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Support for this show comes from Fundrise.
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Let s be honest, investing in venture capital isn t for everyone.
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But shouldn t everyone be allowed to invest in venture capital if they want to?
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Today s number, $11,600.
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That s the average cost of childcare per year in America.
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Ed, true story.
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My son came home and said, Dad, I m asexual.
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And I said, son, I need you to be A plus sexual.
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Is that wrong?
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Welcome to Prop G Markets.
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Today, we re speaking with Josh Brown, co-founder and CEO of Ritholtz Wealth Management about the current investment cycle, portfolio durability, and the number one risk in the markets right now.
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But first, here with the news is Prop G media analyst, Ed Elson.
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Ed, was that joke dirty enough?
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Do I need to do something a little saltier?
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I like when you have a nice sort of clean dad joke.
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It s good, it switches it up.
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We ve got two a week now, so, you know.
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Keep it real.
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Diversity s good.
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How are you doing?
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I m great.
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I saw a couple of movies.
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I haven t seen, I was thinking about it.
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I don t think I ve seen two movies in one weekend in 20 or 30 years.
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I went to, so what movies did you see, Scott?
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Well, let me tell you, Ed.
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Ed, so just so you know, your role here is to ask more about Scott.
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Oh, yeah, I don t do enough of that.
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Sorry.
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So, uh, so anyway, so, uh, Friday, a friend of mine took me to see the premiere of Mad Max Furiosa, which is a prequel.
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The highlight was that guy, what s his name?
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Chris Hemsworth.
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He is really handsome.
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They brought up the entire cast in front of the audience.
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Standing next to him, they all look like defects.
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They all look like the factory is supposed to produce him.
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And they produce these things that you need to send back to the factory.
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I just could not stop staring at that guy.
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The movie itself was a lot.
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You feel like a piece of beaten flank steak by the time you get out of there.
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There s just so much action and so much...
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Jesus, it s like, God, I m exhausted.
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I need like a week in Anguilla and like a frozen margarita just to get over that thing.
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I didn t think it held together.
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I don t think the franchise held up as well as it usually does.
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The one before that was incredible.
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Incredible, I agree.
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One of the best movies I ve seen, yeah.
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What d you do this weekend?
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I m not that interested, but I feel like I need to ask.
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I went to a DJ concert, which was pretty fun with some friends.
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I watched Man City win the Premier League.
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I saw that.
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I did that too.
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It was disappointing.
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Because you re an Arsenal fan now, aren t you?
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Oh, God.
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Seriously, every year, fucking Man City, literally every year.
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You re probably going to be a City fan next year, I think.
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You went from Spurs to Chelsea to Arsenal.
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I mean.
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No, I ve always been, I ve always been Arsenal.
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I just can t come out.
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I m just finally.
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That s not true.
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That s totally true.
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I just have come out of the closet because when you, when you tell people you re a team, you alienate 90% of London.
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They re like, we thought we could count on you.
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People are just so disappointed.
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Chelsea s made a big comeback.
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First started off strong, ended pretty weakly.
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Or weaker.
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Chelsea s... I think Cole Palmer could be a real... He s my favorite man in the world right now.
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He s amazing, isn t he?
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He s incredible.
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Yeah.
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Really is amazing.
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Alright, shall we do our job?
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Go for it.
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Light this candle.
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Let s start with the headlines.
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Now is the time to buy.
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I hope you have plenty of the world at home.
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The Dow closed above 40,000 last week for the first time in history.
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That was also its fifth straight weekly gain.
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Meanwhile, the S&P 500 and Nasdaq finished the week up 1.5% and 2% respectively.
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Reddit is allowing OpenAI to train its models with Reddit content.
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The social media company will also begin offering some OpenAI features to its users.
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Following that announcement, Reddit shares surged 13%.
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OpenAI dissolved its superalignment team, which was focused on controlling the long-term risks of AI.
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The team s leaders, Ilya Sutskeva and Jan Laika, had both announced their departures from the company just days before this announcement.
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And finally, you may remember back in April, we had my uncle, Charles Elson, on the podcast.
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He s a corporate governance expert at the University of Delaware.
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And we discussed this issue of Elon s pay package at Tesla, which he has generally disapproved of.
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Well, last week, the Wall Street Journal published a story with a headline that read, quote, a legal scholar critiqued Elon Musk s pay.
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Now he s out of a job.
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That would be Charles.
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Charles was a consultant for the law firm Holland and Knight.
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But as Charles was preparing a legal brief about the Tesla pay package, Tesla reached out to the law firm and said they would terminate their relationship if he continued to make these comments.
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Holland and Knight alerted Charles of Tesla s threat.
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Charles decided to file the brief anyway, and he resigned.
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He said, quote, if you have to choose between your job and your integrity, you choose your integrity every time.
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Nice quote from my uncle there.
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Scott, thoughts on these headlines?
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Free Charles Ellison.
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So, with respect to your uncle, you seem like a thoughtful guy, good for him.
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I m not sure the law firm did anything, they probably could have handled it more elegantly, but as a contractor, if he writes an opinion that s not good for their clients, they re right to say, sorry boss, we re a for-profit company and our biggest client.
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It s like, did you see a Mad Men where
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one of the account executives is basically molested by a guy at Lucky Strike Cigarettes.
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And they come and Sal says, you know, he, you know, basically he, you know, touched me or whatever.
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And Lucky Strikes sees him and the guy comes in and is angry and leaves the office.
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And they come to Don Draper and go, but he molested him.
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And he s like, oh, he s like, he s like, Sal, you re fired.
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He s like, he s like, if, if Lucky Strike goes away, this whole firm goes away.
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And I m not suggesting, I m not suggesting that s the right thing.
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Unfortunately, there are laws to protect that type of situation now.
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But, um, I m trying to bring this home.
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I m trying to lamb this.
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I ll be comparing my uncle to a guy who got molested.
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No, what what what I don t like and this isn t this isn t your I think your uncle did the right thing Yeah, and I want to say Holland did what they they re allowed to do whether you think it was the right or the wrong thing They re allowed to do it
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Yeah, I agree with you, it doesn t say much about Holland and Knight, but it feels like it does reflect quite poorly on Tesla, who are clearly very sensitive about this issue, and in my opinion, for lack of a better word, butthurt about the compensation, that they have nothing better to do than to threaten the employers of people who say anything even remotely critical of the CEO.
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You know, it just seems strange that this is what they spend their time.
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That s Elon.
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So I guess my question to you is, what does this say about Tesla?
