Is Imperialism Good for Your Portfolio?

Robert Armstrong, U. S. financial commentator for the Financial Times, fills in for Scott. He and Ed break down Trump’s “Donroe Doctrine,” what it signals for markets, and how investors should navigate the shifting landscape. Then, they dig into why bank stocks surged last year and examine the effects of deregulation under the Trump administration. Robert explains why he thinks consolidation in banking could be potentially beneficial. Finally, they go over Robert’s predictions for the rest of the year. Subscribe to the Prof G Markets newsletter Order "Notes on Being a Man," out now Note: We may earn revenue from some of the links we provide. Subscribe to No Mercy / No Malice Follow the podcast across socials @profgmarkets Follow Scott on Instagram Follow Ed on Instagram, X and Substack Send us your questions or comments by emailing [email protected] Learn more about your ad choices. Visit podcastchoices.com/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

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• 1:13Ed Elson?

  Today's number 200. That is how many days of the year the weather is foggy in the Grand Banks in Newfoundland. This makes the Grand Banks the foggiest place on the planet, according to NASA. Scientists have also attempted to catch the fog. However, they missed.

• 1:44Ed Elson?

  Welcome to Prof G Markets. Scott is still on vacation, but he will be back later this week. So today, the person you hear laughing very heavily on the other end of the line, we have Robert Armstrong, US commentator for the Financial Times, favorite of the podcast. Rob, welcome back. Thank you for standing in.

• 2:05Robert Armstrong?

  I think you found such an excellent metaphor for our profession there, Ed. Catching the fog. We are fog catchers.

• 2:14Ed Elson?

  It's true.

• 2:14Robert Armstrong?

  It's what we do.

• 2:15Ed Elson?

  Fog catchers, and we do miss.

• 2:17Robert Armstrong?

  It just keeps slipping through the net, you know?

• 2:22Ed Elson?

  That's exactly right.

• 2:23Robert Armstrong?

  Man, it is. And it's not getting any less foggy out there, I notice, not this week.

• 2:28Ed Elson?

  That's right. We're going to catch something today. I know that. So we got a lot to talk about here. And we're going to start with our first story. And this is going to be about what we've seen in Venezuela and Greenland. So President Trump opened the year with a dramatic show of force, announcing US troops captured Venezuela's president Nicolas Maduro. Just a few days later, he revived his push to acquire Greenland and signaled that he would consider using military force if necessary. And Trump has framed these moves as part of a broader vision for American power, which he is calling the Donroe Doctrine. And this is a reference to the Monroe Doctrine, which was first articulated in 1823,

• 3:10Ed Elson?

  when President James Monroe declared that the Western Hemisphere was America's sphere of influence. The idea back then in the 1800s was to kind of fend off colonialism from Europeans. And it basically holds that any intervention in the Americas, in the Western Hemisphere, is potentially some hostile act against the US. So the administration has actually endorsed this publicly, the Monroe Doctrine specifically. They did that in November. And now we're seeing it play out in Venezuela, more recently Greenland. And we're basically seeing the United States as being treated at this point as like an imperial regime.

• 3:53Ed Elson?

  And now Trump is talking about maybe taking action against Cuba as well, maybe against Colombia. Also, we shouldn't forget what he said about Canada last year. He wanted to fold it into the US. And MAGA supports this. This was a quote from Representative Andy Ogles, which we're going to play.

• 4:11Speaker 06

  We have a greater vested interest in Greenland than geographically speaking than Denmark the Danes have. And so when you look at the Monroe Doctrine, when you look at the Western Hemisphere, we are the dominant predator, quite frankly, force in the Western Hemisphere.

• 4:28Ed Elson?

  So all of this begs the question. I know that we're not geopolitical experts, so we're going to try to tie this into markets as much as we can. But what would an imperial America look like? How would it change the world if we really went out there and decided we are the apex predator? And then how would it affect markets and perhaps the economy? Rob, over to you.

• 4:52Robert Armstrong?

  I have two diametrically opposed thoughts about this, which shows you that I'm intelligent. That was the, uh, this was, this is the, the, I guess it was a Fitzgerald quote, you know, genius is the ability to hold contradictory thoughts in your head at the same time. And my first thought is that people like me, and I think you too, Ed, who believe in free markets and commerce and, uh, letting economics and markets, uh, lead how we structure our, uh, at least the

• 5:32Robert Armstrong?

  commercial part of our lives, we kind of want markets to punish all bad ideas, right? And we want, we want it to be the, a kind of final court of justice for the world. And I'm afraid that that is not true. You know, what do stocks do? They discount future cash flows of corporations. What do bonds do? You know, they are a bet on the solvency of a nation, you know, and that could connect to geopolitics a little more closely. But you can have a, uh, you, we can, you can have an empire that's plenty solvent. There's been a lot of them in history.

• 6:09Ed Elson?

  Right.

• 6:09Robert Armstrong?

  Where you'd want to own their bonds. So we can't turn to markets to solve these kind of political and moral dilemmas for us. It's but, so that that's the thought number one. The contradictory thought is this, where we see markets flourish in history, where, where markets are places where people can make good money over a long time and retire and be happy and compound wealth and all that, those almost one to one turn out to be places that have rule of law.

• 6:45Robert Armstrong?

  You can't over time make money in the Russian stock market. You haven't. You haven't consistently made money over time in the Chinese stock market. And importantly, in the case of China, you haven't made good money there. Despite the fact that the economy has grown leaps and bounds. Right? So investors didn't grow with the economy in China, a place where rule of law is an open question. So if you think we're heading in a direction

• 7:18Robert Armstrong?

  where the rule of law doesn't apply, where the imperial attitude extends not only to other countries, but to our own citizens.

• 7:28Robert Armstrong?

  Then you might see markets in the long run have a problem, but they're not discounting that right now, that's for sure.

• 7:35Ed Elson?

  Hundred percent. Just to go look at what's actually happening in the markets right now.

• 7:42Ed Elson?

  Because it's, I mean, it's, it's true. We, we had this in Liberation Day where Trump does this incredibly stupid thing and the market punishes him severely for it, which is kind of what made tacos so great. And for those who don't remember, Robert Armstrong came up with the phrase taco, which took over the world.

• 8:00Robert Armstrong?

  Yeah. And now it's possibly obsolete as my friends on the internet like to remind me, you know, at least in the geopolitical realm, it doesn't look like a taco world anymore.

• 8:09Ed Elson?

  Exactly. But what we're seeing right now is just exactly as you're saying, this administration, despite deciding that they want to go and invade the region of an ally in Denmark. No, they're not really being punished for it. In fact, we're not seeing that much movement overall. We've seen some big moves from some very specific individual names. So if we look at Venezuela, for example, the oil refinery stocks climbed a lot. So Phillips 66 up 6%.

• 8:41Robert Armstrong?

  And have stayed high.

• 8:41Ed Elson?

  Stayed high. Valero up 12%. The oil service stocks also climbing. Halliburton, Schlumberger. There are a few kind of specific names. By the way, the same thing's happening in Greenland where there are some publicly traded. Rare earth companies that operate in Greenland.

• 8:57Robert Armstrong?

  Unbelievable.

• 8:57Ed Elson?

  They've soared, so critical metals up 25%. Energy transition minerals up more than 30%. I mean, big, big, big moves, but only in a very, very small handful of stocks. The market as a whole doesn't seem to care that much. The, the S and P is up a little bit, but overall, I mean, these very cataclysmic events in the world of geopolitics, Venezuela and Greenland, the market doesn't really care.

• 9:24Robert Armstrong?

