Modest Proposal - AI Commoditization and Capital Dynamics - [Invest Like the Best, EP.380]

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1:29 My guest today is Modest Proposal. Joining me for our third conversation and the first in a few years. Modest is anonymous online, but one of the most thoughtful investors that I know. Overseeing a large pool of capital in public and private markets. He offers insight into many different corners of today's landscape, covering AI's frontier models versus open source models.

1:48 Over capacity issues in transportation in our post Covid world. and the potential economic impact of GLP1 drugs and more. I always love hearing what Modus thinks about markets. Please enjoy our latest conversation. Maybe a fun place to start would be to teach us about

2:07 What mid two thousands commodity markets Can teach us about Today's market. Yeah. So

2:13 Something that's been on my mind. throughout Covid and really accentuated by What's transpiring today with AI. Is this idea of what happens when surging demand

2:26 meets an elastic supply. And The mid-2000s commodities just did a wonderful example of that, which is China had historically been out of the global economy for Long time. Join WTO.

2:40 join the global trading environment. And Within five, six years went from consuming very small amount of global traded commodities to a very large amount.

2:51 And so the way this manifested in markets was one commodity prices went up a lot. And if you remember The backdrop, which is Late nineties tech ball ball.

3:01 Emerging markets ninety seven, ninety eight, total blow up. And so strong dollar, all the capital coming into the US, commodity prices crushed. Now all of a sudden Tech bubble collapses. Nine eleven in the US.

3:15 Big focus on international markets. China's growing fast. and commodity prices are soaring. So money's flowing. And to emerging market. Equity indexes.

3:27 buying miners, buying banks, buying all sorts of this stuff. And The idea was people were putting multiples on the way I think of it in microeconomic terms was temporary surplus. And when you put a multiple on something, you're

3:44 implicitly capitalizing a long duration of cash flows. Capitalism in this case did its job, which was people went around the world and said, Oh Look, there's some mines or there's some materials. Let's go build mines. And Magically over the course of three four five years.

4:00 Eagle. Oh lot of supply came online. We went through the GFC and still in the late two thousands, early two thousand tens. You still had China consuming an enormous amount of commodities, so prices stayed.

4:14 Somewhat stable. But as China's growth slowed and supply continued to increase. Bye. Two thousand fourteen. You got a commodity collapse. And if you look

4:25 any of the indexes. Oil is a little different because it sometimes has some geopolitical Issues with it as well. But I mean if you just look where oil was, it was hundred forty and now it's eighty. You look at Commodity indexes still down.

4:38 And that's not surprising because the supply is permanent. It came online. And The last time I was on we talked about the capital cycle. And this is the

4:48 Classic example of it. But The willingness of markets to continually put multiples on this temporary surplus. Is A

4:59 Constant source of Confusion for me. If you even go into parts of Covet. soaring demand for everything digital in twenty twenty when the real world shut down. That probably wasn't going to persist unless the real world was shut down.

5:14 Permanently. And that did not happen. So you're seeing it today. In a number of places, I mean the most obvious place where surging demand is meeting inelastic supply is Chip.

5:26 Where As fast as TSMC can make chips, they are being sold. The other places you're seeing it are in power generation. Where

5:36 We were talking before we started. Twenty years. Power consumption in the United States is flat. I was reading a report. last week that said they expect something on the order of two and a half percent a year growth over the next seven, eight years and

5:49 That's summed up to over thirty percent. aggregate growth and power consumption in the US. And if you think about it. My gut is over the next two three years.

6:01 They're probably right in the growth rate. Of Power demand. Because these things happen quick.

6:08 The idea that we're smart enough to build AI and AGI, but not figure out how to power it and not figure out how to power efficiently. It strikes me as a curious combination. We know that deep mind In the two thousand ten. was able to help Google reduce power consumption in traditional data centers.

6:26 And The same report actually showed that data center power consumption from 2015 to 2019 was flat. We've got a step function change here. We've got a new technology introduced. There's a whole lot going on. driving power consumption.

6:41 Betting against human Ingenuity. that we will figure out a way to be more efficient. And also candidly If that growth comes to pass.

6:52 There's going to be investment in the grid, which is going to Raise Prices. Which is going to expose end users to price increases. Which is also going to alter behavior. It's

7:04 The idea of Putting multiples on temporary surplus generated from Surging demand meeting inelastic supply. That's a thing that you just have to accept is reality, but If you're thinking over some

7:19 Duration. It seems unlikely that surplus will persist in the way it first. Emergents. What do you think the very smartest counter argument would be? that maybe it's not temporary or something. What would you have to learn that would get you

7:35 I'll pick on an example since it's an obvious one. Get you super excited about buying more NVIDIA stock today. Which is obviously a prime beneficiary of this entire Wave, the prime beneficiary.

7:47 And maybe the best single company example. Again, my words, not yours. What would you have to hear to be like, Oh God, I need to buy put ten percent of my portfolio on NVIDIA. Think you have to differentiate between Are you putting ten percent of your portfolio in NVIDIA because you think it's gonna be higher in twelve months?