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Well, it says it s run by a megalomaniac who isn t a good person, but that s not news to anybody.
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And what I would say is that, you know, memo to young people going into the workplace, the only thing I can guarantee you is a series of injustices.
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And it really doesn t matter.
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Sure, you hope they do what s right, but these companies are there to make money.
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And if for whatever reason, how noble your viewpoint is, you get in the way of them making money, they re there to take in a certain amount of inputs and produce it.
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at a higher value.
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I do think the arc of justice in corporate America is really jagged, but I do think it bends towards the righteous, and that is people who are good and work hard and are good people, ultimately over the long term do well.
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And also, it s good to be Charles Elson, because your uncle is kind of an icon in the legal world.
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He s going to be fine.
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He doesn t need the money.
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And he ll get hired by a lot of other people who want someone of his caliber and esteem to write legal opinions.
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Who this really sucks for is, of course, bringing this back to me.
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A lot of young people, a lot of young people write me and say, I want to be more provocative and fearless in my comments.
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And they re very positive and say these provocative things.
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And I say to them, are you rich?
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No, then don t because you re taking a risk.
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They want people who are going to do hard things and make the company more profitable.
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That is always the flavor of the month.
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Any thoughts on Reddit s contract with OpenAI or the super alignment team dissolving?
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Well, first off, anyone that named themselves a team called super alignment deserves to be fired.
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I mean, that s just I
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When I first read members of the super alignment team, right then I thought, I hope something bad happened to them.
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This is kind of meta all over.
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They pretend to give a shit about this stuff.
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And then when these people are virtue signaling and concerned and getting away in the profits, they just blow them all out.
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And it makes for good media.
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The investors don t care.
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Microsoft doesn t care.
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And at the end of the day, I m still going to type into chat GPT, you know, summarize these business notes for me or whatever it is.
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I don t think this has much of an impact.
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And I m sick of the media.
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I m sick of people believing that these companies are there to do anything but make a profit, nor will they do anything.
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all their actions will just line up to trying to make a profit.
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I think that Reddit, I m a shareholder there, it s great that the stock is up, but the fact that our online discourse is going to inform the majority of the new digital dialogue, and that is LLMs, scares the shit out of me.
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Because here s the thing,
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Our discourse has become more coarse, and it s entirely because of the fucking cancer of our society, which is social media.
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It is normalized shitposting each other.
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And the thing that really worries me about these new developments with Reddit and the fact that these digital platforms are now becoming the grist for the LLM mill
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is that everything that informs business moving forward and media is informed by this really toxic dialogue.
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The LLMs are not crawling.
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The kid who came up to me at Grainger s yesterday and said he knew my podcast and said really nice things.
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They re not crawling the guy at
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at the Arsenal game yesterday who high-fived me and asked where we re from.
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I find people in person are generally speaking lovely.
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They re nice.
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They re nice to you.
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They open doors for you.
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They say nice things to your kids.
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They ask what breed is your dog.
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You go online and they say what dog you look like.
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I mean, it s just, so if that s gonna inform
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our new discourse, I think it s really fucking ugly.
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So I m kind of worried.
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And what I will say is that I do think the LLMs have put in place so far a lot of safeguards to make them less hostile and vile.
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So you got to give them some credit.
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But the idea of where all this AI, I just see so many things that are really unsettling about how AI is developing.
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What are your thoughts?
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Well, I think it s hard for me to say much about this because the terms of the deal weren t disclosed.
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And I just find it interesting, you know, the stock went up 13%, it surged, but no one actually knows what this is even worth.
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I mean, it could look like Reddit s deal with Google, which was around 60 million.
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I think most analysts are expecting that.
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Or it could look like the rest of OpenAI s contracts, which are as low as 1 million.
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So as I ve said before, I ve generally been underwhelmed by the size of these AI licensing contracts in the industry.
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I think the publishers should be charging way more.
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But regardless, I think the most important detail here, at least for the markets, is the price.
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So until we know that, I don t have much of an opinion on it.
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So in terms of the Dow hitting new highs, I mean, I have a couple of points of frustration.
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I don t want Biden as president, but I want Trump to lose.
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And I am incredibly frustrated at the Biden administration s inability to pimp out, take credit for, run up the flagpole, record markets, Goldilocks economy, whatever you want to call this, right?
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Strongest growth of the G7 while the lowest inflation just pulled off the impossible.
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And yet, I don t see Buttigieg, I don t see Gioramondo, I don t see...
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I mean, what is it?
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Do they have a gag order?
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Get out there and start talking.
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They should be on CNBC, on Morning Joe, on Fox, every fucking day.
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Put Secretary Buttigieg on Fox, and I love his responses.
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Whenever he responds to one of these idiots on Fox, they look as if they ve been caught masturbating.
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They literally don t know how to react.
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The other thing that upsets me about this, although we should be dancing the streets, is that one of the things that young people have been fooled into believing, and this goes to some of our comments with Josh, there are two stages in your life.
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There s the investing stage and there s the harvesting stage.
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Ideally, from the age of like, pretty much call it, I don t know, you re harvesting someone else s savings up until the age of 22 or 25, basically your parents or student loans.
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From 22 to 65, you re investing, you re hopefully,
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making more than you spend, and then you deploy an army of capital to try and fight for you and your family and your sleep, right?
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Investments that start generating passive income and growth.
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And then at 65, you start harvesting.
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You start saying, I want a nicer life.
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SPEAKER_02
I m not going to work that hard.
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My earned income is not as great, so I m going to start harvesting for my passive income and my investments.
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I m going to start taking money out.
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When you re investing,
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you want the markets to crash.
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You literally want them to crash.
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I mean, granted, there might be some shrapnel that hits you, you might lose your job or whatever, but the reason I m wealthy is because several times across my lifespan, the markets have crashed.
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And because I was always making money and I always had a job, I had a chance to kind of dollar cost average, if you will, into stocks and real estate when at some point they were fairly inexpensive, even cheap at some point.
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Here s the myth that keeps getting fomented to you and your generation, that strong markets touching new highs are good for everybody.
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No, they re not.
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They re good for me.
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This is another great thing for people my age and another not so great thing for people your age.
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We ll be discussing this in a second with Josh Brown.
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Stay with us.
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Support for this show comes from Fundrise.
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SPEAKER_02
Venture capital has been one of the unsung heroes of our economy for decades.
1
SPEAKER_02
Go look at the S&P 500.
1
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Nearly every major tech company on that list was once venture backed.
1
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Venture funds saw their investments in those generational companies skyrocket in value at unimaginable multiples.