  The most interesting one is that Chevron doesn't really care. Chevron, the only American oil company operating in Venezuela is back to where it started on Thursday. Right? People like, oh, this is exciting. And then you look at the, you know, we don't have to go into this, but the actual dynamics of oil extraction in, uh, in Venezuela, and you realize this is not a great look for the drillers themselves. The, you know, like the Chevrons and the X-Run, you know, you might make a joke that it's a lot easier to extract a president from Venezuela than it is to extract oil.

• 10:02Ed Elson?

  Yeah.

• 10:04Robert Armstrong?

  So I, I think that's fascinating. But there is a kind of side plot that you haven't mentioned that takes us kind of from the macro to the micro that I'd like to mention in this context. Like while all this stuff has been going on in Venezuela, we have seen the emergence of a character that I am calling Donald Trump with Elizabeth Warren characteristics. And, uh, this is someone who in the last few days, Donald Trump has come out and said, he doesn't want defense companies to pay dividends or buy back shares or pay their CEOs a lot of money.

• 10:44Robert Armstrong?

  Because now presidents apparently decide whether, how private companies allocate capital and pay their employees. And he, you know, those stocks are now up because he then went on to say, after those stocks tanked, we're going to spend a lot more money on guns.

• 11:00Ed Elson?

  Half a trillion, half a trillion more.

• 11:02Robert Armstrong?

  Yeah. Who needs Congress to throw another half a trillion dollars at the military? We'll see if that happens or not. So the stocks recovered, but the point was the guy came out and said, we're taking control of these private companies' capital allocation.

• 11:18Robert Armstrong?

  Until they do what I say. And then he comes out and says, and this one's even stupider. We're not going to let institutional investors buy houses anymore because it's making houses unaffordable. And Blackstone is in that business and Invitation Homes, those stocks tank. Right? And never mind that they own a tiny percentage of the houses out there. The idea here is, I mean, you can't make this stuff up. It's like, we're going to discourage investment in housing as a way to make housing more affordable. This was the big plan. You know what I mean? And so, but again, that sounds like the president being imperial towards Americans.

• 11:58Ed Elson?

  Right.

• 11:59Robert Armstrong?

  To me. So I don't, by the way, I don't think those things will happen. I think this is just big talk, which we're familiar with from this guy.

• 12:08Ed Elson?

  Interesting that, that Wall Street seems to disagree with that, that he says something that seems perhaps implausible. I mean, I remember as soon as he said, I'm not going to allow public defense companies to issue dividends, they're not allowed to do buybacks. The first message in our research group was, can he do that? And if you look at the stock, you think, I guess he can, because the stocks are way, way down.

• 12:35Robert Armstrong?

  They're down. They have recovered a little bit, to be fair. And the first move you can't always judge by, you know. But, no, but that's kind of what they're going to put on Trump's gravestone, right? Can he do that? Question mark? You know?

• 12:49Ed Elson?

  It's a really important question. And I think crucially, just to go back to the Monroe, the Donroe doctrine that we're describing here, it seems as though in the last few weeks, he's gotten kind of an appetite for going in with guns and shooting people and blowing things up, taking things, winning. And it seems to have emboldened him to have that approach towards everything. And I guess that is sort of what you're saying here is, it's not just in the world of geopolitics. It's kind of, it's kind of everything. And it's almost as if. Reverse taco might be the defining feature of 2026 where he's decided, actually,

• 13:32Ed Elson?

  you know what? I really don't give a fuck. I thought I did, but I don't.

• 13:37Robert Armstrong?

  I don't. And, you know, this is a historical pattern, you know? I don't know anything about politics, but everything I do know, I learned from Thucydides, Peloponnesian War, you know, which in somewhere in my education, somebody forced me to read it. And the gag there is Athens decides it's the hegemonic power in, I don't even know if I'm saying that word correctly, by the way, hegemonic power in the Mediterranean. And it's like, they literally say, we're the strongest. And, you know, this is where the famous phrase, the strong do what they will, and the weak suffer what they must, comes from. That's attributed by Thucydides to the Athenians. And the whole gag of that book, The Peloponnesian War, is you start thinking that way and you get in trouble.

• 14:19Ed Elson?

  Yes.

• 14:19Robert Armstrong?

  Right? Eventually you overstep. And I, I, I think, you know, again, as a non-politics expert, I think that makes sense. You know, you do something, it works, you try the next thing, you try the next thing. The only thing that stops you is disaster.

• 14:33Ed Elson?

  I like that framing because I like that it doesn't appeal to the ethics of it all, um, which we must recognize, doesn't seem to be a huge part of the calculation for this administration. I, I, I'm sorry, it isn't.

• 14:46Robert Armstrong?

  Yeah. And we can say, and you can look at American history, you know, the, the, the kind of MAGA realists will say, it's always been about force. We were just hypocrites before and we're now we're just being less hypocritical. And, you know, there's a, there's a perfectly plausible reading of history that that's true. You know, it's always been about a contest of force, you know, we just know it now. I'm not endorsing that. I'm just saying it's not stupid, right?

• 15:18Ed Elson?

  I think let's take that to its end. Like, let's take ethics entirely off of the table. Let's go fully realpolitik. If our only goal is to make more money, let's assume that's all we care about. Should we invade nations and take their stuff? And I do think that if you're thinking in the short term, and also if you're thinking in election cycles, as he does, there is an argument to be made that mess you that, that yes, you should, because, you know, just put very simply, like, if I successfully rob a bank, I will be richer and the other guy will be poorer. And if I do it again, I will

• 15:59Ed Elson?

  get doubly as rich. But to your point, I think the trouble arises over the long term. And this is, as you say, what historians have studied for years. And that is if you overplay your hand, if you start abusing other nations to a chronic degree, if you're abandoning treaties, if you're threatening populations, it can be really bad. And this is what this historian Paul Kennedy talks about. He he calls it imperial overstretch. And that is, we saw it with the Romans, we saw it with the Spanish, we even saw it with the British. You keep on trying to take, take, take. And then one by one, if you kind of overstep your boundaries, then suddenly you have a colony that's rebelling. And then

• 16:41Ed Elson?

  sure enough, the entire thing collapses. So from a pure wealth perspective, it doesn't seem a good idea over the long term.

• 16:49Robert Armstrong?

  Yeah, over the long term. But the the problem with these kind of arguments is you don't know when the long term is.

• 16:55Ed Elson?

  Right.

• 16:56Robert Armstrong?

  You know, the, the, the investing horizon of the average investor, the time for when they have enough money that they have something to invest to the time that they retire and have to start spending the money or whatever, you know, it's you got a 20 year horizon there. You're middle aged by the time you have anything to invest and then pretty soon you're retiring. So like, you know, over a period of 100 years, maybe you're right, but we're not playing 100 year game. Nobody in the stock market is playing, nobody in the bond market is playing 100 year game, game, you know what I mean? So it's, it's, you can understand why the market might not price these things in well, because nobody in all the people, when the comeuppance comes, everybody in the market today is going to be dead or in a retirement home.

• 17:40Ed Elson?

  Yes, exactly.

• 17:42Robert Armstrong?

  There we are, you know.

• 17:44Ed Elson?

  And it explains a lot. It explains a lot of the behaviors and it almost makes me think that we are just doomed and kind of history would tell you, or not as I'm probably not doomed, you're probably not doomed, we're fine, but grandchildren, great grandchildren, I mean, I even think of this when we think about the debt cycle. It's like, we just cannot think long term. We, all we care about is the next one, two, three or four years. And it doesn't seem like that is a good signal. I mean, I would like, I'm basically trying to come up with a reason as to why, if you had no care in the world about morality or ethics, why

• 18:28Ed Elson?

  it would still be a bad idea to go in and steal things. That's what I'm trying to do.

• 18:34Robert Armstrong?

