9-3-26 Is the Stock Market Expensive or Cheap?

0:00And that was something completely different. Forget everything you've been told by others before. Like Mike Tyson says, you know, you can have the best plan until you get the first punch in the nose. Can't really for the real deal. So that's what happens with the Fed chairs as they start out with this great idea. And then they're back on their heels trying to fight some type of market drawdown, economic crisis, you know, whatever it is. The full story. And just for the record, that's two weeks in a row that we've used at Mike Tyson quote. That's true. The whole Lam Shalada. That's the name of the next show. There's not going to be a punch in the face. It's money news and information you can use to grow financially healthy, wealthy and wise. What are we talking about again? Financial literacy. Now, welcome in the real deal. Personally, still a member of the Kiss Army. The real investment show with Lance Roberts. Can't be like a, I was sort of affiliated with the Kiss Army. No, no, you had to have the card that says you were a member of the Kiss Army. So, if not, dollar bunch of lasers presented by RIA advisors.

1:04All right. Good morning. Welcome to the show. It is, of course, Thursday, second best day of the week. That also means Michael Lee, which is joining this morning. We're talking a little bit about valuations. Kate versus Pegg. What's one's right? What's it telling us? And we'll get into that a bit this morning. Also, we have the federal reserve meeting coming up here in the next week or so. So, we will talk a little bit this morning about this increase in oil prices. Is that going to put pressure on the Fed to high rates? But the interesting side of that, the other side of that argument is that employment is certainly coming in a lot weaker than expected. We saw the Jolt report earlier this week. Certainly showed some weakness in the job opening labor turnover survey report. Yesterday's ADP report came in weaker than expected at about 38,000 jobs. That was less than the 47,000 expected. That's been on a weakening trend as well. And that's also had a little bit of a correlation with some of the recent reports from the BLS. So, Friday's employment report, if it comes in substantially weaker than kind of expectations,

2:08that may certainly pull down some rate high gods for the Fed coming up later this month again, because full employment and price stability are the two kind of aims for the Fed. And employment certainly not showing a lot of strength there as well. So, certainly some concerns on the economic front, even though we do have a pickup in interest rates due to oil prices. And oil prices, of course, have been on a pretty sharp tear here over the last few days. As we've re-accelerated attacks with Iran, we'll see how this goes. We're putting a lot of pressure on Iran to try to get them back to the negotiating table. We'll see what happens there, but those increase in attacks, certainly lifting oil prices that's feeding into the term premium that we're seeing for bonds right now, lifting interest rates kind of across the curve. So, just something to kind of pay attention to. Outside of that, we have some non-farm productivity. Today, we have the jobless claims number day. And again, tomorrow is the big day with the employment report. So, markets will be focused on that.

3:09Snowflake announced a deal with Amazon last night that stocks up 23, 24% this morning. So, we continue to see deals being done inside of the AI space in particular. And that's certainly leading to a lot of kind of optimism in some of these stocks and some of these areas of the markets. But spending, of course, is also continuing to accelerate. So, we've got a lot of spending going on, very interesting chart out this morning that corporate borrowing costs are now rising. That makes complete sense because as you're getting more and more demand for corporate borrowing to build out data centers, etc. That demand is in basic economic supply and demand. When you have more demand for something, then that gives people the ability to lift prices. And that's what's happening with rates in the corporate side as well, is that the demand for corporate borrowing is now allowing the lenders to hike interest rates to make more money. Right? So, it's the profit motive. So, we're definitely seeing that, but that productive investment certainly showing up inside of economic activity.

4:12Again, that is, that cap expending is productive and is becoming a important part of the actual GDP growth that we're getting in the economy. So, it's okay to, you know, again, borrowing money is not, you know, we kind of have this view lately that borrowing money is bad. You know, it's terrible. But if you're borrowing money to create a higher return on investment in the future, certainly something you want to do. If I can borrow a million dollars at 5%, but I can invest at 10%, and pick up the differential, why would I not do that? So, leverage is fine as long as it's used properly and under control, and it's used for productive purposes, which is exactly what's occurring here, and that's why we're starting to see that feed back into economic growth and activity. Right? With that, let's get to what you need to know before the bell this morning, and we'll get over to Michael Leewoods. Market stuck. You know, we've talked about this for the last few days. Market rally just a little bit yesterday coming right off this support line that we had from this kind of previous pullback.