8:03 Or because you think It's going to sustainably generate the surplus required. to justify whatever the price. And look.

8:14 Ultimately the job of a money manager is To make money. So the the first one Is probably More important.

8:22 Oh. Candidly, what it is is You read something like the piece that was just put out last week, hundred sixty pages on Why AGI is coming.

8:31 Лівасайд верною болів. the conclusion of that paper. The point is that person probably has some insight into the spending intentions of the Frontier Research Labs. Those labs seemingly are going to be spending

8:51 Bigger sums than I think most people realize or expect. because they fervently believe they're on the cusp of building AGI. That means that NVIDIA's gonna sell a lot of GPUs. And probably more than

9:05 is in consensus today. So I think what you need to believe is that these labs. Whether or not they are right, believe that spending more and taking compute intensity up orders of magnitudes as they believe will get them to the promised land. That they're gonna do that.

9:23 I think the second question, which is a much more academic question of What do you have to believe to think that NVIDIA Generates the cash from now until eternity to justify the price. I think that's a different question.

9:39 Which is Do you think it's viable for a single company to be the choke point? Or Five. other of the largest companies in the history of capitalism.

9:49 Do you think that Poor guys in a garage in California aren't currently thinking of ways to more efficiently run. He says. Uh the compute that is currently only efficiently done via GPUs.

10:05 Was talking to one of our friends this week who told me about some folks who had figured out a way to strip out functionality and run it on a CPU. That's Interesting. And whether or not that scales, who knows?

10:17 But kinda have to believe. Та десь ірмас сю. Is not the prime target For capitalism right now, where

10:27 The hyperscalers where every chip designer, where every Smart kid in a garage. isn't aiming at this entity generating It's gonna be two hundred billion dollars in sales at a eighty percent gross market, you know, some crazy number. Generally

10:45 That will draw a lot of attention. But That's in the future. If you ask Is the stock gonna go up over the next twelve months? Probably what you need to believe is the frontier labs.

10:54 Want to spend In a way to Grow their compute intensity. A hundred X, a thousand X, ten thousand X. And that seems to be the trajectory that they are on.

11:05 How are you processing as a predominantly public market investor where the size of the companies that you're investing in is typically quite large, certainly relative to private markets. How are you processing the commercialization of AI so far.

11:19 There's a limited number of we'll call them apps that Have real revenue traction, but it's still on the scale that probably doesn't matter to you. They're not public businesses. But this is really important, obviously. It's something everyone's reckoning with. We've talked about sustaining versus

11:34 Disruptive innovation before a lot, you and I. How are you processing this whole thing? That's a big question, but seems like the question. Look, I think there are a number of Foundational is a Bad word to use in this case, but There are a number of very fundamental questions that I think one has to ask. This one.

11:52 He's on the economics of the here and now, which is Where is the economic activity coming to support the type of spend that is being undertaken. I think The revenue side is obviously more visible.

12:05 But I think you also have to tally up the cost side as well, the cost avoidance side. aggregate the economic surplus that would justify the investment. On the revenue side, yeah. You can listen to what Microsoft says about what the uplift is within Azure.

12:21 And A W S doesn't quantify it, but There are ways to triangulate what you think they might be Generating.

12:29 And then you can add up. All the cats and dogs software applications. Um You probably get to mid single digit Million.

12:37 What you can't really see is the cost avoidance. The Klarna story is probably apocryphal. But it's certainly the case that there are some productivity and efficiency gains on the cost side as well, right now. So you add that up and You probably don't get a number that justifies the two hundred billion dollar capex spin.

12:57 But I don't know. That's particularly unusual for a infrastructure platform shift. If you go back to the late nineties. Someone actually took a deep breath and said.

13:08 Hey everyone. We're putting 120 billion dollars in fiber optics into the ground. What is the profit justifying this? Everybody would have laughed. So I don't think this is unusual. I think you're looking right now.

13:22 For examples that can be extrapolated more broadly. So particularly on the cost side. Where are the productivity gains? Are these gonna Broadly.

13:32 spread throughout the economy, what's the potential aggregate sum of that? And then on the revenue side. If it is truly sustaining Then every incumbent slaps a co pilot into their product and they charge you twenty bucks more. And this is actually a really boring. Technological shift.

13:50 I think What's far more interesting is If there are architectural shifts in products and markets. And it's just so early. To know.

14:00 People I Talk to and trust said that is Happening in software. But Those are gonna be tiny companies today.

14:09 And None of that will be relevant in the public market. World. Yeah. Can you describe what that means? Either using a current example or a historical example of an architecture shift.

14:19 This is what that feels like and looks like and why it's impactful. I think the question in software is On prem to SAS was a pretty disruptive architectural shift. And I think the question today is Are there AI native?