  We had a pretty good thing going. I know a lot of people don't agree with that. And our system, by which I mean the American system, or perhaps the, the developed world system, a lot of people sit in a lot of different places in that system and will have different experiences of it. But I think overall, in terms of wealth and health and all the stuff that I want, you know, I, I listen to the complaints about that system that are made by Trump and his, uh, his team. And they just seem wildly exaggerated. So like the argument I would lean, if I had to make an argument, I'm like, whoa, whoa, whoa, things

• 19:19Robert Armstrong?

  are pretty good. Are you sure you want to start rolling the iron dice here? When we're all, you know, living, we're living long. You know what I mean? We have all this nice stuff. We, you know, since World War II, all things considered by the standards of history have been pretty peaceful.

• 19:36Ed Elson?

  Richest country by a mile in the world.

• 19:40Robert Armstrong?

  And it's like, yeah, I understand things are tough in the Rust Belt and I respect that. And I respect the pain that, you know, inequality and unequal distribution causes. But I feel like we have a lot at stake here. You know, these are very general observations from a guy who sits around thinking about stocks, but there you go.

• 19:58Ed Elson?

  That's what we're here to do. Just to sort of zero in on the natural resources question, because that has been interesting to watch that play out in the markets where it seems, it's so funny, Wall Street seems to react almost in step with the way I react or you would, it's sort of like, oh, my gosh, there's oil in Venezuela, buy. Oh, but wait, it's going to take 10 years and cost $100 billion to get the oil out of the ground. Sell. And that is kind of what's happened here. And so the reason, I mean, I think a big question that people are trying to think about with this question is like, what are the main reasons

• 20:42Ed Elson?

  that we are invading? Is it a geopolitical question? Is it about Maduro? And is it about socialism? Or is it about the oil in the ground and the idea that we can take that? Or is it about China and trying to keep them out of the picture? Greenland, it's a similar thing happening. There's a sort of a geopolitical strategic incentive to have that land. But then also, they've got all of these rare earth elements, and the numbers are quite staggering. Experts say that they might have 18% of all the world's metals. And if you compare it to the US, we've got only 2%. And then you compare it to China, which has almost 50%. And this has been such a

• 21:20Ed Elson?

  big piece of the US-China fight, the rare earth element conversation, where we thought that we had leverage over China, and then we suddenly realized, oh, wait, they've got this thing called rare earth elements, and it's really important for electronics and for weaponry and for energy, all of these things that are strategically critical for the US. And perhaps, Greenland is a way to catch up with them. What do you, what do you make of all of that? And also, how, how Wall Street has reacted to this?

• 21:54Robert Armstrong?

  I think the Wall Street with, with a very limited number of exceptions, like the companies that have refineries on the Gulf Coast, where if there's more very heavy oil flowing around, that's profits for them, that what the numbers on, you know, coming out of stocks on Wall Street are telling you is this is not a big economic event. Right? I can't make As a proposition, the removal of President Maduro in Venezuela, I can't make sense of that as a let's get the oil strategy. I just can't, given this, you know, the oil market, how it works, where else there is

• 22:36Robert Armstrong?

  oil in the world, how much, you know, the differential and extraction costs, the potential risks involved, it just doesn't work as an economic play. And similarly, I would say the same thing about Greenland. Now, it may be that people in the White House have a very different perspective than I do, people disagree, maybe I'm an idiot, maybe they're idiots, but I can't make sense of it. So that just defaults me to this is about politics, not economics, which is not to say that Trump doesn't like to talk about everything like it's a business deal. You know, and he talks about we get the oil and we're going to have this number of billions, they're giving me that and we're going to be controlled and everybody's going to be rich, but that's just standard Trump rhetoric. He puts that on top of everything. Right?

• 23:16Robert Armstrong?

  So, you know, just on the facts, because it doesn't make sense in any of the ways I think, it has to be in the political domain because it doesn't work for me.

• 23:28Ed Elson?

  I think I'd take a slightly different view, which is, I think it justifies, it justifies the action to the president and to the administration. Like, I look at the way he has handled autocrats and murderous dictators in the past, and historically, he hasn't had that much of an issue with them. He doesn't even have an issue with like socialists, and we saw that in his interactions with Mam Dhan, where he was very playful and liked it. I don't think it's, I mean, I think there's perhaps a piece of that in these invasions, but I think what gets him over the line is when someone says to him, hey, by the way,

• 24:12Ed Elson?

  See this area, there's 300 million barrels of oil in it.

• 24:17Robert Armstrong?

  Yeah.

• 24:18Ed Elson?

  And the same thing happens with Greenland. By the way, look at this gigantic number, at which point it becomes no longer a question. Maybe it was a question before, maybe we were thinking about it, but now that I see how much money I can supply, and also the story that I can tell to America and to Wall Street, the idea that I can, and he's now beginning to tell that story. He now is actually talking about the oil and, and, and how, how rich we're going to get from it. So I, I take your point, but I, I, I, I think I, I think, I think the resource part of this is larger than you do, is what I would say.

• 24:59Robert Armstrong?

  You know, I, I hear you. And I think the general kind of explanation that you're reaching for there, that a lot of different stars aligned in the case of Venezuela, that is clearly right. Maduro made fun of him is one. There is a lot of oil. He just published a document saying, we're not putting up with any nonsense in our hemisphere and et cetera. So all these things got into place at the same time. I would just put the emphasis on the kind of hemispheric dominance, wild machismo side, rather than the economic side.

• 25:36Ed Elson?

  Yeah, it's a good point. Just before we move on to our second story here, I, I love what you say about how markets, we want markets to tell us the right story here, and we always want markets to tell us the right story here. But they just don't.

• 25:54Robert Armstrong?

  Yeah.

• 25:54Ed Elson?

  Because the mark, the markets can only, they only care about so much. And it's really interesting. One of our research analysts on our team, Kristin O'Donoghue, was listening to the JP Morgan call when they're talking about what's happened in Venezuela and, and what's happened in Greenland, and was pointing out that it, the way that they talk about it is so strikingly academic and uninterested in how cataclysmic the event really is. I mean, we're talking about guns, war, death. We're talking about very, very serious things, but in a, in a very unsatisfying way, it's the, it's the, it's the market's job

• 26:37Ed Elson?

  and it's the Wall Street analyst's job to sort of treat it as if it's this. I don't know, an academic term or something that you write about in a research paper, which is so frustrating because it isn't that.

• 26:50Robert Armstrong?

  There is a very long thread, kind of intellectual thread that runs back to, I don't know, the 18th century, maybe even the 17th century, that says, if people just stuck to business, if we all just worried about our material well-being and our economic interests, everything would get better.

• 27:11Ed Elson?

  Hmm.

• 27:12Robert Armstrong?

  Right? And people have been talking that way since Montesquieu. And you saw it, for example, in the view that we had 20 years ago, that no two countries that had a McDonald's would go to war. Or that Russia, once, you know, the wall fell and communism ended and became a capitalist country, of course, they're going to be our ally and they're going to join Europe and whatever. And so that, that kind of general school of thought that says economics will save us is really deeply ingrained in a lot of people. It's too bad that it's not true.

• 27:51Robert Armstrong?

  It's just not, right? And we have to be reminded of it, you know, every quarter of a century or so. You know, so there's, there's more to life.

• 28:03Ed Elson?

  We'll be right back after the break. And if you're enjoying the show so far, send it to a friend and please follow us if you haven't already.

• 28:47Speaker 02

  A payday candy bar is miles and miles of peanuts. Salty crunchy peanuts, sweet, sweet caramel, wrapping you up with every bite. Enjoy the tasty journey, my friend. Payday Peanut Caramel Bar.

