark Keller:Mhmm. And I think that is that's a reasonable assumption, but, you know, his you still have higher prices Yes. And lower supplies. I mean, even if he doesn't escalate. I I and that's that's what has me and I think a lot of folks who watch commodity markets scratching their head.
Bill O'Grady:The the thing about it is is that if you're going to position yourself for that, you gotta have clarity that this is where we're going. And if you don't get that escalation, you don't get that clarity. And so instead of price spikes, get price creeps. And you look at crude oil a year out, it's been creeping up, but it hasn't been flying up. And that's building in an inflation problem because at some point, truckers are going to start saying, look, I can't deliver this at this price.
Bill O'Grady:You've got to pay more. And that's eventually going to start building through the economy. Question number three. The federal government's debt to GDP ratio has now hit 100%. What are the ramifications?
Bill O'Grady:What should investors think about this? You know, the most salient point you can make is now every 1% increase in borrowing cost to GDP for the government by the same amount. So if the Fed is truly independent, much like, you know, you go back to Volcker, you're gonna raise borrowing costs to the Treasury. And if that's going to be avoided, the Treasury is going to have to dictate monetary policy. And so the known unknown is either the fed remains independent and we're gonna get a lot higher long term interest rates or the treasury prevails and the fed is forced to focus on government borrowing costs.
Bill O'Grady:So if option number one wins, duration extension is your greatest risk. If option number two wins, you expect dollar debasement per perhaps dramatically. And that's that's where we sit. This is classic financial repression. Now my opinion is the higher probability outcome is option two.
Bill O'Grady:But you know what? I could be wrong.
Mark Keller:I'm I'm with you on that. I just hey. Both of us lived through the Volker era. And, you know, I I I had started my career shortly before he was named Fed chair. And I do not see the level of desperation at either the public or the political level to ask for a Volker.
Mark Keller:It had to get pretty bad persistent double digit inflation rates. We don't have that right now, and we don't have the inflationary psychology we had back then. If you needed something, but you really couldn't afford it, you didn't save for it, you borrowed. You went ahead and bought it now because it was only gonna get more expensive year to year at a 10% rate. And, you know, your borrowing costs were, you know, regularly trailing the rate of inflation.
Mark Keller:So it just made sense to borrow because you get to pay it back and in depreciated dollars, even with the high interest costs. And that ultimately led to a demand for someone to do what Volker did. I think we are so far away from that that we're going to probably choose option two.
Bill O'Grady:Well, the other part of it is if you got Volker now, your borrowing costs would reach a point where it would become destructive. So question number four is asset allocation is persistently holding a position in commodities. But what would you need to occur in this environment for us not to allocate to commodities? Well, we're borrow a little bit from the previous question. The Fed remains independent.
Bill O'Grady:We get a Volker moment. That's not good. The second one would be The US fosters expanded globalization depressing the drive to hoard. That would be bearish too. I don't think both of those are likely.
Bill O'Grady:The third one actually is one we do need to consider, and that is that the Chinese economy implodes. China is a huge consumer of commodities, and their economy has really been struggling. And, if they ended up in a depression, it would harm the commodity market. That's why I spend so much time on China. And, you know, there are higher odds of this than meets the eye because, you know, China is avoiding aggressive stimulus pretty much at a surprising clip.
Bill O'Grady:I mean, it's become a parlor industry. People looking around saying, well, China surely got to stimulate now. And chairman Xi says, stop calling me Shirley. And it it just doesn't happen. The first two I'd look.
Bill O'Grady:It's the probability is not zero, but it's really, really low. You know, the current war we're going through is now convincing everyone. You gotta buy stuff and you gotta store it. You gotta have it there, and you you you just have to do that because the world is becoming unsettled. But the the one thing I do worry about in in in because I'm very bullish on on commodities and hard assets.
Bill O'Grady:But one thing I am worried about is if we had a Chinese implosion.