5:13And again, we just, we were just kind of stuck within this kind of consolidation bracket. Very similar to what we saw here for about a month or so previously, we finally broke out of that consolidation, moved up to kind of a new ban. But the market really has not done a lot here over the last really three months. We've just really been kind of stuck. That had had, overall, had a positive return from June kind of through, through, through August. But again, not much. And it's been pretty frustrating here as we continue to see markets just kind of rotate from one area to another, you know, one day, technology's down and health cares up next day, health cares down technologies up. So money's just kind of jumping back and forth to the market. And that rotation is certainly just kind of weighing on investors because you know, it's like I have these stocks. They're working today, but they don't work tomorrow. There's been certain pockets of the market that have been under a lot of pressure. In particular, you know, as we've talked about before, where, where all kind of the chase was previously was in the momentum sector of the markets.

6:16Now remember the momentum ETF MTUM, which is this is what I'm showing you, changes out the holdings, the largest holdings based on what stocks are currently running and providing momentum. But that momentum trade has certainly been under a good bit of pressure as of late. We're on a sell signal. We're fairly deeply oversold. So as, and again, what we should expect here at some point is that we're likely going to see a pickup in that momentum trade. And that may not be for another month or so, but as we start getting into the end of the year, we may see a return to momentum, particularly as we start to kind of come down potentially test, you know, lower levels of support. And we have some support running really kind of back going to kind of June, where we have these kind of previous bottom. So we could definitely see a pullback here to that. And you certainly have an issue potentially with the head and shoulders pattern breaking out. We break this neckline. We could see a bit move lower in momentum. Now we're not there yet. And again, something worth paying attention to.

7:16But again, this has been one of those trades. It was very hot earlier this year. A lot of people piling into the momentum trade. We're now starting that we have been watching that reverse and momentum really kind of come out of the market at the same time. If we take a look at the value index, this is value stocks that's been doing pretty well. Again, holding up here has been in a nice uptrend overall. But again, holding, you know, kind of with the overall market, these value stocks have really been the place to kind of hide out during this turmoil that we've seen the money coming out of momentum has been migrating more towards valuation type stocks, value stocks. So we're certainly seeing that on the large cap side. And then of course, if we take a look at kind of low beta stocks as well, this is low volatility. That also has been under some pressure here. So even though we're kind of seeing this kind of across the board, we're watching kind of this market just kind of gravitate sideways here. And again, this is why it's frustrating at the moment. It's like nothing's really doing much of anything. And we're seeing some areas underperformed, some areas outperformed, but that rotation happens pretty quickly across the board.

8:22And then lastly, if we just look at, for instance, high quality. This is US quality, this is the US quality factor. Again, kind of the same premise as the S&P 500 right now. Just we've had this move up consolidation has been really kind of breaking through this consolidation process. Sitting right on the 50 day moving average on a sell signal and getting decently oversold. So again, just once we kind of talk about different areas of the market, you can kind of see where that pocket of weakness is is in those previous kind of high beta, high impact areas like semi-conductors, those remain under pressure. Money's kind of rotating back into more safety defensive right now. And for this time of the year, that's not surprising to a large degree. And if we take a look at things like the volatility index, as we talked about before, that remains very compressed. Putting hedges on portfolios remains extremely cheap. Nobody wants to buy puts right now, even though we're going through this kind of market weakness. We're not seeing a gravitation towards put buying at this point.

9:22The cost for adding hedges to your portfolio is still very, very cheap, cheap insurance right now to add puts to your portfolio. But again, just try to kind of keep a watch on this. We're just stuck here. Don't make any big, as we talked about yesterday. Don't make any big moves, don't make any rash decisions until we still this market kind of starts to tell us what it wants to do. Anyway, that's what you need to know before the bell this morning. We'll come back, pick up with Michael Leewood, talk a little bit about valuations. Don't go away. Get daily investment news you can use delivered at the speed of the internet at realinvestmentadvice.com. How can you pay for college without sacrificing your retirement? Our next dynamic learning series will show you how to create a flexible college funding strategy without jeopardizing your retirement or going into debt. It's the smart way to pay for college.