• 29:03Speaker 03

  This episode is brought to you by Welch's Fruit Snacks. Back to school season can be tough on parents. But choosing a snack you and your kids can both get behind doesn't have to be. Stock up on Welch's Fruit Snacks. Made with whole fruit and now made with no artificial dyes. It's a snack kids already love and one you can feel good about giving them. Go back to school with Welch's Fruit Snacks. Now made with no artificial dyes.

• 29:35Ed Elson?

  We're back with Prof G Markets. Fourth quarter earnings season kicks off later this week with all of the big banks reporting. And we'll break down the results on next Monday's episode. But today, we want to zoom out and focus on the broader shift reshaping the industry. One of those shifts is deregulation. The Trump administration has made several moves to loosen banking rules. That includes rolling back parts of Dodd-Frank, the post 2008 framework that was designed to limit risk taking. And the result is it is a really good time to be a bank. And we can just look back at the year 2025. The big bank stocks rose 30% over the course of the year.

• 30:16Ed Elson?

  That's nearly double the gain of the market at large, the S and P. So, Rob, looking ahead to, well, let's, I guess, start with last year, which was the strongest year for banks since the pandemic. What do you make of what happened last year in the banking industry? And what can it tell us about the year ahead?

• 30:40Robert Armstrong?

  A couple of stars aligned here in a really nice way. The first and most obvious one is that banks do as well as the economy that they're sitting in. A bank, you know, and the American economy was pretty good, and that's where you have to start anytime you want to talk about banks. When the economy is strong, people borrow money, people pay back the money they borrowed from you before, all of that stuff. They deposit, they make deposits in your institution, et cetera. So that's good. Then you already hit the second important point, which is with the election of Donald Trump, the regulatory overhang lightened significantly. And, you know, the most important for the big banks aspect of this is there were all

• 31:24Robert Armstrong?

  these rules that hadn't arrived yet, that they were kind of coming down the pike, that were going to increase the capital requirements of the big banks even more than they already have been increased. They were, of course, massively increased and hardened after the financial crisis. This is to say, how many dollars of actual equity capital you have to have for every dollar of loans or assets or whatever you have out there? So we were worried that what they call Basel III end game was going to mean, you know, JP Morgan has to hold two more dollars in addition to the 11 or 13 dollars they already hold for every hundred dollars of assets. Looks less like that's going to happen.

• 32:06Robert Armstrong?

  Acquisit, you know, mergers are getting easier, they're getting executed faster, all this good stuff. So regulatory overhang, good, that is good. Now for the tricky part, where listeners should either pay attention or just tune me out altogether. One or the other. So take your pick. So back when interest rates were really low, before 2022, and there was inflation and rates got higher, any asset a bank bought then has a really low yield on it. If you bought a mortgage or even a business loan or 20-year treasury, you bought it at a yield of just a couple of percent.

• 32:47Robert Armstrong?

  When interest rates go up, the price of all those assets has to reprice to the new interest rate, which means the value of those assets goes down, right? So if you buy a mortgage bond with a yield of 2% and rates go to 4%, the market value of that asset has to go down to make its yield 4% too. Okay, the sound of your listeners going to sleep, I can hear it now. So that this was a very bad occasion for certain banks. It hurt a lot of banks. This was at the root of what happened to Silicon Valley Bank last year, et cetera. But what's happening now is that assets that were purchased back when rates were really

• 33:32Robert Armstrong?

  low are rolling off of banks' balance sheets. So you lose a loan you made in 2020, you replace it with a loan you're making in 2025, you're getting rid of something that yields 3% and replacing it with something that yields 7%. So and that that was going on last year and it's going to go on even more this year. So there's this natural lift under banks' income, just as the old, old world stuff rolls off and you replace it with higher yielding new stuff. So that's and final point, and now readers, listeners who tuned out can tune back in. For the very big banks, when you have very active capital markets, as we had last year,

• 34:15Robert Armstrong?

  that's very good for your investment banking and your trading desk.

• 34:18Ed Elson?

  So, I mean, if we were to look at what happened in 2025, all of those things that you describe leads to one of the strongest years we've ever seen for the banking industry. And by the way, just a side note, this is ironic because when Trump comes in, the whole message is the wall, the guys on Wall Street have won for too long and we're going to hand it back to Main Street. It's not about getting them rid. And what do you know? I mean, everyone on Wall Street is getting richer than basically ever before.

• 34:47Robert Armstrong?

  Than ever before.

• 34:48Ed Elson?

  I mean, let's look at just the, the, the big bank stocks and their performance over the year. I mean, I mentioned the, the banks index, but that includes all of this. All the banks, let's look at the big, big banks. J P Morgan gained thirty four percent. Citigroup gained more than sixty percent, sixty three percent over the year, which was kind of unbelievable. And for all of those reasons you describe, you have these regulatory conditions which are better. You have more M and A, global M and A volume was up more than forty percent for the year, which means that your investment banking business is crushing it. Also, one thing that I would add there that you didn't mention is the volatility that we saw in the stock market, which is so good.

• 35:28Robert Armstrong?

  Fantastic.

• 35:29Ed Elson?

  If you're a trader.

• 35:30Robert Armstrong?

  Fantastic.

• 35:30Ed Elson?

  I mean, just the more it goes up and down, which it did, the more trading activity happens and the more money you make from facilitating those trades. So, trading revenue was up fifteen percent last year. So, I think the question then is, you'd think that because we had such a big year in twenty twenty five, we're probably not going to have that kind of year again in twenty twenty six. But I'm all, I, I'm not so sure because I don't see any of these conditions changing. And then I would add one other thing, which is it seems that the IPO market is going to explode. Explode might be a strong word, but it seems like it's going to really come online this year.

• 36:12Ed Elson?

  If you've got SpaceX in the pipeline, potentially OpenAI, potentially Anthropic, that would be a great thing for the banks too. These would be some of the largest IPOs of all time. So, my preliminary thought is twenty twenty six is going to be a great year to be a bank as well. But I want to see what you think.

• 36:29Robert Armstrong?

  I think that's probably true. I mean, there will be more of this replacement of bad assets with good assets. That will still happen. I think that, as you say, there's every reason to think barring a crash or something awful, that the trading and investment banking business will be good.

• 36:48Robert Armstrong?

  And I think as the economy is positioned right now, the economy seems pretty solid to me. So, all the conditions are in place for good performance. But you have to remember, at the beginning of twenty five, bank stocks were cheap. They're not cheap anymore, right? And so, the reason people were excited about owning banks is that the stocks look like bargains. They don't anymore. I've been hearing a lot of chatter in the space where people are like, is J P Morgan a good buy at this price? I mean, you can understand why Citibank went up sixty percent because. It's a troubled bank historically and it went from being mediocre to being slightly

• 37:31Robert Armstrong?

  less mediocre. And those kind of transitions is where you really make money in the stock market, not from good to great. The big money is from like trouble to slightly less trouble, you know?

• 37:44Robert Armstrong?

  I mean, but you don't do, but you don't do that twice, right? You know? And so it's going to be hard in terms of stock market performance. It's going to be hard, I think, for the banks to repeat what they did last year. But I think performance wise, your central case has to be that they're going to be just fine.

• 38:04Ed Elson?

  Yes. Okay. I think that's a good, good way to frame it. The pressure on the stock will be the multiples. By the way, one thing that I find quite interesting that Tom Lee, who's the head of Fundstrat, he says that, he says that he thinks that bank stocks are going to eventually and in the near future receive tech-like multiples because he thinks that there's all of this.

• 38:31Robert Armstrong?

  So I, I'm just gonna, I'm just gonna get on my, I'm just gonna get on my hand with my broker and sell everything. When Tom Lee says that banks are going to trade like tech stocks, I think it's time to hit the doors.