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The technology boom since the late 90s made venture capital the highest performing asset class in the world over the past 25 plus years.
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The hard truth, however, is that the biggest venture funds were almost entirely funded by institutional investors like endowments and sovereign wealth funds.
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Unless you knew a guy who knew a guy, you and most other investors could not get in early.
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That meant missing out on hundreds of millions, if not billions of dollars of each company s growth.
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The Fundrise Innovation Fund is changing that.
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It s designed specifically for individual investors, aiming to bring its portfolio of technology leaders, disruptors, and pioneers to as many investors as possible.
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Now you can get in early.
1
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Relevant disclaimers can be found at the end of the show and at fundrise.com slash innovation.
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Welcome back.
1
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Here s our conversation with Josh Brown, co-founder and CEO of Ritholtz Wealth Management.
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Josh, thank you so much for joining us.
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SPEAKER_00
It s a pleasure as always.
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So the Dow closed above 40,000 for the first time ever on Friday.
1
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S&P was up 1.5% last week, Nasdaq up 2%, generally just a very broad-based rally that we re seeing across pretty much every sector right now.
1
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So just, I d love to start with a pretty high-level question.
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SPEAKER_01
What s your general read on investor sentiment in the stock market right now?
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SPEAKER_00
So my general read now and forever is that sentiment follows price.
1
SPEAKER_00
It never works the other way around.
1
SPEAKER_00
So of course, sentiment is improving because prices are going up.
1
SPEAKER_00
People are being rewarded for things they re buying relatively quickly, and that makes them want to buy more things.
1
SPEAKER_00
This is not really a market story.
1
SPEAKER_00
This is a story of human nature.
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SPEAKER_00
Volatility is low.
1
SPEAKER_00
We ve had a pretty successful earnings season.
1
SPEAKER_00
Earnings ran about 8% higher than the prior year, which was better than the Wall Street expectation.
1
SPEAKER_00
And even though you had a few individual company blowups, if you looked at the share price two to three days after those individual earnings reports,
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SPEAKER_00
You saw stocks regain everything they lost relatively quickly.
1
SPEAKER_00
Netflix is a great example of that.
1
SPEAKER_00
I can give you five or six other high profile examples where a company reported earnings.
1
SPEAKER_00
The media said it was a quote unquote disappointment on guidance.
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SPEAKER_00
Stock fell five, 6%.
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SPEAKER_00
Couple of days later, it was like nothing happened.
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SPEAKER_00
Share prices bounced immediately.
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SPEAKER_00
That s indicative of a market that is being relentlessly accumulated.
1
SPEAKER_00
And investors are willing to look past things like, you know, revenue shortfalls or lowered guidance because in the end, they want to be long stocks.
1
SPEAKER_01
Do you think this has anything to do with inflation as well?
1
SPEAKER_01
I mean, we ve had this somewhat positive inflation news.
1
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CPI ticked down a little last month.
1
SPEAKER_01
It s now at around 3.4%.
1
SPEAKER_01
Meanwhile, you ve got most fund managers expecting a rate cut this year.
1
SPEAKER_01
I think the number is actually 8 out of 10.
1
SPEAKER_01
Does this have to do with inflation as well?
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and how are you feeling about our inflation progress at the moment?
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Are you pleased, disappointed, optimistic?
2
SPEAKER_02
So there s very little change in inflation month to month.
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SPEAKER_02
We re talking about one tenth of a percent up or down.
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SPEAKER_02
So the inflation rate, while higher than we d like, has actually been
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fairly steady.
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SPEAKER_02
And again, it s not anywhere near the Fed s target.
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SPEAKER_02
It s three and a half percent.
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SPEAKER_02
The Fed is repeatedly pounding the table that they are not satisfied until they get two percent.
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SPEAKER_02
But the thing is, it s not moving.
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SPEAKER_02
And I think that lack of rate volatility, to answer your question, absolutely does help to improve sentiment.
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SPEAKER_02
Everyone understands that the trajectory is still lower, but the last mile is pretty slow going.
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SPEAKER_02
The big picture thing that happened in the last couple of weeks, though, that I think led to Dow 40,000 was an employment report that was cooler than expected.
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SPEAKER_02
In recent months, the employment numbers have been coming in higher than expected, which freaks out the market a little bit because the market starts worrying, oh, what if they don t cut rates or what if this continues?
2
SPEAKER_02
They actually have to raise rates.
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SPEAKER_02
I think the last employment report took that off the table to some extent.
2
SPEAKER_02
And in the meanwhile, the economic data is solid with moderating inflation.
2
SPEAKER_02
That s a Goldilocks scenario.
2
SPEAKER_02
And for as long as it continues, I think stock prices will remain buoyant.
2
SPEAKER_01
How much does this matter?
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SPEAKER_01
I mean, we ve been paying attention to rate cuts and interest rates so much this year.
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SPEAKER_01
And one conversation we had with Aswath Damodaran is that this is kind of a new thing, our obsession with every single Fed meeting.
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SPEAKER_01
Just you as a wealth manager and investor, how much do you care about all this?
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SPEAKER_02
Well, I hate it because I come from a different time.
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I come from a time when Alan Greenspan would deliberately go out of his way to say absolutely nothing.
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He would give testimony in front of Congress twice a year.
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and he would speak in as obtuse, it was almost like listening to the caterpillar from Alice in Wonderland speak.
2
SPEAKER_02
He would talk Congress in circles and they of course had no idea what he was saying and that was the point and that gave him the
2
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the room to do what he wanted to do.
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And he wasn t always right in everything that he wanted to do.
2
SPEAKER_02
But there on CNBC in the 1990s, they would film him walking across the street from the Federal Reserve to Capitol Hill, and they would try to get a gauge of how thick his fucking briefcase was.
2
SPEAKER_02
Which means what?
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SPEAKER_02
How many papers were sticking?
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SPEAKER_02
I m not, you can Google this.
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How many papers are sticking out of Greenspan s briefcase?
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And that would be some sort of indicator of whether or not he was going to cut interest rates or hike interest rates.
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So I like that better.
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I don t like 12 fed governors.
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roaming the country looking for lecterns to talk for an hour in front of.
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SPEAKER_02
I think it s a tower of babble.
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It sends the media into hysterics.
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SPEAKER_02
They re parsing every word and every phrase in every one of these speeches.
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SPEAKER_02
And in the end, the Fed keeps saying, we re going to be data dependent.
2
SPEAKER_02
So, you know, I wish it would stop.
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SPEAKER_02
And, you know, maybe we re going to get to a place where it calms down and we don t hang on the Fed s every word the way that we have been.