10:25Here's the September through with Sarah Banger and Jonathan Pan. 529 plans aren't the whole story. Unlocking scholarships, education savings accounts, and making smart decisions before tuition bills arrive can help you avoid paying more than you need to. What's the smart way to pay for college? Register today for our dynamic learning series Thursday September through with Banger and Pan at realinvestmentadvice.com. We're listening to the real investment show. Good morning, welcome to show. Java Joe asked this morning when his land is going on vacation. What? You don't like me here? I mean, happy to take a vacation. My day true. But the response was his last Italian adventure curved his interest in vacation. True story.

11:25You don't know the story. We got robbed when we were in Italy. So anyway, no, it's all good. No, no vacation plan in time soon. Maybe December. My son's coming in from the UK. So we will probably go spend a few days with him. Hang it out. So we'll see some. So be a while. You're stuck with me for a while. Anyway, let's bring Mike in. Morning, Mike. How are you? I'm doing great. Lance. Good. How about you? Doing well. It's Thursday. So, you know, weekends upon us. The Liberty weekend. Got your plans. Long weekend. We got a bunch of little things going on, but nothing big. How about you guys? Nothing. One of my favorite weekends. We actually my daughter's coming into town. So my wife and her will probably hang out for a Saturday and Sunday. Get their nails done. Do whatever the girls do. Right. They just they do the wrong thing. Anyway, but stay out of your hair. So yeah, it should be pleasant. All right. Well, let's talk a little bit about let's let's let's start with the Fed here real quick because we've got the FOMC meeting coming up fairly quickly. We've got rate high gods running about 53 54% last time I checked it may have changed here last day or so, but

12:36is about a 50 50 split between the Fed Mike high grades. They may not high grades. But again, we saw the ADP report yesterday. I'm very interested to watch the employment report we get tomorrow. If that's as I was saying, if that's substantially weaker, that certainly takes some of the pressure off the Fed to high grades. And then the other side of it is we're seeing rates certainly come up here on the interest rate side, but a lot of that's due to the term premium coming up because of oil prices. And it would seem to me that Kevin Worsh would be a little bit more sensitive to hiking rates into an oil spike, which is probably temporary at best. And not a permanent condition. What do you think? Yeah, yeah, Lance, I'm actually confused. So like you said, the odds are actually a little greater than 50 50. I think it's 65 35. Towards a rate hike. But if you look at kind of what's going on, right? We know that inflation has been elevated because of higher oil and other impacts of the war. The last two inflation reports have been one was negative point four, one was plus point two, benign, right?

13:44So inflation is one of the key gauges that the Fed has to deal with. And that at least for two months now has been benign and expectations are that the next one, which will be out, I believe in a week or two, is not supposed to jump that much. So, you know, again, point two. If you look at core year every year inflation, it's exactly where it was before the war started now. And remember inflation was on a downward trend before the war very slow, but downward trend before the war started. So you have inflation that has been elevated due to a supply shock of which the fed hiking rates will have no impact on what goes on in Iran. Right? Now you have employment, which there were, I think it was last Friday. They revised another 80,000 jobs out of employment. This is after it was reported down 23,000 jobs. And we're only averaging, I think the numbers 30, 35,000 jobs, new jobs in aggregate a month for the last six months.

14:49It's a pretty weak labor market. It's growing. And the unemployment rate has been very stable, but the participation rate has dropped by over 1% over the last year. So people leave in a workforce, some for legitimate reasons, some because they can't find jobs. So we have an environment where if you just kind of isolate those things, you would say the fed should probably be talking about cutting rates, not increasing rates. And, you know, again, keep in mind that interest rates are well above where the economy's been growing. The last GDP report was, I believe it was 1.5% growth. And all of that growth is coming from AI catbacks. Right? If you strip that out, this economy is probably flat growth, maybe even negative growth. So you have all those fundamentals that are what the fed, you know, the fed is price stability and full employment are their two goals. And that should be driving policy.