• 38:44Ed Elson?

  You don't like it. You don't like it.

• 38:45Robert Armstrong?

  Well, I just think they're banks. You know what I mean?

• 38:48Ed Elson?

  His view is that there's so much power in AI. I mean, so much layoff potential, really, that these are extremely human capital intensive businesses.

• 38:56Robert Armstrong?

  Yeah, that's fair.

• 38:57Ed Elson?

  Which could open up new opportunities for multiples. I mean, if JP Morgan decides to AI charge its business, then suddenly you have a company that, that looks more, when you look at the business, looks more like a software company than, say, a bank with a bunch of physical branches.

• 39:15Robert Armstrong?

  I got two things to say about that. One, yes, high fixed costs and human capital costs are part of the reason that bank stocks traditionally trade at something of a discount to the market. The other reason is that their earnings are very volatile because they're sensitive to the economy and to the stock market. And that's not going away in the AI world.

• 39:34Ed Elson?

  That's what kind of.

• 39:35Robert Armstrong?

  So that's that, that factor will keep multiples down. Two. This world in which AI gets a lot of people fired, maybe a world will be arrive at much more profitable companies in certain sectors, but it's going to be a hairy ride to get there. So like, I was just looking the other day at this bank, Truist, which your listeners may or may not know of, but it's a very large regional bank that was built out of a merger of two, two quite big regional banks, BB and T and SunTrust five years ago. The stock's been a dog ever since the merger. And they did fire the people. They had something like 58,000 employees as two independent companies. And now they

• 40:19Robert Armstrong?

  got 38,000 and they got more assets. So like, mission accomplished on firing people, not by AI, but by doing a merger, right? But you hear the war stories about what it was like getting from point A to point B, the culture clash, the people who leave because they're pissed off at everybody, the, the sturm and drang, right? You know, if you, if the thesis is banks are going to fire a third of their people, like, is it going to be fun to be at those banks while that's happening? And if the people inside the institution are like afraid for their lives, do you really want to own it while that is happening?

• 41:03Ed Elson?

  Yeah, that's a great point. It's very, it's all a lot easier said than done.

• 41:08Robert Armstrong?

  I mean, we make, we may get there.

• 41:09Ed Elson?

  It'll take some time.

• 41:11Robert Armstrong?

  It'll take some time and some pain.

• 41:13Ed Elson?

  Yes. This is a nice transition to something that you've been talking a lot about in your newsletter, which I want to get your thoughts on. You've been saying that, I mean, just for some context, we usually say on this podcast that consolidation is kind of a bad thing because it generally.

• 41:36Ed Elson?

  Involves a monopolistic entity going in and buying up all of the smaller players, which reduces competition. It leads to potentially price gouging. We generally are not huge fans of when a big bank goes and buys, or a big company goes and buys another small company. Your view that you've been talking about, and I want to hear more about it, is that consolidation in the banking industry would actually be a good thing. Why do you say that?

• 42:03Robert Armstrong?

  Well, I think it would be pro-competitive. I think that what you look at, you know, I don't know what, I should actually figure out this number, but what percentage of the profits in the banking industry are made by JP Morgan, you know? And then if you put JP Morgan, Bank of America, Wells Fargo, Citigroup, and US Bank together, you know, they're just squeezing most of the profits out of the industry, and there's your oligopoly.

• 42:30Ed Elson?

  Right.

• 42:31Robert Armstrong?

  Right? You know what I mean? And the fact that there is 1,970 other banks in America that are squeezing out tiny little drops of profit, uh, doing local banking, doesn't mean the industry is really properly competitive. And from an investor point of view, the small, you know, the regional banking industry has been a terrible place to invest. And so, on the, I think consolidation of that issue would be good for investors. I think it would be pro-competitive for the industry. The problem is, the more that I read about it, and the more bankers I talk to, integrating a bank merger is a nightmare.

• 43:13Ed Elson?

  Why? Why is it a nightmare as opposed to anything else?

• 43:16Robert Armstrong?

  Okay, so, one reason is because it's such a human capital industry. So, the first thing that happens when BBNT and SunTrust get together, is that, uh, everybody at the competing banks calls up the best banker at the merging banks, and is like, you really want to put up with three years of bullshit while these guys screw around changing their name and re-upping that? Why don't you come work for me instead? And that banker, maybe it's a commercial banker who makes loans to banks, or it's somebody, a trader, whatever, you know, they just walk out and they take a lot of their clients with them. Right, that you know, the, you know, as people used to say about Goldman Sachs,

• 43:59Robert Armstrong?

  our assets go up and down in the elevators every day. And to a certain degree, that is true of, of all banks, you know, e- even like a, a traditional, like branch banking bank. And you go through the disruption of a merger, all of that is at risk. You know, so that's a big problem. Also, regulation in banking is so much stricter than every other industry. So you got the regulators on the top, less so now under Trump, but you have the regulators on the back while you're, on your back while you're trying to do it. Uh, that's another issue. And, you know, culture is really important in banking. You know, vibes, you know, it's, it's a, it's a people business again. So you mess with that corporate culture and you got an issue. So it's just really hard to not say it won't happen.

• 44:43Robert Armstrong?

  I just like, the more I talk to bankers about this process of consolidation, the harder it looks to me from the outside.

• 44:49Ed Elson?

  Something you also mentioned in a previous conversation is that, if you're the head of a, of a regional bank, you're the man of your town.

• 45:01Robert Armstrong?

  You are.

• 45:03Ed Elson?

  A really important point. And you don't want to give that up.

• 45:07Robert Armstrong?

  No, you're like, you're the, you're the national bank of wherever, like, you know, whatever it is, you're, you're the head of, name the town you want, you know what I mean? Middletown, wherever, and you're head of the national bank of Middletown. You are the man at the country club. You're the head of the rotary, you know, everybody loves you. And you got this great job and this great life. And like, basically the deal, if you sell your bank, you're no longer the man anymore. And you're looking down at all the people who work for you and say, you say, look, it's been great. We just got bought out at a premium valuation. It's great for the shareholders. A third of you are going to get fired. Goodbye.

• 45:47Ed Elson?

  Exactly. Which is another example, I would, I would add of people don't think in terms of economics. We are not, there are moments where there are things outside of economics that are outside of money that trump money. And it happens in a lot of situations. This would be one of them. I'm, I'm the head of the Rotary Club and I'm the CEO of the regional bank here. Yes, technically speaking, this would be a better deal, but I don't want to give up these things that I enjoy in my life.

• 46:17Robert Armstrong?

  I, and you know, I don't want to hurt the people around me. And, and you know, the, the opposite mal incentive also applies. So they don't have, if you're the head of a small regional bank, you're CEO, you have a strong incentive not to sell. If you're the buying bank, you have a strong incentive to overpay. Barclays, the investment bank, did a great chart of this. There's, there's like a incredibly strong correlation between bank size in terms of assets and banker CEO pay. So like, if you run a bigger bank, you just get paid more money. So like, whether it's good or bad for the shareholders, you do an acquisition, maybe you overpay, it destroys value, whatever.

• 47:01Robert Armstrong?

  You double the assets you're managing as a banker, you can double your income. So you have the, there's a conflict of interest between the CEO and the investor. And you, and like, you don't want to, you just don't want to be that involved in an industry where management and investors have different interests.

• 47:20Ed Elson?

  Yes, exactly. And it's the same thing that we see in, say, venture capital where, I mean, the whole industry seems to be getting overrun by the management fee. And that is, you're not making money on the 20, you're making money on the two. And

• 47:35Robert Armstrong?

  Yeah, yeah.

• 47:36Ed Elson?

  That basically incentivizes companies and firms to just buy up as much stuff as humanly possible.

• 47:43Robert Armstrong?