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SPEAKER_02
But the start of a cycle, whether it s a hiking cycle or a cutting cycle, it does lend itself to this kind of parlor game where everybody tries to nail the timing.
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SPEAKER_02
So we ll we ll get the first rate cut at some point before the end of the year.
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SPEAKER_02
It ll be largely symbolic because there s absolutely no emergency.
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SPEAKER_02
There s no need for the Fed to get easier.
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Federal Reserve generally does not need to be cutting at full employment with a stock market at record highs and a real estate market on fire.
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It s just like we re cutting to accomplish what.
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So, you know, it ll be symbolic, but I think we ll get it.
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And then maybe everybody will stop crying.
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It reminds me of my favorite economic indicator.
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My colleague, David Yermack, used to track the tail numbers of private jets of CEOs.
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And if they were scheduled to go to some, you know, fat warm place like St.
2
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Bart s Anguilla the day after an earnings call, he would say that means the earnings call is gonna be good.
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SPEAKER_00
I like that, I don t hate that.
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It was found that there was a correlation based on if the guy was going on vacation after the earnings call or if he was staying at the office.
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Anyways, the rally here is a global rally.
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It s Brazil, it s India, it s Canada, it s Japan.
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Do you see this as,
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SPEAKER_00
So, and maybe I m being too reductive here.
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SPEAKER_00
I think of things as either being cyclical, animal spirits, people going on margin, going all in, you know, spending their student loans, taking out student loans to buy stocks, or do you see it as structural?
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SPEAKER_00
The market over the medium and long-term tends to be up and to the right because of demographics and productivity.
2
SPEAKER_00
Do you think this is what you would call a healthy rally, or do you think we re inflating somewhat of a bubble globally?
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SPEAKER_00
Because this is more than just the US.
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So what s interesting is in Europe, they ll be doing a rate cut also.
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And in Japan, they ve managed to stoke some inflation.
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They ve been trying for four decades.
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They finally got a little bit, which psychologically is important.
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Japan has been in the state of paralysis due to disinflation and outright deflation.
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Now, all of a sudden, if people have a sense that there is some positive price growth in the economy, it leads to more investment, it leads to more urgency, and on balance, it s a really great development.
2
SPEAKER_02
So, if you ve got Europe and Japan, the two large developed markets in the world, with stock prices acting in concert, and then you add in
2
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the reforms in China, they want to at least appear as though they re more stock market friendly.
2
SPEAKER_02
One of the things that Larry Fink from BlackRock did with his annual letter to shareholders is he explained the difference between the recovery from the great financial crisis that the United States has experienced versus all of these other global markets.
2
SPEAKER_02
And he ascribes it to, in the United States, we have a stock market that has been a powerful driver of behavior and incentives and investment and spending.
2
SPEAKER_02
And in these other places, the stock market is just not as important.
2
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And that s the thing that global leaders now I think want to change.
2
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So China threw out the head of its securities regulator.
2
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Coincidentally, that is the week that the Chinese stock market bottomed.
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It s up substantially since then.
2
SPEAKER_02
In Japan, more stock market friendly measures to get retail investors interested.
2
SPEAKER_02
That s taking place.
2
SPEAKER_02
In Europe, if you look at the way Macron is talking in France, his whole invest in France initiative, these countries have figured out that if they fix their investor class,
2
SPEAKER_02
all of the dominoes will then fall in their actual economy.
2
SPEAKER_02
And of course, these things take time, and there are some cultural reasons.
2
SPEAKER_02
But Scott, to address what you re saying, yeah, this is much bigger than just Apple and Nvidia driving earnings in the S&P 500.
2
SPEAKER_02
There is an investment wave.
2
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There is an investment cycle taking place all over the world.
2
SPEAKER_02
And investors are returning to equities again.
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And that s a really powerful thing when it happens on a global synchronized basis.
2
SPEAKER_00
Where do you think bonds are relative historically?
2
SPEAKER_02
Well, I think that bonds have largely been pretty wrong in this cycle.
2
SPEAKER_02
So if we think that s where the smart money is, you look at these wild moves in rates in both directions.
2
SPEAKER_02
What that s telling you is that fixed income market, that volatility, the fixed income market has absolutely nothing to be confident about.
2
SPEAKER_02
In its own ability to handicap what the central bank will or won t do what the inflation rates will or won t be so i don t think that either market is particularly the smart money.
2
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One thing that i guess you could say is that stocks have gotten this moment.
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More correct than bonds have.
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If you just look at what s happened since the market bottomed in 2022, it almost perfectly timed and discounted the recovery in corporate earnings.
2
SPEAKER_02
So the bears in this cycle, the main thing that they ve gotten wrong is not the macro.
2
SPEAKER_02
The stock market bears got the earnings situation wrong.
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SPEAKER_02
They underestimated the extent to which corporate America would find a way to grow profits, find levers to pull, layoffs to do.
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SPEAKER_02
cost rationalizations, cutting spending.
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SPEAKER_02
They just systematically underestimated that capability.
2
SPEAKER_02
So now you have some of the fastest earnings growth in years.
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SPEAKER_02
If you annualize what we ve seen over the last quarter, almost no one expected it.
2
SPEAKER_02
No one s numbers were where they were supposed to be.
2
SPEAKER_02
So that s on the stock side.
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SPEAKER_02
On the bond side, look, I think right now overnight rates are incredibly appealing.
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What wealth managers like myself are trying to do, though, is extend durations and explain to clients that we are now at a juncture where you might want to give up a little bit in nominal yield.
3
SPEAKER_00
in a portfolio in order to lock in a fairly high level of income for a longer stretch.
3
SPEAKER_00
And I think that that s going to play out now across portfolios all over the world, whether we re talking about insurance companies or individuals and everything in between.
3
SPEAKER_00
If you say to yourself, look, yes, it s great.
3
SPEAKER_00
I can get 5.1% on an overnight rate.
3
SPEAKER_00
The thing is, on the first time the Fed cuts interest rates,
3
SPEAKER_00
that rate is no longer gonna be there, and then I m gonna have roll risk.
3
SPEAKER_00
If you could extend out that duration to one year, two years, three years, and start thinking longer term, even if you re accepting 4.5% or 4.75% as you extend, you re giving yourself a lock-in that s longer, and you re reducing the risk of having to roll those bonds when they mature,
3
SPEAKER_00
at what could be a much lower level.
3
SPEAKER_00
So I think if you ask wealth managers like us, how are you approaching the fixed income market right now?