15:58Now the flip side of the story are our bond yields, bond yields are rising here and abroad. And you know, we've seen what the Treasury Department has done under best and they're increasing their buybacks. Let me jump in with the real quick because there's a bit of a bit of a misstatement that's being made is that I was listening to a podcast yesterday and the person on this podcast was saying, well, you saw what happened with the Treasury. They came out and did these buybacks and you know, they got absolutely nothing for it. They didn't do any buyback, yet they don't start till tomorrow. And they run through like November the 9th. So, you know, we haven't even started doing those buyback that buyback operation hasn't even started yet. Right. And you know, regardless, there's it's one thing after another just weighing on the bond market, whether it's AI debt, whether it's the price of oil, it's, you know, now it's the yen. What's happening with the yen, the yen is spiking this morning. Is that weighing on bonds are actually up today. But you know, it's all these factors. So, so is Warsh going to hike rates to give a better view of the market that he really cares about inflation.

17:16Right. I think the market saying, well, he's just talking to talk, but he's not going to raise rates because he doesn't, he doesn't really, he's not as vigilant about inflation as he may say. But I agree with that statement, Mike, but I think you have to quantify again. So let's let's play on Fed Chairman Warsh, right. And yes, I'm being vigilant about inflation, but what I'm concerned about is long term inflationary pressures. I'm not, I'm not some concerned about short term inflationary pressures. And I think the market is really focusing on, you know, what's happening with inflation near term, which is a lot of that's been due to Iran, what's going on with oil prices, etc. that feed through into the inflation loop. But that's not again, that's not long term pressure. If I'm seeing three and a half percent, four percent, four and a half percent nominal growth in the economy. And I'm seeing wages on the rise, which, you know, would be a good indicator you've got good strong nominal growth. Then I'm worried about higher inflation rates in the future being more sustained.

18:19And if I'm worried about an overheating economy because of this build out, etc. Certainly makes sense to start hiking in that environment, but to hike into an environment where you just have an oil price issue for the most part occurring. And when you look underneath the surface, you see demand destruction through personal consumption expenditures. That's weaker, employment's weaker. You're seeing that demand destruction come in. It would seem a little bit kind of contradictory to go and hike into that. And then immediately have to turn around and cut rates if you get an oil price decline. Right. That's my point. This seems like a PR hike. If they're going to hike versus a fundamental hike. And you made a great point, right. Inflation expectations. What are they telling us? Right. What are five year tenure inflation expectations telling us what they actually tell us is that the inflation, the expected inflation based on the way bonds trade, not surveys where people can just willy nearly say whatever they want.

19:20But based on how money is being invested by the largest investment firms by countries, you know, all the insurance companies endowment funds pension funds. It's telling us that inflation expectations are actually a little bit lower today than they were before the war started. So if you're looking at inflation expectations, that's not a reason to hike rates. If you're looking at what inflation may do for the next month or two. Okay, but you know, you don't have you rates don't have control over over Iran. So again, I'm very kind of confused with why the market is pushing this rate height scenario so much. It seems like a big stretch for the for wars to hike rates into an economy that's pretty weak into a very recent inflation data that is not very concerning. But you know, it's important to know we'll get the employment number tomorrow.

20:23You know, based on everything we've seen, we should expect it to be, you know, probably within 50,000 of zero could be minus 50 plus 50. But I wouldn't expect a gangbusters number. And then we'll get CPI before the Fed meets. You know, so what's the, you know, let's just say we get a point one or point two on CPI. That brings, if we get point two, that brings the three month average to zero. Is that really where the Fed wants to be hiking rates? And why, you know, why are so many people calling for a rate height? Is that going to calm the bond market down? Maybe, but, you know, so that that's I think what we're dealing with is. I think some possibly irrational calls for rate hikes. And I'm not calling for a rate cut. But I am saying that that they're the Fed's objectives. What they were chartered to do if you're just looking at that says that they should probably be thinking about rate cuts, not rate hikes.