  Same thing is true in fund management. And that's why all funds tend to look the same. The important, the thing that's going to make you retire rich is retaining, you know, hopefully growing, but like retaining assets and earning that 2%.

• 47:58Ed Elson?

  Yeah. You don't even need to invest well. You just need to invest lots.

• 48:02Robert Armstrong?

  Yeah, yeah. You just, so, so you, you have a strong incentive like not to screw it up. Then you have to like really, you know, go for it. You know, it's, it's a huge issue.

• 48:13Ed Elson?

  We'll be right back. And for even more markets content, sign up for our newsletter at profitemarkets.com/subscribe.

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• 49:46Ed Elson?

  We're back with Profty Markets. So Rob, you are one of our first guests of the year. So we want to get your take on what is in store for 2026. So we are going to go through some of the predictions that you shared in your unhedged newsletter. And I'm just going to ask you questions and hear more about what you think is going to happen.

• 50:06Robert Armstrong?

  Can I just say something as a by way of process? Like, I don't think these predictions, I don't think my predictive powers are particularly strong. Right. You know, there's this guy, Dan Davies, who's a writer. And he says, the reason to make predictions is that otherwise you don't know what to be surprised about. Do you know what I mean? Like when events happen, the natural tendency is always to be like, oh yeah, I saw that coming. You know what I mean? And once you go on Ed's podcast and you say it out loud in front of everybody, at least people will call you up and tell you what an idiot you are when it turns out to be wrong. You know what I mean? That's literally the main reason to do predictions is, is to, it's a discipline.

• 50:46Ed Elson?

  Yes, exactly.

• 50:47Robert Armstrong?

  So it's not because I have some crystal ball because I think about markets all day. Nobody does, right? But it's, it's, it's an accountability machine in some way.

• 50:57Ed Elson?

  Hundred percent. And also an important way to catalyze the conversation and frame what we should be thinking about.

• 51:04Robert Armstrong?

  Correct.

• 51:04Ed Elson?

  And watching for, as the year continues. I'll just say, our listeners are very familiar with this because Scott makes many predictions. In fact, he makes a prediction every single week.

• 51:16Robert Armstrong?

  Good.

• 51:17Ed Elson?

  Some of them are right, some of them are wrong. We try to keep track, but let's get into it. And let's start with this first question, which is, are we in a bubble? And will the bubble burst? And you say, yes, we are in a bubble, but no, it won't in 2026.

• 51:35Robert Armstrong?

  Well, that's just numbers, right? I mean, this, as I said, on my own show this morning, in finance, either you believe in valuations, you don't. I believe in them. We are in the top, not even decile, but what is, what's after decile, like a hundredth or the, the 95th percentile? We're in the 95th percentile, the 97th percentile of how expensive risk assets are related to history. And always before in history, that predicts low returns over the long term, you know, over the next 10 years or so. As you might think, pay a lot for something, right? Here, you know, the profits aren't going to be as high. And in history,

• 52:19Robert Armstrong?

  Those low profits over the long term, over the next 10 years, don't come with a slow deflation, they come with a big step down. So history says primarily for this reason, but also for others, we are in a bubble now. But the problem is that long term, you know, do we have that big step down in 2026 or 2031 or one year in between? I have no idea. And while I'm waiting around for it to happen, I'm giving up returns. So if it happens three years from now, and I've been sitting on the sideline not owning stocks, what have I achieved? So, so like this, this is just probability. The probability is we won't have a pop this year because most years we don't.

• 53:04Robert Armstrong?

  It's, it's that dumb, right?

• 53:10Ed Elson?

  Is that really your reasoning? Because most years we don't?

• 53:14Robert Armstrong?

  Most years we don't, you know, even at these levels of high valuation, these things can go on along for quite a long time. And I would add on top of that, the general setup is pretty benign right now. The economy is strong. We can talk about the somewhat wobbly labor market, which is, is a red flag, but in terms of growth and spending and activity and a lot, by a lot of measures, things are good and perhaps even getting better. We might have Fed cuts coming. We definitely have massive fiscal stimulus coming. Uh, you know, like it's, it's an environment that is quite benign, which means there's less

• 53:57Robert Armstrong?

  possible triggers for the deflation of the asset bubble that we're in right now.

• 54:02Ed Elson?

  I would completely agree. I guess the way I was thinking about, have been thinking about it is, I mean, if you believe that there is a bubble and, and you're trying to think about How to invest or how to bet on whether or not it pops. The idea of betting on it popping in a year where we are about to see this flood of fiscal spending that is going to prop up the market, where we are seeing interest rates coming down. It's just a bad bet when you look at the reality of what else is happening.

• 54:36Robert Armstrong?

  Look, there's midterms coming, baby. You can't believe, you can't believe that Scott Besson and Donald Trump are going to throw the kitchen sink at this economy. And 2027, be damned, you know, they're going to do everything they can for 2026.

• 54:52Ed Elson?

  Hundred percent, which is why my, my view on, on 2026, and we said it on a previous episode, I, I just think returns are going to be kind of eh, like it's going to be, you have all of these downward forces which are related to what you're saying, that valuations are too high. You also have all of these expectations around AI. And I don't think that people really understand how it's go, where the ROI is going to be and what the ROI is going to be. I think it will likely disappoint people as it has done throughout history. The one good thing that I would note is that we're not seeing huge amounts of leverage and huge amounts of debt.

• 55:32Robert Armstrong?

  Very good point.

• 55:33Ed Elson?

  That the, these companies are spending, you know, they're spending on data centers with money that they have for the most part. There are a few outliers, they might get crushed, but would that pop the entire thing? Would that cause a real correction, a real crash, especially when you got those forces propping things back up? I think no, and then it all kind of goes in sort of a semi-flat line.

• 55:55Robert Armstrong?

  I mean, one thing that is interesting about where we are now as opposed to in 2008, say, is that, and this is the kind of sentence that gets you in trouble, but I'm going to say it anyway. Most or all of the leverage seems to be in the government. In 2008, there was leverage in households and also in companies. And since then, households and companies have cleaned up their balance sheet with the assistance of, from governments, which have this infinite appetite for debt.

• 56:22Ed Elson?

  That's such a good point.

• 56:23Robert Armstrong?

  So, yeah, that doesn't sound like a very good, sustainable solution and way to live your life as a world to me, but it might make, uh, at least in the short term, a crash less likely because the crashes, we know.

• 56:39Robert Armstrong?

  In in developed countries, at least, they tend to happen, they started with households panicking or or private institutions and somebody will write in and find an exception to me, but most of the debt is in the government and they've got a printing press, which leads to the next important point, the big spoiler. The thing I'm worried about most is inflation, right? When you have all this debt in the in the public realm and you're forcing all this stimulus into the economy fiscally and you're cutting rates and the economy is doing pretty well and you've reduced the labor supply by throwing all the immigrants out. I I can't predict inflation, you know, I don't even, I don't understand it, but like

• 57:22Robert Armstrong?

  if there is inflation, every, all the nice things I just said are not true, right? You know, inflation goes up, the 10 year yield goes to five and a half percent, it, you know, it's a different game.

• 57:36Ed Elson?

  Yeah, you said that I was, that was on my list here, the biggest risk in 2026 will be inflation. What do you make, just a quick side note, what do you make of the inflation report that we saw recently where it came down to 2.7, which shocked me and then I learned, I mean, I guess I'm sort of answering, but.

• 57:56Robert Armstrong?

  Give me your take first, let me just ask you, what did you make of it? No, that's fair, oh, yeah, you you know it as well as I do.

• 58:03Ed Elson?