14:34 Companies That are going to utilize a modern architecture where Data is queryable. real time buy these models. It's amazing how fast the world moves. SAS is the best business model in the world three years ago. And now everyone's wondering, hey, how come all these things are growing 10, 11, 12% and they don't have any margins? So the fact that we're even discussing whether or not there's a architectural shift coming to the SAS is insane. But it just shows how fast that world moves.

15:03 That's one example. I think On the consumer facing side There's This real question of Does a horizontal

15:12 Search. Hype. product remain the gatekeeper downstream. Does that get verticalized with specialized agents, things like that, but It's all so early.

15:22 That Even if that were to happen. I just don't think we would have any inkling of it yet. If you think about the incredible dominance of US technology companies now for fifteen years. It's been a long, long stretch.

15:38 probably when you and I first met, there was still that nice chart that showed like the relative performance of the S and P versus Efa and it was this nice sine wave that went back and forth and it was sort of widely accepted. Oh, it's sort of cyclical. It goes one way, then it goes the other way. And then that line has just gone straight up to the right in the US's favor ever since. Long time now. How do you process that chart today? It's funny, I was looking at something yesterday. I was looking at the rolling ten year returns of the S P five hundred market cap weighted versus people weighted.

16:05 And The equal weighted was actually Ahead. on a rolling tenure basis consistently. From basically

16:14 Two thousand to Two thousand eighteen, right around the time we met. That was when the market cap weighted recaptured its glory. And now it's on a ten year basis running like two point eight percent or something. A year. Remember, that's for year.

16:27 Uh. You go to Efi, if you go to Acqui, if you go to Acqui XUS. It's just Insane. But Look, these companies

16:37 And Yes, their multiples are. Higher. Apple and Microsoft trade it thirty times. I think NVIDIA trades in the low thirties. Facebook and Google trade in the low twenties. They're elevated verse.

16:49 Seventy five year history at mid to high teens, but That's not something saying, wow, people have really lost their minds here. It's more a reflection of the fact that their earnings power over that entire period of time. I've just grown.

17:03 If you're a software investor, sometimes you have to ask yourself If my opportunity cost is Microsoft growing mid teens, what am I doing here? Because that energy Has proven over the last ten years the ability to compound its earnings power at Made teen.

17:18 Apple is upstream of all economic activity in the digital world for all intents and purposes. We found out how much Google pays. To be there so that They can insert themselves one level below Apple.

17:32 into the downstream activity. These are just incredible businesses. So I think it's very tempting as many of us were brought up as mean reversionists. To say, Well, this can't go on forever, it's gonna change.

17:45 It is true. It will end someday. But people have been calling for this end for years and years. And I think The companies are in no worse shape today than they were five years ago when people were calling for them.

17:59 To have to revert. If anything A couple of them are in stronger positions today. So It can't go on forever.

18:07 But Their market cap is not functionally out of line with the cash flow that they generate as a percent of the overall market. Many of them are growing at or above The rates.

18:20 of the market. So For the foreseeable future, you just have to say These are some of the most incredible Businesses ever

18:28 And they're still performing, so If you're an active manager Yikes. What gets you excited then? You can easily access all those things at zero cost in an index. If you buy an index today, you basically are getting a bunch of exposure to those companies. They're the best companies ever, everyone agrees.

18:46 They're probably priced. To that truth. What gets you personally excited? And I'm curious about All the frameworks here, like the competitive advantage period that Mobison will talk about, or the benefits and the barriers that Hamilton Helmer will talk about in finding new businesses that won't have this problem of pricing a temporary surplus because there's some barrier to entry for the kids in the garage can't come disrupt the thing. Is that your framework for looking for things that are not

19:10 Just the index,'cause that's easy to buy and As an active manager, you gotta find something. I know I think everybody in this business should be humble about the fact Right. the index over the last

19:24 five and ten years has been Undefeated. I know people, I'm sure you probably know more than me, but I know people with All different Styles.

19:34 Of public market investing. And I would say Very few of them. would be pleased with their relative performance to the index. Over the last five years.

19:44 And probably also over the last 10 years. As you said. In that middle two thousand ten period there was still A fighting chance against the index, but over the last five years.

19:55 It's been incredibly difficult. And something that I think I haven't thought enough about and I don't hear talked about too much. It just The stress of COVID. And everything that's transpired since.

20:07 really magnified. Strong management. And competitive advantages. and really stressed marginal companies and marginal managements. And

20:17 I think Along with all the other great characteristics of these companies that play to their advantage, that on a relative basis A lot of the market has just been in a very stressed situation. At one point or another.

20:32 And look, the marginal management team is not great. The marginal Company is not great. And this overall environment has really stressed. And bifurcated. those types of companies.

20:44 As far as what gets you excited. One, I think it's a fascinating time. I'm not a technology. Expert. When you hear people say things like

20:54 This is as big as the internet. This is as big as mobile. And you pay attention and you try to learn and it is fascinating what's going on. But otherwise I they could still try to find interesting opportunities with asymmetric. Risk return, risk reward.