3
SPEAKER_00
We are trying to work with clients to accept the trade-off.
3
SPEAKER_00
We want to lock in a good rate, not focus so much on what the overnight rate is and obsess to the detriment of later performance.
3
SPEAKER_02
Have you changed your recommended ratio of stocks to bonds?
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SPEAKER_02
I mean, I ll put forward a thesis and then answer that question.
3
SPEAKER_02
For a long time, for a decade plus, it seemed as if you really weren t getting paid for the risk you were taking in bonds.
3
SPEAKER_02
And now it feels like you are getting paid.
3
SPEAKER_02
And A, do you believe in that?
3
SPEAKER_02
And B, if so, have you changed the ratio or the recommended ratio where your clients put their money equity to credit?
3
SPEAKER_00
So we haven t changed the ratio, but what we have done in 2020, we put out a letter saying exactly what you just said, where we explained to clients there is no benefit to holding longer dated bonds if they re yielding the same amount as shorter dated bonds.
3
SPEAKER_00
I mean, for us, we re not a hedge fund, but we made this fairly aggressive change in fixed income allocation
3
SPEAKER_00
so that we would be much, much, much shorter duration, and we weren t really giving up anything on yield.
3
SPEAKER_00
In February of this year, we made a change.
3
SPEAKER_00
So we put out a letter to clients in February explaining why we are now going to be lengthening our duration and bonds because right this minute, there is no benefit to longer duration, but we think there s about to be.
3
SPEAKER_00
And so that ll come as a consequence of overnight rates being cut.
3
SPEAKER_00
It won t have an immediate impact right now on client returns, but we re not really trying to time the market.
3
SPEAKER_00
What we re trying to do is do the best with what the market has to offer.
3
SPEAKER_00
We have to have considerations about not just what s the most nominal yield we can collect right now, but what is the way that we can make sure a portfolio is durable enough and prepared for any environment going forward.
3
SPEAKER_01
I want to shift slightly to, you mentioned NVIDIA earlier, I d like to ask about NVIDIA.
3
SPEAKER_01
Last week we were discussing AI and we were discussing the possibility that this is a bubble, as indicated by just the massive levels of speculation that we re seeing both in the private markets and the public markets.
3
SPEAKER_01
And Scott made this comparison to Cisco.
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which is that back in 1999, the safe bet for the internet boom was this company that would be providing all this infrastructure to power the internet, and that company was Cisco.
3
SPEAKER_01
But if you invested in Cisco, you got burned around 90%.
3
SPEAKER_01
Could that perhaps, could AI perhaps be the next shoe to drop?
3
SPEAKER_01
And do you think there s a possibility that NVIDIA could be the next Cisco?
3
SPEAKER_00
So the NVIDIA Cisco comparison is very popular and people have been making it for four years and that s been a huge money loser.
3
SPEAKER_02
No, it s not.
3
SPEAKER_02
It s fucking genius and original, Josh.
3
SPEAKER_00
Rob Arnott made it on stage with us at Future Proof last year.
3
SPEAKER_00
And the similarity is everybody has to own NVIDIA just like everyone had to own Cisco because Cisco was the backbone of the internet.
3
SPEAKER_00
So if you believed in the technology, then you had to believe that Cisco was a good investment.
3
SPEAKER_00
That s true.
3
SPEAKER_00
Here s where things are different.
3
SPEAKER_00
NVIDIA has actually gotten cheaper since the AI boom started, which took place in, uh, chat GPT was introduced in November of 2022.
3
SPEAKER_00
NVIDIA has gone from like 60 times earnings to 50 to 40 to 30.
3
SPEAKER_00
Why does it keep getting cheaper?
3
SPEAKER_00
because the spending that every company and every government organization, everyone on earth is now basically being forced into doing, that spending is what s fueling the earnings growth in Nvidia.
3
SPEAKER_00
Cisco got more expensive because that earnings growth did not materialize, and why not?
3
SPEAKER_00
Cisco was a beneficiary, like many other high-tech companies of the time, of this CapEx explosion due to fears surrounding Y2K.
3
SPEAKER_00
People don t remember that this was a real thing.
3
SPEAKER_00
There was a global prank called Y2K that a handful of scientists played by saying planes were gonna fall out of the sky if everyone didn t upgrade their equipment and software, not next year, not in two years, today, right this second.
3
SPEAKER_00
Unfortunately, Wall Street took that CapEx boom and extrapolated it out into infinity.
3
SPEAKER_00
And when the clock turned over from 1999 into 2000,
3
SPEAKER_00
We really didn t have planes fall out of the sky.
3
SPEAKER_00
And please believe me that I m not joking.
3
SPEAKER_00
Spike Jones directed a Nike commercial and it was a jogger on New Year s Day with planes falling out of the sky and houses exploding.
3
SPEAKER_00
This was a true driver of a CapEx bubble that fizzled out in the year 2000.
3
SPEAKER_00
It s not coincidental that the Nasdaq topped in March.
3
SPEAKER_00
So that didn t happen this time around because it s not an artificial CapEx boom being driven by fears of planes falling out of the sky.
3
SPEAKER_00
It s a legitimate race amongst some of the largest companies on earth, including not just the United States, but China as well.
3
SPEAKER_00
to be positioned for the next technology wave.
3
SPEAKER_00
Everyone involved here.
3
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is old enough to have been involved in the internet boom.
3
SPEAKER_00
And the thing they remember was eventually the land grab, if you didn t grab your land, you were out of the game.
3
SPEAKER_00
So Apple, Microsoft, Alphabet, Amazon, these companies literally have unlimited amounts of CapEx and their spending generates spending amongst everyone else, all of their customers.
3
SPEAKER_00
So you have these hyperscalers and you have all of the companies that are
3
SPEAKER_00
working with the hyperscalers in a race to acquire GPUs and build out their AI services.
3
SPEAKER_00
We re gonna modernize $2 trillion, they say, worth of data centers so that they are GPU, AI-capable data centers.
3
SPEAKER_00
And that s why NVIDIA s earnings are going up, whereas Cisco s did not.
3
SPEAKER_00
So it s a great comparison until you understand the fundamental difference in spending patterns.
3
SPEAKER_02
my sense is every company you speak to is spending money, both financial and human capital, on trying to figure out how AI is gonna upgrade Nabisco s business, right?
3
SPEAKER_02
Every company has been tasked with figuring out how AI is gonna help Chipotle be more efficient or whatever it is.