  Well, I I guess I I don't believe it, or I didn't believe it at first, and I I always hate being the guys, I don't believe the numbers, but then we talked with Mark Zandi and he basically took us through all the reasons why the data was completely flawed. And so in reality, we're actually still at 3% based on the analysis that they did.

• 58:25Robert Armstrong?

  Yeah, I mean, it looks to me, and again, the data is flawed and we have this, we have this gap and it's surprising, we have this gap from the government shutdown and it's surprising how that affects the data in months to, like, all this stuff is kind of path dependent and all this stuff, but you know, what it looks like is we're still above target, uh, goods is maybe getting a little bit better, services outside of housing is not, that was kind of my takeaway, and that's the bit that's like dependent on wages and et cetera, et cetera. So I I think it's hard to say, you can't say we're at target. But I think it's hard to look at all the numbers all in and say things aren't getting a little bit better, right? That's why I say I'm not predicting anything. I'm not saying,

• 59:10Robert Armstrong?

  I'm not, that's, that, I'm not saying that I think inflation is going to happen for whatever, what it's this X, Y, or Z probability event. What I'm saying is it's the worst thing that could happen now.

• 59:24Ed Elson?

  Within, within the realm of probability?

• 59:26Robert Armstrong?

  All the things that are good going into next year depend on inflation staying under control, right? And, and so if something should happen that in that area, you know, we got to reconsider all of our assumptions.

• 59:42Ed Elson?

  For all of the reasons that we're outlining here, I don't see it improving. That's, that's, that's really why I saw the 2.7%. I'm like, bullshit. No, no way. And I was very relieved to see the analysis which said I'm right.

• 59:58Robert Armstrong?

  Okay. Well, I'll give you, I'll give you two reasons. You know, you, you can take these or leave it. These are two things why it might improve. Uh, the first reason is we lap, at some point this spring, we lap the, uh, A- April tariffs. So like, you know, that, if that turns out to be a one timer, right? We lap that. And so that falls out of the goods numbers.

• 1:00:22Ed Elson?

  Yes, that would be huge. I, I'm that, that, if that happens, yes, fair enough.

• 1:00:26Robert Armstrong?

  And on, on the kind of services side, uh, we do have a bit of a mushy labor market, which tells you maybe wages, wage growth won't be that strong this year. And, you know, although a lot of things surprise me, surprise you, people do teach you back in school that inflation and wage growth are very intimately linked. And it's hard to get hot inflation when wages aren't going up. So I'm not sure I buy those arguments either, but I guess those would be the standard ones that the inflation doves would roll out right now.

• 1:00:56Ed Elson?

  Definitely. I, most of, I mean, the, the basis of my belief is really tied to tariffs. And who knows what's going to happen with tariffs at this point, especially we've got the Supreme Court ruling in the pipeline. So, you know, this is going to be an ongoing conversation, but in a tariff world, unlike it's only goes up. I do want to keep us moving because you have more predictions. Um, will AI euphoria cool? You say yes, kind of linked to the bubble, but let's just get a quick why.

• 1:01:26Robert Armstrong?

  Because it's already happening.

• 1:01:29Ed Elson?

  I love these predictions.

• 1:01:32Robert Armstrong?

  Uh, Nvidia has been going sideways. The stock's been going sideways for four months. Meta is struggling. Oracle is struggling. There is a sense visible in market prices that the market is being more caught, becoming more cautious about this narrative. And of course, the dream scenario, what we should be all happening is that we have kind of incremental caution rather than a moment of freak out. That this kind of just cools down. And, you know, look, as somebody, as a really smart investor, Patrick Kizer at Brandywine Global put it to me this week.

• 1:02:10Robert Armstrong?

  He was talking about the moment you're worried about is not that revenue that like AI data center spending just suddenly stops in the middle of 2026. That's not going to happen. The, the cranes are already there. The purchases are made. The cement is rolling. The moment you're waiting for, some moment in 2026, when people look out to 2027 or 2028, and they can see the end of the runway out there. Right now, the road just goes on forever. Right. But the moment we're waiting for, because the market discounts forward. The market doesn't care what's happening today. Right? So at some point, the worry is that you see the end of the runway sometime in 2026.

• 1:02:54Robert Armstrong?

  And I, I just feel like, uh, I don't know. My guess is no, it's not, it's not a high probability prediction, but I am reassured by the fact that the market is already exercising a little bit of discipline.

• 1:03:07Ed Elson?

  It is interesting, the discipline that we're seeing in the markets. And I think one of my, one of my predictions for AI is that the, the winners in AI are going to be the ones that can signal a level of responsibility. I mean, if you look back at the previous couple of years in AI, you were rewarded for being unrealistic. You were rewarded for saying, we have this gigantic idea. It's going to be artificial general intelligence. We're going to take over the world. And then people gave you money for saying that. I think that it's beginning to flip now where if you start talking with that sort of techno babble language, you begin to get punished. And it's the companies that are signaling the level of responsibility

• 1:03:49Ed Elson?

  and usually signaling that means you are actually being responsible. And so a company that I think would be rewarded as an example, would be anthropic this year versus OpenAI.

• 1:03:59Robert Armstrong?

  Okay, so this is a question I would put to you that I was thinking about earlier today. So let's suppose, and I have no, I should emphasize at the outset, I have no grounds for thinking this is going to happen whatsoever. Let's suppose the the wheels properly come off OpenAI this year, right? Like they try to raise some money and they can't. Or like they, the revenue stops growing and they have some horrible conference call. They try to sell the thing, the, you know, pick your scenario. Wheels come off badly at OpenAI. How big an event is that for the market at large?

• 1:04:31Ed Elson?

  I think it's gigantic personally. I mean, the the amount of money, the the good news is that the market is beginning to sort of understand that possibility. So that one and a half trillion dollars that they said they were going to spend over time, I mean, immediately you look at Oracle and the market says, it's real, it's great. And he's the Oracle shootout, it goes crazy. Eventually, they started to discount that one and a half trillion because they realized it's less realistic than we thought. But on top of that, I think that OpenAI has become such a symbol of the AI story. I mean, the the gains, the the biggest moment in the past five years is the launch of ChatGPT.

• 1:05:15Ed Elson?

  And that was the seminal moment where we kind of have to measure what has happened since then. And since then, seventy five percent of the gains in the stock market have been AI. It's all AI related. So I think because of the power of that story, if you have a blow up similar to what we saw with FTX, I think would might be another good example. That was sort of the what anchored the whole crypto story. If that just comes off the rails, I think that really shakes people's confidence.

• 1:05:43Robert Armstrong?

  Yeah, no, I don't know what to think about it. That's why I asked you is because I don't know what to think about that. I can imagine a scenario where the world's like, look, Google's still Google. Microsoft's still Microsoft. Nvidia probably takes a monstrous hit that day.

• 1:05:56Ed Elson?

  And eventually, I think that would happen. I think you see the crash and then eventually people would realize, actually, this doesn't mean it's over.

• 1:06:03Robert Armstrong?

  Yeah, yeah. It's just that this is a project that failed and on to the next path. Yeah, yeah, yeah.

• 1:06:09Ed Elson?

  Exactly. Moving on, interesting prediction here. Will US stocks trail the rest of the developed world? You say, no, they won't, which is the reason that's kind of relevant is because last year, the S and P rose 16% and then the rest of the world ripped higher than that. So you say that's not going to happen.

• 1:06:35Robert Armstrong?

  And by the way, to further congratulate the rest of the world, they did, they ripped higher in their local currencies. They didn't even need the weak dollar to beat the US. A couple, I mean, earnings growth is just like comparing to Europe and Japan. I'll restrict the discussion to Europe and Japan just for simplicity's sake. Our economic growth is stronger and our earnings growth is stronger. And at the beginning of last year, it's a bit like the banks. The, the lower earnings growth and the lower economic growth was very much priced in to European and Japanese indices. Now they have a higher hurdle to jump. And so I just feel like they had a great year next year.