21:11 And hope that you have a fighting chance against. What is a very difficult benchmark to be. And I said public markets only, but

21:20 Let's not exclude the challenge for private markets. You have a lot of venture listeners on your podcast. The Nasdaq one hundred has returned five X M L I C. On a pretty consistent basis for the last

21:34 Number of years. If you just take a 10 year rolling Q QQ. That's a five X M O I C for a long time. And so I jokingly ask my friends in the venture world. How many fun families do you know of?

21:46 That have multiple five X M O I Cs. It's not many. And there are some one offs where Someone hit the right cycle. But to put up

21:55 Three five X M L I C funds. Very unusual. And yet the public market is doing that consistently. Year after year. You look at private equity.

22:06 They claim mid teens IRRs. Those are one six, one seven M L I Cs. The continuous compounded return only worked if they were returning capital. If money in was the same as money out. And the IRR was fifteen, then you gotta continuously compound it. I saw a chart the other day that showed there's about a three hundred billion dollar

22:25 Deficit in money back versus money in over the last three years. That is going to wildly impact. the continuously compounded return that the investors are receiving. Again, put that against the twelve and a half percent ten year cager of the S P five hundred. With

22:42 A quarter of the leverage. and full liquidity and you'd say, not sure that was the right move. So The public indexes, I think have stressed all forms of investing, not just public investing. In saying on a relative basis, why is money going

23:00 elsewhere other than these indexes. This is a good thing though, in aggregate. It just raises the bar for capital's not gonna allocate itself. We need people both in primary terms and in secondary market setting prices. We need some amount of active management. Probably we need more of it at the primary capital level down in private markets.

23:19 When stuff is newer and you can't underwrite it quantitatively like you could in the public markets. So is everything you just said just really good for capitalism because it just raises the bar for capital allocators and biases towards better ones and this is just a good natural thing. Fascinating question, right? If markets were perfectly efficient and did not capitaliary surplus, just look through it and basically the price just was Capitalism would be less incentivized to do its thing if commodity prices didn't rise.

23:48 In the mid two thousands many of those minds would not have come online, maybe in the same way. You probably do need the distortive impact. In order to draw in the technological innovation that furthers

24:03 Society. So yeah, totally agree with that. As to whether or not It raises the bar. On

24:10 Who the capital allocators are. Yeah, I mean this is something that I think has been happening for a long time. Mobison has written about the paradox. Of skill. And I think this is a big

24:21 Still to be had debate. In the investing world, which is As money flows out of active The presumption is that better active investors remain.

24:33 And I think those remaining in the business believe that there are more inefficiencies today than there were as a result of that. If you think about what I said though, that a lot of people are not happy about their five and ten year return streams relative to the index, I'm not sure that the math would actually show. that the remaining investors are taking advantage of these supposed inefficiencies. 'Cause if they were, they'd be outperforming.

24:57 And so I think that it's probably the case. That You have Very good.

25:04 skilled active managers left. I'm not sure it's the case. that means that they will all outperform. I think it actually probably means it's harder. If you think about everything outside of tech. What?

25:17 has your attention and curiosity most. Like you mentioned the size I understand it could grow incredibly fast, and the same thing in the internet era would have been silly to say. But let's say it's ten million dollars of impact, real impact. From both the cost and the revenue side generated from AI products so far. There's lots of individual biologic drugs that do that much revenue by themselves in a given year, growing twenty percent by themselves. Like I looked up this one drug dupixen that does. Fourteen billion dollars of sales growing

25:45 Constrained in its growth because we can't manufacture enough of this stuff. Some of these other markets are so big and get so little attention relative to tech. Everything X Tech. I don't think we've even scratched the surface on. The microeconomic

25:59 And The real existential questions in AI. But that's just AI and tech. Outside of tech, I think the most fascinating thing to me is again, we last talked on this podcast.

26:12 in the fall of twenty twenty. We were sitting in our houses still at the time. There was no vaccine on the horizon. The market was still pricing permanent zombie apocalypse. In the

26:24 Time since that. What's been fascinating for me to see is how many industries Have suffered from a capital cycle as a result. Of Copy. And

26:34 At the time I was only thinking forward, where may a capital cycle occur. And some of them I was right about, some of them less right, but I did not realize how far flung the impact would be. And so I'll give a couple examples. If you look at the transportation and freight market.

26:51 Because everyone was stuck at home and ordering three washing machines and eighteen footballs and all the hard goods that we were ordering in twenty and twenty one. You had this huge surge in demand. In order to move those goods through The network in the United States.

27:08 Lots of trucks. We're at it. Lot of capacity came online. In May of twenty twenty two, Target and Walmart came out and said

27:18 We are absolutely stuffed to the gills with inventory. We are gonna liquidate all of this and we are going to stop flowing goods two years later. They still have not started flowing goods in. And you have this enormous overcapacity in the transportation market. And it's not just trucks because truck sets allows

27:35 marginal pricing for rail. Intermodal transport. And so you just have Huge areas. of the transportation markets where

27:44 You don't have volume growth. You have overcapacity on the supply side. And pricing sucks. So you're literally two years later, the hangover is maybe starting to wear off. And each quarter it's, oh, I think we're getting close to the bottom. That's one. This one really amused me.