3
SPEAKER_02
And if AI doesn t prove to be kind of the game changer that I think a lot of people think it is across every company,
3
SPEAKER_02
at the first indication that a lot of these companies don t feel like they need as much AI, they don t need as much compute, and then these GPU sales just level out, could you see a pretty serious drawdown?
3
SPEAKER_02
Because the number I saw that scared the shit out of me is there s been a $2.5 trillion increase in market capitalization around the four big cloud companies.
3
SPEAKER_02
And that s across a variety of dimensions.
3
SPEAKER_02
Their businesses are really robust.
3
SPEAKER_02
But the actual incremental revenue increase that these AI LLMs have inspired is about 20 billion.
3
SPEAKER_02
So you have 120 times revenue based on pretty serious expectations.
3
SPEAKER_02
You don t see that playing out.
3
SPEAKER_00
Oh, no, I actually 100% agree with you.
3
SPEAKER_00
And there s two other elements to this that I think are even scarier.
3
SPEAKER_00
I point out that NVIDIA has gotten cheaper on earnings, which is true, to distinguish this from Cisco, but I think the risk here is an air pocket, and NVIDIA will be the last company to see it coming.
3
SPEAKER_00
So by air pocket, I mean exactly what you just described.
3
SPEAKER_00
There could come a moment, and some people say it s guaranteed, and some people say we ll see, but there could at any time come a moment
3
SPEAKER_00
where there s enough customer feedback at AWS or at Alphabet or at Oracle, where the customer feedback says, look, thank you for all these tools and all this compute that you re offering us, but there s just no ROI from it and we re going to slow down.
3
SPEAKER_00
NVIDIA is the caboose.
3
SPEAKER_00
They are the component supplier to
4
SPEAKER_00
They will be the last to know.
4
SPEAKER_00
You ll hear one CFO make one comment.
4
SPEAKER_00
Actually, some of these plans that we laid out for scaling up, blah, blah, blah.
4
SPEAKER_00
Actually, here s our new guidance and it s lower.
4
SPEAKER_00
And then other CFOs will hear that and they might say, you know what?
4
SPEAKER_00
If Microsoft s not going to spend it breakneck speed next quarter, maybe we aren t either.
4
SPEAKER_00
And you absolutely could see this convulse through the S&P 500.
4
SPEAKER_00
And I think that is the biggest risk to the market right now, the number one risk, an air pocket where all of a sudden.
4
SPEAKER_00
Jensen Wang comes out and says, look, it s very early on in AI.
4
SPEAKER_00
And some of the spending that we thought would materialize in Q3 is getting pushed out into Q4.
4
SPEAKER_00
As companies reassess their plans, that stock price is not ready for that.
4
SPEAKER_00
That s a 20% haircut instantly.
4
SPEAKER_00
So right now, we are pricing
4
SPEAKER_00
the largest technology companies on the premise that there will not be an air pocket, there will be no slowdown, there will be no hiccup.
4
SPEAKER_00
And if one materializes, NVIDIA will be the last to hear about it.
4
SPEAKER_00
And so I think if your portfolio is full tilt AI, you re putting yourself in a position where you re probably going to take more pain than you need to.
4
SPEAKER_00
The other thing, Scott, is it s really incestuous.
4
SPEAKER_00
My spending is your income, your earnings growth.
4
SPEAKER_00
Your earnings growth is my spending.
4
SPEAKER_00
And we are seeing the seven largest market cap companies basically giving contracts to each other.
4
SPEAKER_00
And there s no such thing as a perpetual motion machine.
4
SPEAKER_00
No one has ever invented one.
4
SPEAKER_00
So at a certain point, something exogenous will stop that if it s not being stopped internally.
4
SPEAKER_02
We ll be right back.
4
SPEAKER_01
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This conversation s been so interesting because we started out, it appeared that you were quite bullish on AI and you were talking about the fundamentals and the idea that it is a land grab and something is gonna come of this.
4
SPEAKER_02
But then as you described the incest and this perpetual motion machine concept, the situation feels actually extremely dire based on that characterization.
4
SPEAKER_02
And, you know, last time we spoke,
4
SPEAKER_02
we were sort of talking about, oh, is a recession gonna happen?
4
SPEAKER_02
Do we know?
4
SPEAKER_02
And you said, well, no one knows.
4
SPEAKER_02
But what you pointed out is that it s going to take a shock to the system.
4
SPEAKER_02
There has to be one exogenous event that occurs, and that s what would trigger the recession.
4
SPEAKER_02
That s the only thing we know.
4
SPEAKER_02
The thing that you just described, the story that you just told, that feels to me like that could easily be the shock.
4
SPEAKER_02
So I m just wondering how you re...
4
SPEAKER_02
how you re computing those two thoughts at the same time.
4
SPEAKER_00
Ed, we had a recession.
4
SPEAKER_00
We had a recession caused by caused by the hangover of Y2K in 2000, which I won t rehash the whole thing, but there was this capex explosion that was then not repeated.
4
SPEAKER_00
You had a lot of jobs and startups.
4
SPEAKER_00
You had a lot of economic fuel coming from the instantly wealthy people who were benefiting from this dot com slash wireless telecom bubble.
4
SPEAKER_00
And when it went away, it slowed down a lot of spending.
4
SPEAKER_00
It was not a catastrophic recession.
4
SPEAKER_00
If you were Scott, if you were Scott Galloway, it was.
4
SPEAKER_00
But but for most people, if you didn t, if you didn t live in Silicon Valley,
4
SPEAKER_00
it s very possible that you just like had a normal life and didn t even notice.
4
SPEAKER_00
So statistically, it was a true recession.
4
SPEAKER_00
It was multiple quarters of GDP growth and contraction, but it was not on a par with what we experienced five years later in 2007, 2008, the onset of that.
4
SPEAKER_00
What was interesting about the 2000 recession is that two horrible things happened on the heels of that CapEx bubble meltdown I described.
4
SPEAKER_00
I m both of which are one of which is definitely exogenous shock and the other is kind of a stock market related shock so just just humor me on this it s it s worth getting into.
4
SPEAKER_00
The first thing that happened was this dot com bubble meltdown the nasdaq fell ninety percent that was catastrophic for people working in the high tech industry and people working on wall street.
4
SPEAKER_00
The investment banking machinery just ground to a halt.
4
SPEAKER_00
There were no more IPOs.
4
SPEAKER_00
There was no more M&A.
4
SPEAKER_00
It was just a disastrous time for capital formation, for venture, for tech.
4
SPEAKER_00
Okay.
4
SPEAKER_00
But then here s what happened on the heels of that.