21:28Yeah, and it is very interesting. Again, you know, part of what's going on in the markets right now is that a market's just trying to start to figure out how to go back to fundamentals rather than leaning on the Fed. For direction, the market's out here, you know, kind of flailing around a bit trying to figure out, OK, we don't have the Fed giving us any direction now. So I've got to really try to figure out what rate should be. So we're also seeing part of that transition into this environment where there's no where there's. I wouldn't say no forward guidance because we just guidance guidance from Worshit the Jacksonville summit. But an environment with much less forward guidance than what it used to. Right. And you know, what's making that a little harder is that some of the Fed member, other Fed members are still speaking. So there are spouss in their views. Worshit pretty quiet. And that's the one you want to hear the most. So, you know, there have been hawks, there have been doves and they're very confusing to be honest. I'm drawing a blank on her name, but the one from Cleveland wants to hide rates yesterday.

22:30Someone was out there a week or so ago saying that, you know, maybe we're certainly we shouldn't be hiking rates. Maybe we should be cutting rates. So, so that's not helping either the fact that Worshit isn't speaking and you have these. It's better. Fed speakers that are all over the place. And again, they're providing. And which is also kind of interesting because the Fed says Kevin Worshit says we don't want to be providing. So, you know, we've got to get out into the markets, but then you got all these Fed speakers running around providing guidance to the markets. Right. And it's a, you know, it's just a vote. Right. So, best views from a voting perspective manner just as much as Worshit. They each get one vote. Right. So, you have 11. I think it's 11 out of 12 people speaking and one that's not. He happens to be the chair. But nonetheless, it's. And I think it's a good idea to have some confusion as well. You know, I mean, if he's really going to push this forward guidance thing, he should also limit speeches or certainly speeches on policy on a monetary policy.

23:36Right. You know, maybe we should go back to a Fed that just doesn't say anything at all. And they just keep it all internal. Maybe that would be better. Yeah. Yeah. Yeah. Exactly. Just go back to the old days. All right. Let's shift gears here. Mike and talk a little bit about valuations. Mike published an article yesterday on our websites. If you got a real investment vice.com, you can get the article. We're kind of go through some of this here this morning. But, you know, one of the things that we see going around a lot, Mike is, you know, valuations are high in the markets. Take a look at Schiller's KPE ratio, which by the way, the KPE is was produced by Dr. Robert Schiller. It looks at 10 year annualized earnings and smooth that and gives you the sickly adjusted P E ratio, right? Price earnings ratio. And so this has been widely used as a benchmark for the markets. And whenever there's somebody out there wanting to, you know, discuss. So the markets are so overvalued right now, you need to be careful. They'll show you a chart of of KPE valuations, which looks like this. And again, KPE valuations are elevated. We're up to about 40, between 39 and 40, depending on the day.

24:45On valuations highest level we've had since the dot com crisis. And certainly a great reason to sit here and go. And markets are expensive. Now importantly about this is we've, Mike and I have talked about here before on the show is that what valuations are don't do is there a terrible timing indicator. Looking at this chart saying, OK, I'm getting out of stocks because evaluations here can be a really, really bad move because these valuations mean very little over one year. They have a little bit more impact over five years, but over 10 years they do tell you that returns from stocks should be lower on average. And again, that's what history tells us about valuations. But that's that's what we're wrestling with here today is in terms of looking at markets trying to understand where we are and looking at valuations. Certainly I have been a great piece of kind of the, you know, kind of the bearish view of why you should get out of the markets. Why markets are going to crash, but that's really not what valuations tell you in the short term. They just tell you that people are willing to overpay for the E by right increasing the price of the PM. We've certainly seen that over the last few years might.

25:56Yeah, it's a, you know, we was at about a month or two ago. I wrote an article comparing Nvidia to Walmart. And when you look at their price earnings, they were virtually the same and they still are. But if you just look at their forward price to earnings, Walmart's in the low 30s in video is I want to say like 14 or 15. So, you know, what I think is really important and you know, if you read the article that the one point I hope you got across is that the two valuations are two different things. They're telling you two different things. One is saying the price versus what's happened first reality, what we know the other one is giving you the price versus what we think we know what Wall Street expects and pass in future are obviously two different things, which all of this leads to kind of one big question. How, how will AI benefit the economy and when and that's the bet that's being made that, you know, and that helps explain why so the peg ratio, you know, you talked about the cable of it.