28:00 Beverage cans grew. Two to three percent globally a year for long, long time. Yeah. Three public companies. Two of them.

28:08 ball and crown they were spending about six hundred and five hundred million dollars a year in capital. Covid comes along. People are sitting at home. Drinking a lot of sodas and beers. Off premise, not on premise.

28:20 Demand goes from three percent a year to ten percent a year. When your largest customer You can think of two very large Soda and beer customers come to you and say We need more capacity.

28:32 You either build capacity or someone else builds the capacity. To lo and behold. Capital expenditures go from six hundred million dollars a year to a billion and a half dollars a year for each of the companies. So they do that for two, three years. Then

28:45 The zombie apocalypse ends and people go back to bars and people go back to sporting events and they stop drinking sodas in their home. And demand reverts. And now there's a bunch of capacity. And so for two years it was, oh my God, we have this huge overcapacity in the beverage cant, which was a historically very stable oligopolistic Great market structure.

29:06 Rational Capital allocators. So you just go through one by one and you see how distortive. Covid was And

29:16 Look, at a macro level, you see it in the way that Prices spike. The way that wages spike. There were level changes in demand. That required

29:28 A price increase to draw in supply. And so I think I've been Супер. If you can catch

29:38 The Traw. Of those They over spend. Then they pull back. Then

29:44 capital spending troughs and then you get a new upcycle. That's a very interesting place to be. Amazon built UPS and Two years. That's the quoted stat is they put so much capacity into their

29:56 distribution network in two years. that they rebuilt UPS. And they suffered the hangover. When Demand slow.

30:05 So there's all these pockets throughout the economy. Totally unrelated. in some cases to technology. Where

30:15 If you can catch inflections in the capital cycle, you probably have an interesting setup. Candidly, rate's not there yet. People have been trying to call this for A year. And so there are areas where I think outside of A I

30:28 Some The GLP one which is the other mega trend. I think you could just do the normal work that you historically did, but there's this common theme, which is the distortive impact and the capital cycle impact of COVID. There's this ultra simplifying version of this is like every single shortage is followed by a glut that sends the people talk about. Is there opportunity in exceptions to that rule where

30:51 there's a spike in demand and the opportunity is that there's some barrier to on streaming new supply and that it's identifying those areas that Create Especially interesting opportunities. Or is capitalism just so damn good at

31:06 Supply rising to meet demand that It's just always this way. As you described it. The word. Kuna.

31:12 Jumped into my head. Yes. Look, clearly markets are making their bets on where Demand has risen and Capitalism. will not respond.

31:23 I think that's always the trick is To understand or to theorize where there are significant barriers. And those are the things you mentioned, whether it's Homer or Porter or Mobison how much of the rapid increase in Surplus. is a company able to hold on to

31:41 Nobody knows right now, but That is the bet that markets make when they put rising multiples on rapidly rising surpluses. To make that real, does a company like ASML come to mind where Yeah, you need what ASML provides, but you can't just on stream a new ASML. It's unbelievably complicated. So it's process power or something in Helmer's framework.

32:01 Yeah, sure, but every once in a while you hear uh someone be like, Oh, this semi cap provider believes that they have A new process which would be as efficient as EUV at A tenth of the cost. Do I think that's actually gonna happen? I have no idea.

32:16 That's way too technical for me, but Little headlines about that. SML is an incredible company. They're a choke point for The entire semiconductor process. You have to believe, though, that smart people are aiming to dislodge those choke points at every given moment in time.

32:33 I think the question in those cases is more the duration there. That's not going to be instantaneous. Look, those are well recognized, I was soon this year. Both of those were pitched. And I sort of laughed about it.

32:44 You're an aficionado of markets and historian. If you go back ten years. And you looked at the pitches at Irisone. It would be Some distress debt. Here's a turnaround situation.

32:57 Here's a short, here's a middling twelve times PE that we think can re rate to fifteen. And this year we had Daniel Gross interviewing The CEO of Magic.dev. We had ASML winning the best ideas contest, TSM C pitched.

33:14 Just a different world. That's where all the focuses rightly because that's where the returns have been. And again, that's the point of the job. If you had to pick three companies. You're uh upstart.

33:26 Kid in a garage. And the Universe of opportunities to go attack one of these juicy You know, Prophet Streams exists. Which three profit streams would you be most terrified to try to attack?

33:38 It would be the hardest castle of the storm. That's a great question. Does it have to be in technology or it can be anywhere? Oh, you pick. I think Apple is an enigma.

33:48 Because Yes. So fundamental at the top of the food chain. And yet it goes four to five years without growing profits.

33:57 Work. Not line even. What? Displacing Apple. You almost have to believe in A Gi you have to believe in a model so powerful.

34:06 that it basically abstracts away. the need for the integrated hardware software solution. If you think AGI is coming Apple's probably your target, but in the world that we functionally operate in today, I'm not sure I would want to go attack. A great comment a CEO once made to me was no independent device has stood up to the mobile because of the smartphone and want.