4
SPEAKER_00
Because of that stock market meltdown, everybody started to ask more questions about their investments in general, and two massive frauds were uncovered.
4
SPEAKER_00
One was Enron.
4
SPEAKER_00
The other was WorldCom.
4
SPEAKER_00
These contributed to a sentiment depression for stocks, which prolonged the negativity of that economic cycle.
4
SPEAKER_00
Nobody trusted anyone anymore.
4
SPEAKER_00
Arthur Anderson, the largest accounting firm in the country, was literally forced out of business.
4
SPEAKER_00
WorldCom was one of the most widely held stocks.
4
SPEAKER_00
It was MCI.
4
SPEAKER_00
It was the equivalent of what Verizon and AT&T are today.
4
SPEAKER_00
Enron was one of the largest publicly traded companies, a giant utility.
4
SPEAKER_00
If you can t trust the phone company and the gas utility as investments, what the fuck else would you invest in?
4
SPEAKER_00
So this was a malaise that hung over the beginning of the millennium and had a real sentiment and therefore fundamental impact on markets.
4
SPEAKER_00
And then, as if that wasn t enough,
4
SPEAKER_00
into the same stew we had 9-11.
4
SPEAKER_00
And so that cycle, that cycle had these highly specific exogenous shocks.
4
SPEAKER_00
And I think to answer your question, the next one will as well, but can Nvidia crashing on the stock market cause an economic recession in the real economy?
4
SPEAKER_00
I m not so sure about that one.
4
SPEAKER_00
So that could be catastrophic for the stock market, but it doesn t necessarily rise to the level of shock that you re describing that would spill over into the real economy and cause a recession.
4
SPEAKER_00
I suppose it could, but to answer your question, I don t think that that s the thing.
4
SPEAKER_00
That s not the thing that I think causes the next big economic event.
4
SPEAKER_00
I think it ll be a big a big deal in the stock market.
4
SPEAKER_00
It ll cause valuations to realign.
4
SPEAKER_00
It ll definitely hit venture valuations.
4
SPEAKER_00
It ll definitely change attitudes.
4
SPEAKER_00
But, you know, I don t think that s the catastrophe that everyone seems to be looking for.
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I have in my notes here, discuss meme stocks.
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So yeah, so just to rehash, you know, GameStop shares surged, so did AMC, so did a few other meme stocks.
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Those shares are now basically coming back down to Earth.
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You know, I m sure the first GameStop saga was a surprise to you.
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I m wondering, did this one catch you off guard as well?
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The only comment that I would really make on this is that the sequel is never as good as the original.
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With the exception of Empire Strikes Back and Godfather 2.
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Aliens.
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This was never going to run.
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Aliens is better than alien.
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Okay.
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There s some exceptions, but as a general rule, I don t think that anyone should have thought that we were going back in time to 2021.
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By the way, same reason I don t think the quote-unquote tech bubble today in any way echoes, you know, what went on in the year 2000.
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I think there are bubbles at all times and, you know, in 2021 we had a SPAC bubble, we had a crypto bubble.
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These things will crop up.
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So what s happening today is a little bit of an echo of 2021 with the meme stocks, but it s not gonna rise to that level.
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It ain t gonna be on Saturday Night Live.
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It s not gonna
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be as much fun on Twitter.
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If it is a permanent feature of the markets, how important is it for you and for other investors to be paying attention?
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It s not because these waves will ebb and flow and I m not a hedge fund.
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We re not shorting stocks.
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It s not what we do.
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We re not at risk of this stuff.
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One thing I ll say is that I was there for the birth of the original meme stock.
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It was a company called iOmega.
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It had captured the attention of investors on message boards.
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This is prior to social media.
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So this is mid to late 90s.
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It was the first time investors had a venue from all over the country, all over the world to exchange comments with each other.
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Prior to that, it was people sitting in the waiting room at a brokerage firm.
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Looking at the TV, you would talk to two people at a time about the markets.
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This was hundreds of thousands of people who would wake up, go on the early version of the internet message boards.
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It was a site called Raging Bull.
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There was Yahoo Finance.
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There were a small handful of places that you could go and you could talk to people for the first time about the stocks that you were interested in.
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Um, I omega was a penny stock that basically got taken up to a massive valuation.
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You had people on these message boards, goading each other into buying more.
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You had people doing their own homespun due diligence, like driving past the corporate headquarters, parking lot, and putting up messages about how many cars were in the lot.
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And it was a lot of fun.
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That was the first meme stock.
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And that predates Twitter.
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and it predates Facebook.
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So this is not new.
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It s not a new phenomenon.
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And so I don t think we should treat it as anything novel or unique.
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There are unique aspects to it.
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The scale of it obviously grows with the scale of the internet, but people have been doing this since the bucket shop days, 120 years ago, and Jesse Livermore would somehow orchestrate it so that an entire room of bucket shop brokers and traders
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in St.
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Louis would all get excited about the same railroad stock at the same time.
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And the results were no different than what we saw with GameStop and AMC.
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Josh, what do you think the media is missing in the investment markets?
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What do you think is going to be a story that people aren t talking about right now?
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I think we re on the verge, we re in the process and on the verge of creating more multimillion dollar households, 30 something households and 40 something households than ever before in the history of America.
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When you look at 401k balances, when you look at the rate of accumulation people have enjoyed as a result of stock options, stock-based compensation, when you look at liquidity, you look at salaries, millionaire is now going to be like this generic catch-all for the middle class.
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One of the things that you talk about a lot, Scott, and I try to talk about as well is.
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If you re not somehow in the stock market, even if that just means the company you work for is giving you stock or you re not in real estate, you literally have no chance, no chance to, to, to live in the world that is currently under construction.
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We are building a system where if you don t have financial assets, you just are not going to be a part of it.
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I know a lot of people are trying to address it.
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Talked to Brad Gerstner a bunch about issuing stock market accounts to babies at the time of their birth.
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But like in the end, we have to figure out how to make everybody an owner in this economy and give everyone the opportunity to enjoy the growth of profits.
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Because if we don t, the bifurcation that we ve experienced thus far is only gonna get worse.
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We are going to have an explosion in middle-class millionaire households like nothing we ve ever had before.
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It s going to reshape the economy.
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And if you re on the outside of that, it s going to be really problematic, not just for you, but for subsequent generations.
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And I think about that all the time because of where I sit.
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I talk to
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Uh, current and potential investors.
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And when you hear people s stories, how they got to their first half million dollars, how they got to their first $5 million, you just realize like, this is what everyone s going to have to be able to do.