27:11The peg ratio is forward price to earnings over a three to five year growth rate forward price to earnings is one year, one year out. So when I just had Nvidia was 14. That's looking at Nvidia's expected earnings for the next one year. That's a denominator with the price above it in the numerator. Right. So what you're banking on is that Nvidia is a very cheap stock if Wall Street's right. It's an even cheaper stock if Wall Street underestimated it and it could be an expensive stock if they overestimated that number. So we're going on forecast and that's risky because no one knows what's going to happen this afternoon let alone two three four or five years ago. So the peg ratio is that forward price to earnings divided by a three to five year expected growth rate. So as risky as a one year for a P is the peg ratio gets even riskier, but the peg ratio is the cheapest it's been in in 30 years, 35 years and maybe even longer than that.

28:21So what the kind of paradox is is that we are very expensive versus the trends of the past and pretty cheap, very cheap versus what we think the future will hold. And as investors, especially if you're a long term buy and hold investor, that's where you really have to say, OK, are these forecasts right? Are they too low or are they too high? And at the end of the day, this all comes down to AI when and how will it produce benefits to the economy that will allow money to flow not just to Nvidia and a very small handful of companies, but to the entire universe of large S and P 500 small businesses, people, governments, everything. And you know, I've been doing a lot of work on that my last my article last week, the Gilligan's Island really talks about innovation lays a groundwork for why innovation is so important for economic growth.

29:25I'm working on one, hopefully we'll get it out next Wednesday that kind of talks about the distribution of those innovation benefits and things like weak links that even though you have all this innovation, if you don't have electricity, it's hard to have data centers. So that's, you know, electricity is a weak link in some cases. So and that impedes the ability of an innovation to really have its full effect. So, you know, I think that's what investors have to realize is that the future in the past may be the same trend or AI could could cause that growth rate to expand exponentially or it may be a lot of money. Or it may take 30 years for AI to truly impact the economy in a good way and the markets overpaying. So these are the things that, you know, I've been spending a lot of time reading, watching some videos, trying to get my head around how this huge innovation, which is almost most likely to be a game changer when will it be a game changer and how.

30:38And no one and look, you know, I can study this 24 seven for the next six months and I'm not going to have the answer. No one has the answer. We don't know how things play out, but I think if you're long term buying hold. Look at the cape and it's telling you the 10 years may not be so good, but I think the trajectory of innovation that we're on now may make that argument bunk or it may make it come completely true. Or somewhere in between we could fall 40% next year and then rally for the next, you know, nine years and get to a zero percent. Exactly. And that's the way they work, right? You know, this is the whole misunderstanding in Cape. Everybody says, well, I'm getting out of the market because Cape ratio is 40 and that says forward returns over the next 10 years are going to be likely negative 2%. Historically speaking. So I'm going to get out of the market. That's not what that means. It just means that yes, on a buy and hold basis over the next 10 years, your return will probably be zero or slightly less.

31:42But that doesn't mean every single year, it'll be up 10% one year up 10% the next year down 30% up 10 up 10 up 10 up 10 you wind up at zero whatever the numbers work. But you know, it does again, you know, we saw this in real time between 2000 to 2013, you had 250% corrections in that period, but you had big rallies during that process as well. Where you could make money, the problem is just being able to avoid the decline, at least to some degree and bring this chart back up on peg ratios. And here's the issue with peg ratios as well, which is to your point, Mike, this is all based on forward estimates. And what you'll notice is that historically when peg ratios are extremely cheap like they are now, there's big reversions in that. And the reason there's big reversions in that is because there's a recession or something happens and those forward estimates get cut sharply, which causes that peg ratio to rise. The P's not declining that particularly that much, but the estimates are being cut that bottom line of the peg, the earnings growth are being cut so sharply that peg rises very quickly.