34:28 And I think that holds true to today, that it is the Unifying device of every ecosystem. And so I think that would be a tough profit pool to go. Attack, as many have learned.

34:42 You would have said five years ago I I think Someone on your show pointed this out that if you just watch where V C dollars were being invested, nobody was going after Google. And

34:52 That If you went on Sand Hill Road and said I'd like to raise money to attack the search engine business that you would have been laughed out. And that's generally a sign that there's some enormous Power present. I think

35:06 Clearly that's no longer the case since perplexity is raising money. That was one for a long time you would struggle to go after their profit pools. But look, their niche businesses I guess people out there are probably trying to figure out, I know they are trying to figure out a more energy and climate friendly version of aggregates, which are rocks. Why. pretty hard to go after the profit pool of rocks right now because the way to do that is to have another

35:31 Rock quarry. And they own most of the rock quarters. So capital intensive. The distance they're local monopolies, effectively. The distance to transport the rocks. is the challenge and they on the rocks and you don't. So I'm not really sure.

35:46 You need a low cost synthetic material to displace them and If you're smart enough to do that, there's probably some other better use than displacing rock. To say a bit about your reaction to GLP once. You and I have never talked about this. Yeah, look, I think it's amazing. I have nothing smart to add on the science. I think on the behavioral side.

36:04 I was intrigued to read it was a Sanford Bursity research report that talked about the adherent that humans have to drugs they have to be on for a Long time. And I think the adherents to cancer drugs was Something like sixty or seventy percent.

36:22 And then it rapidly fell off from there. And one that's just an insane comment about human behavior. But To the extent today GLP ones require this ongoing

36:36 Dosage. I think That strikes me as a pretty big behavioral barrier to getting to the types of penetration. That would be

36:46 very societally beneficial. If you just think about at thirty five percent adherence To get to fifty million Americans on the drug.

36:56 you can run the math on what the annual number of people having to be on the drug is. I think Clearly that the health benefits of them seem extraordinary and we learn about new benefits every day. I think The real question is, does anything emerge longer term?

37:13 Side effect wise or anything, but The safety seems to be holding up so far. Then the real question is just How do you get adherence to these? In a way that

37:23 Uh Benefit sustain. But this would be We talk about the economic benefit of AI. I mean the economic benefit of Taking a huge chunk of the country out of

37:35 obesity out of diabetes, out of the long term Hair costs. That we absorb. Medicare, Medicaid.

37:44 Via health insurance. That would free up productive resources in an unimaginable way. But again. Human behavior is a very difficult thing to change, particularly if life saving drugs are only being adhered to.

38:00 Three quarters of the time. What seems craziest to you? in the world of capital markets. Today. What do you just look at and just laugh or

38:09 Shake your head and Almost can't believe. I think that Warren Buffett famously talks about the three eyes. I think that David Swanson and what he did was genius at the time.

38:21 I think that the endowment model and the allocation of assets Into private I think has gone too far. I think that

38:31 And this is not self serving as a public equity investor. This is as a Observer of the landscape I think that The reasons now for the capital to go into private markets. is much less about

38:46 Risk reward. and gaming the efficient frontier and taking advantage of opportunities. And it is much more based on institutional smoothing, return smoothing, and volatility avoidance and I think that these pools of capital have

39:04 you want to call a lapper curve or something, have gotten onto the back side of the curve where it's probably detrimental the extent to which. Assets are being moved into illiquid environments. I just don't think that if you actually sat down And Did the math and looked at everything.

39:22 That these pools of capital are best served having thirty, forty, forty five percent. Of their assets. in a liquid privates. Look, we're at a moment in time clearly where the public benchmarks are extraordinarily

39:36 Difficult to beat. But to some extent. Actually to a large extent. The private markets are a reflection of the public market. So to believe

39:46 that the forward ten year returns of public markets are gonna come down substantially. And not impact. The forward market returns of these private asset types. It's kinda crazy. And I just think that

40:00 Look, if you were early to venture. And you're in uh five or ten funds that have demonstrated persistence. That's awesome. The challenge is Or those pools of capital that got in early.

40:12 those five or 10 funds probably represent an immaterial portion of their overall asset base. And so even if you continue to earn extraordinary M O I Cs It's probably becoming less and less of an impact on the overall return stream.

40:28 And for those later to the asset class. You are getting access to the non-persistent performers. And you are now exposing yourself to probably Nasdaq at best returns with an illiquid Profile.

40:44 Private equity. We talked about Private credit. There's it. rush into this asset class.

40:50 There are a handful of public managers that report Their return. So you can look at what private credit is doing. And again, I just question whether the efficient frontier is being properly calculated. taking into account the inherent risks.

41:05 That are there. And so that is the thing that strikes me as craziest is the overall allocation of assets between public and private. If you were put in charge of I don't know, pick your state pension or something, some massive pool of capital, hundred billion dollars.