Mark Keller:Mhmm. Yeah. I I'm also bullish, you know, for the reasons we've really already discussed as a multipolar world and a world where the dollar steadily depreciates, which is what we think is the two most likely scenarios for geopolitics and foreign exchange is very bullish for commodities. Yeah, especially if if we start financial repression, which, you know, if you're not familiar with that term, that the government through the Treasury and Central Bank purposely depresses interest rates and rates of return on consumers for on savers, I should say. And, you know, that's that's really bullish.
Mark Keller:But China imports about 50% of just about every commodity you can name that is traded around the world. And, you know, they sneeze and, you know, the the the commodity markets get really sick. For about thirty years now, it's been the major export low cost exporting power. It got took the mantle from Japan. And, you know, US had this role many, many, you know, hundred years ago.
Mark Keller:And eventually, you end up in problems and potentially a balance sheet recession. And, boy, if they go through that, yeah, you you you just wanna drop commodities like hot potato. And so we watch it very closely. It's been the call you know, depression has been called by many people for for at least a decade, decade and a half, and it hasn't happened yet.
Bill O'Grady:Yeah. Yeah. It it and it is probably the guy I pay most attention to on China is Michael Pettis. And, he's careful to say that, you know, look. They got a debt problem.
Bill O'Grady:They've got an overinvestment problem, very similar to what The US had going into the nineteen thirties. It doesn't mean they're they're going to have a depression. They do have lots of tools available to them to prevent that. Just maybe they won't employ them. Who knows?
Bill O'Grady:And so but outside of those three things, everything I see is that it it's highly likely that this is gonna continue, that commodities are going to benefit greatly.
Mark Keller:And I think getting back to previous question, the war in Iran has accelerated that trend. It has accelerated de globalization, in my opinion. And it has accelerated the desire to hoard. So, yeah, no, I'm still very bearish, but yeah, that's that's the key thing we're looking for.
Bill O'Grady:Last question. So starting the year, we had what looked like the great rotation. You saw lots of parts of the equity market that have been out of favor come into favor. Last month or so, we've seen, you know, a retracement of that. Is this just a normal retracement, or is this a return to the growth AI outperformance?
Bill O'Grady:What do you think?
Mark Keller:Well, I think the rotation is intact and is moving. Really, the key is the thing to focus on more than the positive objects of rotation is to keep your focus on the Super Bowl, the bubble, if you will, in the AI trade, which is kind of seems the last hurrah of the great mega cap growth trend of the last decade. It is you know, it sucked all the capital out of the room out of the markets worldwide for a long time, and particularly for the two and a half years ending November 1. Since then, capital has started to rotate out of that trade and into everything else. I won't just say it's a value trade, but, you know, dividend stocks, non US stocks, small caps, they've all gotten some love.
Mark Keller:But starting April 1, boom, it's all come back with a vengeance, but it's very narrow. And so one of the things that's characteristics of bull markets, even bubbles, is that the March higher and higher gets thinner and thinner. You you have fewer and fewer stocks. Technicians call this breadth. Market breadth gets narrower and narrower, and all that capital is being funneled essentially into one sector of the AI trade, and that's semiconductors.
Mark Keller:Most of the other sectors are either below or testing the highs of last year. But semiconductors, you know, most of them are feeling that trade. If they could be tied in any way to AI, they've doubled since April 1. That's that's mighty impressive, by the way. I'm not I'm sneering at that at all, but it it is that this is a this is not atypical of the way a bubble ends to have a movement up, a step back, and then a powerful, almost straight up move and with very narrow breath.
Mark Keller:There's some folks in quite a few folks have been pointing out that the S and P, not just Nasdaq, S and P had been hitting new highs while the number of twelve month new lows has gotten rather large. In fact, it's usually over 100 per day. And if you get any as many as 30 new lows while the S and P is getting new highs, it's a bad sign for the S and P. In most cases, it's lower six months later. And this is this is a kind of a scary time, I think, for the AI trade and for those mega cap stocks that, you know, are making up almost 40% of the index when you when you look at all of the stocks in that trade.