32:50Right, the G is very volatile and it's going to change quarter to quarter and that's really what's driving the peg ratio. And there's also a G in the in the numerator in the forward P just a one year, but, but both the numerator and denominator heavily tied to expectations for growth. And like you said, AI may be the most innovative thing and may have such incredible benefits, but we may have a recession. What if I ran gets out of hand and oil goes to 150, there are other things that can happen that can really set the market much lower this year next year, the next year after that. But then the innovative benefits of AI ripped through the economy for seven years, eight years straight, and then through the market. Yeah, and here's the chart and everybody seen this chart before. This is a scattered chart evaluations versus forward expected returns again, where we are right now, you're expected returns the negative 2.6. So, you know, again, it's just this doesn't mean go get out of the market, right, but we've spent a long time the last 15 years promoting buy and hold investing. Oh, just buy an ETF, you'll be fine.

34:01It all depends on your starting valuations of the Albe fine part. You know, 15 years ago, 16 years ago, coming out of the financial crisis, valuations had been had had a decent reversion. So you were coming into the market with a much cheaper market following the financial. So, you know, the financial crisis, that's not the case today. So if you're starting a buy and hold process today, you may have very disappointing returns over the next few years, not necessarily next year, not necessarily the year after that. But when you look back over the decade, go well, I started there and on a buy and hold basis, I've made no money for 10 years and I'm ready for retirement. That's going to be the problem that a lot of people wake up to. I think Lance, like you let the most important thing to get across is that valuation tools are very helpful. They let you know where we are, but they're very poor timing tools. The technical analysis can be a very good tool to help you navigate the current environment the next couple months, but they too are kind of poor in the long run.

35:06So you have to merge both understand both what's the market telling you today, as well as what's the market telling you about valuations in general. And, you know, we're always conflicted with these bullish and bearish charts and social media just makes that 10 times worse, right? Because you have someone harping on the Cape ratio with scary, you know, projections and last time this happened was, you know, 1999 2000 and before that was a great depression. It could be scary when you're looking at that or just looking at the chart you just posting on the flip side. We don't know what's going to happen growth right now is accelerating pretty rapidly and even though historically growth forecasts both one year and three to five year have not been they've been very poorly correlated with what actually happens. And most one year forecast actually end up too high than what they actually were the last year or two has actually been the opposite where growth has exceeded forecast.

36:14And we're seeing it again with 26 and 27 where they're coming in higher than what they originally thought. So, you know, how much of this is the AI is the AI investment and certainly a lot of it is, but then when does that AI benefit come through. But it's two factors right because right now the earnings estimates are primarily going to semiconductor companies, which is what's driving a lot of these earnings estimates being ratchet higher and again here's a chart what Mike's talking about if you normally what happens with earnings estimates going into earnings. And so, what's going to happen is they get revised down as we get closer to actual earnings season and let's start out too high than they revised their revisions down. As you get into earnings season over the last two years are actually looking forward. We're actually revising earnings up and that was happening this year and the next year as well. We're increasing earnings expectations for next year, which is what's driving that peg ratio to be such a low level to Mike's point that's about forward expected returns on a three to five year basis.

37:16Those were going up sharply and a lot of that's in the semiconductor space that we're seeing very large pricing creases. We're seeing demand across the board, you know, just really surging through the roof, but it's very selective and when that demand for the build out is complete. That whole big push is going to start to resolve itself and over the next, you know, we start looking out at 27 28 29 earnings. This growth for the S&P is starting to return back to more normal levels around, you know, 10 11% annualized. That's going to be a fairly sharp contraction with what we've seen over the last couple of years. Still positive, still positive, just the rate of change is going to be substantially slower. I'm kind of thinking you can really think about this just like the railroads. They spent an immense amount of money laying track. And while they were laying track, there were a lot of money being spent, a lot of people hired, but it wasn't really providing much benefit to the economy. Then over the next, you know, through today from the mid 1800s through today, those benefits of those tracks have made our economy much bigger.

38:23It's made our people much more prosperous, our corporations much more profitable. So the question is when's that, you know, it's assessing that gap between laying the tracks, which is building the data center, the AI labs doing their thing. And when does that filter through to the trains going down the track to prosperity for the whole country in many different ways. And the stock market rising as a result of that. And will there be a lag or won't there be an and look, some of the benefits, unlike the railroads, we got to wait for the track to be completed. There are ready benefits to AI. So this potentially is a quicker, at least some of the benefits will flow through and are flowing through like we see it is software engineering already. That AI can, you know, create software in many cases better than humans. And look, there's there's a lot of that concern. But we're seeing a very large hiring of people for generating AI software.