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The prices in the economy, the costs, the inability to invent more hours during which to work for hourly pay, it s just going to engender the situation where you re going to need to have a portfolio to fund the lifestyle that you want to live.
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To follow up, last time we had you on, Josh, you gave me some really great advice around investing.
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You told me- By Nvidia.
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Yes.
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By Cisco.
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You told me stop rooting for the market to rally.
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Because as you correctly pointed out, I m young, I m in buying mode, I should be rooting for cheap stocks.
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And I thought that was really great advice.
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I d love to ask for just to end just one more round of advice.
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Lots of college graduations happening this week.
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What would be your advice to any graduating seniors who might be listening right now?
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Make yourself useful.
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This is the single best advice that I ever got, and I try to pass this on.
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You come into a situation, get a job, you have people above you, point blank, go to the person that you directly report to and say, what is the worst part of your job?
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What do you hate doing the most?
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I ll do it.
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Give me the worst 10% of your job, and then ask for more.
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Okay, I m now doing the worst 10% of your job.
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I want the next worst 10% of your job.
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What is the thing you could train me to do that I can make it so you never have to worry about it again?
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Once you re doing the 20% worst part of someone s job, you are indispensable.
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You are imminently useful, and they cannot live without you.
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If you carry yourself that way in your 20s,
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By the time you re in your 30s, you re going to have people begging you to do the worst part of your job.
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That is from, from my perspective, the number one thing that young people mostly don t seem to understand.
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They re more worried about the amenities of their job.
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You have to be useful to the people above you.
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And one day the people younger than you will be begging to be useful to you.
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Josh Brown is the co-founder and CEO of Ritholtz Wealth Management, a New York City-based investment advisory firm managing more than $4 billion in assets for individuals, corporate retirement plans, and foundations.
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Josh, you know this.
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We love having you on the show.
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Thanks for your time.
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Thanks, Josh.
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Thank you guys so much.
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This has been so much fun.
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Algebra of wealth.
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Scott, you often tell young people not to follow their passion, but to follow their talent.
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Can you break down what you mean by that and how it relates to attaining financial security?
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Wow, we are really squeezing as much juice out of this lemon as possible.
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It s literally going to be on my tombstone.
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Don t follow your passion.
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I m pretty sure it s on your Wikipedia page.
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Scott Gunn is a professor of marketing.
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He says to not follow your passion.
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Yeah, could be worse.
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At least it doesn t say I was like a priest that was defrocked.
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That s what I want to be known as.
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I don t know where that came from.
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Look, here s the thing, and I ve said this, the person telling you to follow your passion is already rich.
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And the majority of people who got wealthy did it in a fairly boring industry.
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Young people often mistake their hobbies for their passion.
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I wanted to be quarterback of the Jets.
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And then I thought, well, maybe I can, you know, write films or something or write scripts.
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And then what I realized is that, okay, I m a really mediocre athlete.
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I m not that talented at that point at writing.
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I wanted to be an investment banker, because it sounded really romantic.
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I wasn t very good at that.
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I kept workshopping, and this is your job in your 20s, to keep workshopping until you find something that you have some natural ability at, that you could be great at, and here s the key part, has a 90 plus percent employment rate.
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And the good news is 98% of industries do have a 90 plus percent employment rate.
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The romance vanity industries have a 90 plus percent unemployment rate, because every kid initially wants to follow their dream,
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and open a restaurant or be a DJ or pursue their career in fashion.
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So there are too many people, which means the few companies that make it in those industries can pay those people next to nothing.
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And I don t want to crush anybody s dream.
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If you want to be an athlete, if you want to be a fashion designer, if you want to have a jewelry line,
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Whatever it might be, fine.
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But set, ring fence it with a certain time limit.
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And if you aren t getting flashing green lights that you re in the top 0.1%, which you will need to be, then try and find something where you can be in the top 10% in an industry that has a 90 plus percent employment rate.
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SAG-AFTRA is the Union for Actors, and 87%, these are the most talented 180,000 people in the world in the field of acting.
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And last year, 87% didn t qualify for health insurance because they didn t make more than $23,000.
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Whereas the millionaire next door opened a car wash and then bought another one.
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Be a DJ on weekends.
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Find something you re good at that you could be great at.
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And then the money, the accoutrements, the prestige, the camaraderie, or the relevance will make you passionate about whatever that thing is.
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Get passionate about economic security, taking care of your kids, taking care of your parents, and living a wonderful life, which a capitalist society offers to anybody that makes good money, regardless of how fucking lame it sounds.
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And don t become a business podcast co-host.
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OK.
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There you go.
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But you re in the top 0.1%.
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You re in the top 0.1%.
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You would describe this as a sexy business.
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Do you think this is a vanity business?
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It s on the cusp.
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It s almost.
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It s kind of there.
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We kind of want to be sexy, but not quite.
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I mean, it s, yeah.
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I love my job.
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But let s just double click on this.
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Podcasting, right?
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There are 1.7 million podcasts.
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1.7 million podcasts with people writing, producing, recording, editing, distributing.
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I mean, this is, this shit s, it sounds easy, it s not, right?
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It s real work.
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1.7 million, how many do you think are profitable?
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And I don t know the answer, I m just going to guess.
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Of those 1.7 million, how many do you think are profitable?
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I don t know.
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I mean, I ve heard from you it s the top 1%, something about the top 1%, but I don t know.
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I would guess maybe 1,000, 10,000?
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It s probably too much.
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OK, 1% would be 17,000.
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There s no way the number 17,000th most downloaded podcast is not hemorrhaging money.
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I would bet optimistically, optimistically, it s the top 1,000.
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So that s the top 0.01%.
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In other words, it s about probably the same as being a professional basketball player.
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And by the way,
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and this is a flex, we re in the top 100.
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We re in the top 0.0005%.
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Right now, you re not Kobe Bryant, you re not Michael Jordan, but you re Scottie Pippen.
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It s a great life for you.
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But be clear, folks, don t go into podcasting expecting to be that.
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I just want to point out that if I m Scottie Pippen, I think you basically just called yourself the Michael Jordan of podcasting.
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Oh, 100%.
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100%.
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100%.
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I think I m more like, I d like to be Rex Chapman.
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I like him.
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He s soulful, went through a pretty big crash, but came back and is now helping people.
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I m the Rex Chapman of podcasting.
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I would take that.
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I think Rex Chapman is the Rex Chapman of podcasting.
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He s got his own podcast.
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Yeah, that s right.
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He s doing really well, isn t he?
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He s doing really well.
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Stick with Michael Jordan.
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