41:21 Canadian pageant. What would you do? What would you do? It's funny, when I go to conferences, I love finding people who have that job. 'cause I think it's very hard. And I'm also intrigued by what they're doing because what they are doing is probably what their peers are doing, and that's where a lot of money is going.

41:37 I think you have to embrace the idea that some diversification is good. But I think you also have to be cognizant. Let's say you run a hundred billion dollars. If you want to have a venture portfolio. Think about the size. of that venture portfolio. to matter to your overall return stream.

41:52 Then think about how much that capital is as a percent. Of Top quartile venture funds. And think if it's truly accessible. If you look at private equity, you would say, Okay.

42:04 Maybe there are some folks who have demonstrated outperformance in Like metal markets or something? But for the most part. You're getting

42:13 four five six times leverage to generate Like I said, a one six, one seven M O I C. I think you have a very hard job. One, two, today you actually have a Bombs are an option for the first time in a long time. So you can earn yield. I mean, think about this job in the mid two thousand tens where you looked across your spectrum and said, Okay, I can get zero here. So I think bonds represent a real opportunity today.

42:38 And If the environment we're in offers up One two percent real returns on the tenure US Treasury going forward. That is a very different environment than what we had for fifteen years prior.

42:50 If you're an allocator, that's something to consider. But Look, I think you have to have a significant weighting in US equities. I think you want to have a significant weighting in international Develop market equities.

43:03 Probably want to have some bonds and Maybe you have some privates, but I think you need to be very cognizant. of why you are investing in private. I do not have a personal belief behind this question, but why have any way to international equities? It's a good question. The funny part is

43:18 When you look at there are great companies in the rest of the world, and when you look at them, they are usually priced at or above They're comparable US. Pierre So Europe has some wonderful companies, but they are not cheap. When you look at them.

43:33 I think you do have to be cognizant of the fact that Over time. Unless you believe that the US just outgrows the world. in perpetuity, which

43:43 has been a fairly good bet, at least the developed world for a long, long time. I think you wanna have some exposure. Episodically like right now, if you look at the world. I think Japan is a Very interesting.

43:55 Potential opportunity. And I will say potential because Every international investor has gotten rug pulled probably twice in their career already by Japan, being this time is different. But what's happening there? Is very meaningful in terms of the Tokyo Stock Exchange.

44:13 Essentially shaming companies into adopting more forward looking capital management program. And They're basically requiring companies to put forward a capital plan.

44:27 And if they don't, they put out a list. periodically of who has and who has not. In the classic sense. What's happening is those who have not put forward a plan are getting shamed into putting forward a plan.

44:40 Now those plants may be underwhelming at the beginning, but Every march starts with the first step and For anyone who's paid attention to Japanese equities overall. Long period of time. These are wildly overcapitalized for the most part. They have huge cross shareholdings.

44:55 They don't do buybacks. They have very low payout ratios. They have nonsensical crossholdings of Oh, this is a strategic asset because we founded this company 60 years ago when there was no venture capital. Totally unrelated industries. Look, I think there's a chance that could be a

45:11 very interesting place for capital for a number of years. So I don't think you wanna holistically write off international. But If you're a hundred billion dollar

45:22 allocator, you need to be dynamic in your process there, identify the opportunity, and then find the manager to do that. And that's hard. I am very sympathetic to that job. I think picking managers is probably as hard or harder than picking individual securities to outperform. If you think about the way markets felt to you Ten, fifteen years ago as an active participant, buyer and seller.

45:45 This is like a market structure question. How does that feel most different today? What would you say about market structure, how markets trade, what it feels like to be a person buying and selling in them versus ten, fifteen years ago? Has it changed much? It's a great question. I'm not a frequent enough trader. Other folks might have different opinions, but a couple of things I've noticed is

46:04 The definition of what I would call a smaller, less liquid name has moved from a billion dollar market cap to fifteen billion. Where The sort of Lack of interest. In the generic

46:18 five ten billion dollar company. That doesn't have news on that day. It's just left for death. And the attention has moved so much towards whatever the flavor of the moment is and then the larger stocks.

46:34 That I just think There's a much larger Aperture of names. That are left behind. That's one thing.

46:44 I can't prove this quantitatively, but it does feel to me like objects in motion stay in motion longer. Meaning whether it's algorithmic trading or what have you, but it does feel like when prices are going in one direction, they tend to go in that direction. More vigorously.

47:01 And longer. So these trends Yeah. quite pronounced. Until they stop. Those are the two biggest ones. It definitely feels more like a trending market and it definitely feels more like

47:13 If you don't have a story The size at which you are irrelevant is much larger. Than it used to be. If I could go back through like your entire history of every buy and every sell you've ever made in public markets. And

47:28 Studied those. Days and those decisions and the things leading up to them. What would I find in aggregate what would I see as the common reasons why you were a buyer when you were and why you were a seller when you were? So the buyer generally would be I think

47:44 If you piece together from the outside. You would be able to put together a story of some sort of controversy, tension. Unknown currently unknown, but probably likely to be resolved in the near term type.