39:27Software engineers. Yeah, yeah. So you're seeing a, and so it's like, oh, AI is going to replace all these jobs, but we're hiring those in mass runs right now. And it's also interesting. I posted this chart this morning, right. One of the kind of the claims about AI in general is like, oh, it's all fake. Nobody's actually going to, you know, they're never going to create any revenue, etc. This is a chart of the number of small businesses that are now using AI more than 50% of small businesses in the US are now using AI of large businesses at 66 and a half and medium size business 62. These are people paying for AI. So AI is already generating revenue. The, the real question is, is can they generate more revenue than they're spending? And that's kind of the process of building out things, right. I've got to build, I've got to build out the facilities first before I start generating revenue on it. But there's this whole kind of narrative out there right now. So AI is fake. It's never going to, nobody's ever going to use AI. It's all, you know, it's, it reminds me a lot of what we saw during the internet when we started first get really kind of the internet coming online in 1995, 96.

40:32Like, oh, the internet's a fad. Nobody's ever going to use it. It's just a flash in the pan. I'll ever generate any money. And then we have Google. So, you know, I think you've got to be very careful about your narratives and predicting something like this that's never going to be profitable, never going to make any money when you've got a very fast adoption rate for what's being used inside companies. And look, you know, we use AI inside of our company and that certainly helps with time and productivity and certainly benefits our advisors to work with our clients. And, you know, I think this is going to be something that's more adopted across the board. And look, it helps us think about all this stuff. I, you know, there are times where I'm debating AI. Like, I'll, you know, like some of this innovation stuff, you can kind of have a conversation with AI and say, give me some evidence. I, you know, make a statement, provide me three bits of evidence that this is wrong. So you can use it, you know, for not just to do tasks, but to help you think about things and that's proving very helpful to me, at least. And I know you last.

41:35Yeah, well, yeah, because you can, you say, here's my thesis, am I right or wrong? And then, you know, it'll, it'll, you can debate with it back and forth and make sure that you're using, you know, proper sources and those type of things. So that you can actually have a much deeper understanding about what, what's actually happening. And so, you know, what's, what I found, I found very helpful with AI is just helping me analyze stocks very quickly because I can put a stock in an, and say, okay, run me a research report on this. Get, you know, give me all the data. And it can just very quickly, rather than me spending two hours, you know, going through our databases to drag out priced earnings ratios and earnings growth rates and all those type of things, which we can do. This just does it compiles it very quickly. And so it certainly speeds up. Again, it's not replacing my job, but it makes me much more efficient when we're looking to buy a stock or sell a stock or whatever it is. It can just speeds up the time process of doing the research. And it's always so nice to me. Yeah, exactly.

42:35It's exactly. Well, that's, that's chat too. Chat loves you and, and they want to be like you. Everybody wants to be like Mike and chat. So, yeah, that's all good. All right. I can't, I can't a little bit of jealousy there. Absolutely. There's jealousy there. They don't ever say that about me and chat. So, you know, I'm just waiting for your fake. I'm the whipping boy. Yeah, they just want me to go on vacation. So maybe I just turn the whole show over to Mike and Mike does the Mike show every day. No thanks. All right. I've got the serve for the day. Be sure and get by the website, real investment by psychon. Get Mike's latest article. It's a really good read about peg ratio and capes. So, if you want to understand the, the valuation arguments are really good. Read to go through. It's on the website now real investment advice.com. Be sure to like and subscribe to the channel. We appreciate you very much. And we'll be back here tomorrow with financial fitness Friday. And on Monday. What is it on Monday? Who is our guy? Oh, yes. Oliver Russ. I forgot. Monday, tune into the show. Oliver Russ from trueflation. We had a great conversation with Oliver about the trueflation.

43:44And we're going to talk about the trueflation index. What it's telling us now, how it's constructed really fascinating interview. You're going to really enjoy it. That's on Monday. Oliver Russ on trueflation right here in the real investment show. Y'all have a great weekend. See you then. You