Mark Keller:Well, 40% of the value of the index. We're we're only talking about let we're talking about less than 10% of the stocks in the S and P, but almost 40% of the value.
Bill O'Grady:So one of the things I was wondering about, you know, it looks like we're gonna have at least two, if not three, huge IPOs this year. You know, trillion dollar companies going public, SpaceX and Anthropic and OpenAI. Does this become like a big capital suck? The other thing I noticed is that in the in the nineteen nineties tech bubble, the S and P deviser rose steadily, you know, which meant that companies looked at the stock market and said, good time to go public. And, really, since then, we haven't really seen a lot of that type of activity.
Bill O'Grady:And now although the numbers aren't huge, these are going to be really big big companies for the market to digest. Do you see this as maybe being well, historians look back at this and say, well, that was the mark of the top.
Mark Keller:I I think it's quite possible. And it's very different financial landscape is quite different than it was back then. And that is there it wasn't near as much money available in the private equity market, private credit market as there was then. Then if you wanted to cash out, you had to go public. Now you can sell to private equity.
Mark Keller:Lots, this is not just a tech thing, but lots and lots of industries are doing this. And frankly, some of these valuations in the private sphere are extraordinarily high. And, you know, I've talked to some folks who think that actually the process of going public may unmask those crazy valuations. In other words, the public market won't pay 25 times EBITDA, which is what the private market might be paying for a business.
Bill O'Grady:You mean like WeWork? Yeah. Exactly.
Mark Keller:In other words, you might get it public, but it that might be the that might be the top. Yeah. And so, yeah, it is, I I think very well could be because I think some of these businesses, like, you know, frankly, they're they're so big in the valuations. The multiples are so high that they really have run out of private equity capital. About the only place they're getting it now is from companies that are both either selling them stuff or buying stuff from them.
Mark Keller:This is so called circular financing going on in AI right now. They they really there is no other step even though they have potentially half trillion dollar valuations. They gotta go public if they want more capital. And that might just might just top it out. And and I think there's a a lot of us are looking at it and saying, yeah, this is a that could very well be it.
Mark Keller:Now I do have a caution. There's so much risk in the world right now. The rotation into non AI stocks may mean that those beneficiaries of the rotation may still go negative. Right. It's irrelevant.
Mark Keller:Yeah. I mean, if we have a recession, like energy crisis induced recession, for instance, the rotation may just mean you lose half as much money in in the beneficiaries of the rotation as you do Right. In in the the stocks that have been the beneficiaries of the bubble up to now. So we're we're we're speaking relative on a relative basis. Yeah.
Mark Keller:I hate to end on a downer, but that that that could that could it very well could be what what happens here. But, you know, the end of a bubble is always tough, and that's and I think we are I think we're nearing that.
Bill O'Grady:Yeah. The other thing the other cautionary note is that market tops are virtually impossible to call. Absolutely. Absolutely right. You know, I I just but we both lived through the September 1999 to March 2000, March of the the Nasdaq, and just being astounded at the time.
Bill O'Grady:And so, you know, it there's there's still could be more to go here.
Mark Keller:Oh, yeah. I'm I'm astounded again.
Bill O'Grady:Yeah. But what what we are saying is that there are signs you typically see when something is about to run out of gas.
Mark Keller:Yeah. I I feel very much like I did in December ninety nine, January 2000. Just all the signs are there that we're getting close to a top in this bubble. It it did happen in third week of March of that year, but the market went up a lot Yeah. In the those next two Right.
Mark Keller:Two or three months and sucked a lot of capital into it, and I kinda feel like that's what's happening now again.
Bill O'Grady:Yep. Well, Mark, I think this is a pretty good place to wrap up for the day. As a reminder, if you want to submit a question, send one to mailbagconfluenceim dot com. Today's discussion is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice.
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