47:59 A fact. Or overhead. And so I think particularly the ones that worked out the best, I think you would be able Two. Recreate. Okay.

48:08 XYZ is the story People believe this. Clearly taking the other side of that. With the expectation that it would be resolved in this way, and lo and behold. In some period of time that happened.

48:21 The sales would be much I think much more across the board. In terms of I'm not sure there would be a unifying theme. In some cases, the tension would have resolved. In other cases I was wrong.

48:33 Some cases there was a better opportunity. So I think most investors probably have a much more consistent reason for buying than selling. I think Circumstances change. To to cause you to sell. Sometimes the plan plays out perfectly and you sell.

48:50 And sometimes they're just better opportunities. So I think that's much more diverse. I think Іфстор газ. that the buy should be more similar. Where do you feel? Pockets of that tension today.

49:03 That's a great question. I think In some of these capital cycle situations where It's this unknown and if you could find them. I will say The macro right now is probably driving a lot of tension. And it's interesting today we had a favorable inflation report.

49:22 Um Because the macro environment is still disrupted, I think, by what happened. Covid and post COVID. We've stepped up to a new level of real interest rates.

49:33 The nominal interest rate is higher than we've seen in a long time. The housing market is in this very strange place. Where We're selling four million existing homes a year versus should be probably five and a half.

49:48 But Within that new home sales are soaring'cause nobody's selling their existing home. There's just A lot of Macro driven distortions. And so

49:59 I think there's a lot of tension to be Un released, and you're seeing that to some extent today. Where if you get better visibility into the path of interest rates. Look, there's gonna be quick twitch reactions in the residential market and in homes. And then there will probably be a slower but very real reaction.

50:21 in commercial real estate. This is a big relief to private equity. This is a big relief. within non residential construction type.

50:30 Activities. So It's not so much tension as there is. Potentially a rubber band. that could snap back in some of these markets that have been

50:42 Very Pressured. By particularly the front end, the level of front end interest rate. And I think it's a good thing.

50:49 It's hard to believe that with stock market at all time high The economy doing very well. That there are still very large pockets of the economy that are Essentially flat in a recession.

51:03 And Those areas that may benefit from this. I think the question is How much will they rebound? Who will capture profits.

51:13 But The macro is driving a large portion of the non-tech tension right now. Is there any idea? Or ideas that have your mind on fire lately, like things you've encountered that you're just Blow away by

51:25 I'm super fascinated by We have not talked about this with regards to AI, but I am fascinated by what I perceive to be a coalescing conclusion in the investment world. That

51:42 LLM models are If not commodities are going to be relatively undifferentiated. And uh The frontier models

51:54 Will push forward. But then Ведет лама Or Nestral, these guys will fast follow. And that the open source models

52:05 Will in a classic Christians sense be good enough. And that the frontier models maybe are relegated to certain types of real leading edge activities. but that they don't make the leap to AGI. Or that they don't make the leaps so far. that they are differentiated.

52:24 On the other hand Just in the last Ten days you've had Two people, one who's left open AI and one two nights ago within open AI, basically say we think AGI is here within three to five years. And

52:37 To have two diametrically opposed sort of opinions. Like that. It's really important how that shakes out. Not just because who knows what AGI means or any of that.

52:50 Let's leave even AGI out of it. If the frontier models are able to establish A significant performance advantage such that you use them and not open source for most things. Incredible.

53:03 Surplus a cruise. to Google. to Microsoft and OpenAI. AWS, big loser. Lots of software companies.

53:12 Big loser. In a world with relatively undifferentiated models. And open source being good enough. Enormous surplus accrues to application.

53:24 Because essentially what you have is a commoditized model layer. The infrastructure may capture some of it. That's the question. W Start it with.

53:33 But then This enormous world. is opened up for the application layer. But in the world where the frontier models are that much better. Like why won't a generalizable model be a specialized model?

53:45 And so I think this And I've been with People much smarter than me. And ask the question and the reality is.

53:53 No one knows. There are a few people who very fervently believe. in one of those paths. And then the investment community is Just

54:01 Along for the ride. Yeah, but we're all sort of come to this idea that Look. If Mana's gonna spend Forty billion dollars fast following.

54:11 Yeah, they're gonna commoditize their compliment and Then you'll just run these models where your data is and data gravity is real and If your data is in AWS, it's there. If it's at Azure it's there. That world

54:27 Looks very different. five, six, seven years from now than the world where the frontier models Build Again, let's not harp on building God. Let's just say the generalizable model is so good.

54:41 that it usurps everything else. That is just a very different outcome. And it's interesting to me that The investment community has written that path off.

54:51 I think that's a great place to close. As always, an incredibly interesting conversation on all things markets. I wish it hadn't been four years since our last one. Maybe we'll do an every two year scheduled episode or something like that. Thank you so much for your time. Thanks, really appreciate it. If you enjoyed this episode, check out Join Colossus.com. There you'll find every episode of this podcast complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.

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