• 1:07:20Robert Armstrong?

  I'm, I'm a kind of politics aside, American exceptionalism believer, meaning I think there is a reason that US markets get a premium that makes perfect sense. And we're now into the normal range for that premium, better earnings growth, better economic growth.

• 1:07:36Ed Elson?

  Okay, I think that makes sense. We also have here, you say that cyclical high volatility stocks will outperform defensive low volatility stocks. Why do you say that? And then also, what are cyclical stocks?

• 1:07:51Robert Armstrong?

  So cyclical stocks, we talked about banks, which I think are good. These are just stocks that are very tightly, they respond very much to the underlying economic growth. So like a classic example would be a construction company. You know, if the economy is shrinking, put the cranes away, nobody's calling. And if it's growing, you can, you can price any way you want. So you're going to be, you're going to be like the economy plus or the economy minus. So that's a cyclical stock. I mean, look, fiscal stimulus, cutting rates, we had a kind of sludgy fourth quarter that seems to be ending. And some, you know, a lot of the cyclical stocks as opposed to tech stocks

• 1:08:32Robert Armstrong?

  are still not bonkers in terms of what you're being asked to pay. So I think the economic background is good for them. And growth investors are probably looking for somewhere to go that isn't tech. Right. And again, this is one of these predictions that's easier because it's already happening. Over the last month or so, banks, materials, industrials, they've gotten a nice lift. Again, this is a perfect example of the inflation problem. If inflation perks up, the rate cuts come off the table, the investors are going to run out of industrials, banks, cyclicals at top speed. So this is a perfect example

• 1:09:16Robert Armstrong?

  of how inflation gets loose. All of these predictions change.

• 1:09:20Ed Elson?

  All bets are off. Final prediction here. Will the Fed funds rate end the year below 3%? You say no. Why? And also just what's, what do you make of what's going to happen to the Fed in 2026? We've got a new Fed chair who will come in, we don't know yet, but someone's coming in in May. Jerome Powell's out.

• 1:09:44Robert Armstrong?

  A friend of mine, Ed Alhousany, who is a fixed income guy at Columbia Threadneedle, is one of my best sources and a friend. He put this in this way. He said, we're heading into situation where the chair of the Fed is going to be a dissenting vote.

• 1:10:06Robert Armstrong?

  Right? Which is kind of new. And I looked this up and one of my colleagues came back to me and said, actually, under Reagan, Chair Volker, even the great Chair Volker, Paul Volker, did get outvoted by the committee once or twice while he was. So it's not unprecedented for the chair, but it's like a weird and novel situation. How important is it that we seem likely to get a Trump patsy as Chair of the Fed? And I guess I'm thinking, maybe that's just another vote. Like, the press conferences are a little weird, granted, if

• 1:10:45Robert Armstrong?

  they keep having press conferences. But, you know, the guy just gets outvoted. And there's a long history of people getting appointed by politicians who are then in safe jobs, like they're Supreme Court justices, or they are Fed Chairs, and then disappointing their former master, because they're safe. So, you know, but I will admit that this one does keep me up awake a bit more than the other predictions. I was partly saying we're only getting one or two, one or two cuts, because I wanted to be provocative.

• 1:11:28Robert Armstrong?

  You know what I mean? Because everybody's out there saying, it's gonna be, whether it's Wash or whoever it is, which Kevin it is, they're gonna come in there and it's gonna be like, suddenly, the whole committee is gonna be calling for 50, 100 points of cuts right off the bat. And I just wanted to push back against that narrative.

• 1:11:49Ed Elson?

  I think it's a really important point. And I think it's sort of an important reminder of how the Fed actually works. And for those who don't know, there is a committee, and each person on the committee gets one vote, including the Fed Chair. So, the question is, what power does the Fed Chair really have? And, you know, there's

• 1:12:15Ed Elson?

  Power in the sense that they set the agenda for the committee. They decide which things are going to be talked about and how the conversation is going to proceed. They're also the person who gets on the TV and talks to the country about what is happening. But it is a really great point. It's like, but also they just have one vote.

• 1:12:35Robert Armstrong?

  There's no doubt that the way central banking works is less through the actual impact of the interest rate and more through signaling and messaging. You know, the, the, the, the actual interest rate, we're talking about quarter point increments at a rate that very few people in the economy pay, right?

• 1:12:57Robert Armstrong?

  What's important, and so where the chair can have sway is everybody on that committee knows that they're sending a message as a group to the world, right? So there is pressure for them to, you know, one or two dissents are okay, but the world does not need a split committee from the Fed. And the committee is, the, the open market committee is aware of that. So, you know, we're going to have an interesting experiment in kind of group dynamics here that we haven't had in many decades.

• 1:13:27Ed Elson?

  Such an interesting point. I, I, I really hadn't considered that. And I love it because it's such an obvious point.

• 1:13:37Ed Elson?

  Okay, let's take a look at the week ahead. We will see inflation data from the Consumer Price Index for December. We will also see the Producer Price Index for November. And of course, we will see earnings from JP Morgan, Bank of America, Wells Fargo, Citigroup, Morgan Stanley and Goldman Sachs. Rob, this is the part of the show where we ask Scott for a prediction, but we've already kind of heard some predictions from you.

• 1:14:02Robert Armstrong?

  Yeah, yeah, you've already done it to me. You give me a prediction. I ask you, I ask you for a prediction.

• 1:14:06Ed Elson?

  I, I, I'm not going to give one. I'm not going to put myself in that position. Instead, I will ask a more general question. Is there anything you're watching closely this year or anything that you're looking forward to this year? Or perhaps anything that maybe you're excited about this year? And it doesn't have to be markets related.

• 1:14:27Robert Armstrong?

  Well, for the last two summers.

• 1:14:31Robert Armstrong?

  I I've done each of the last two summers I did a triathlon.

• 1:14:37Ed Elson?

  Wow.

• 1:14:38Robert Armstrong?

  And like this is the year at like a man, as a man in my mid 50s, I think this year I'm going to try to get really see what you can do with a 55 year old body. And the answer maybe not very much. But, uh, but you know, that's my kind of thing. I mean, it's a sort of a trite New Year's resolution, but like I'll do a couple more of these races. Going to try to slim down a little bit and just see what what sparks of youth I can recapture. And we'll see how it goes.

• 1:15:09Ed Elson?

  I love that. So these triathlons, what what's the, how how far are you running and swimming? And what is it?

• 1:15:14Robert Armstrong?

  It's an Olympic distance. The two I did in the last two summers are Olympic distance. So you swim about a mile and you ride your bike for about 25 miles and you run for about six miles. And what that really turns out to be is two bullshit events and a run.

• 1:15:33Robert Armstrong?

  The the the run is where you pay. That's where you pay. The rest is easy.

• 1:15:38Ed Elson?

  I love it. So is it going to happen? Are we gonna, are we gonna see you in a triathlon this year? Or you're you're mulling it over?

• 1:15:43Robert Armstrong?

  Yeah, again, I'm going to do it again. I've signed up, you know, I put the money down. So, you know, I, you know, the the sunk cost fallacy may drag me into.

• 1:15:53Ed Elson?

  Well, I love that. And we're gonna need to get a selfie and maybe, maybe we'll have you FaceTime in. Maybe we'll record an episode while you're running. That will get clicks.

• 1:16:02Robert Armstrong?

  Please don't run, running, running, by the way, is a slight exaggeration in terms of what I do. It's not exactly walking, but it ain't running either.

• 1:16:11Ed Elson?

  Robert Armstrong is the US commentator for the Financial Times, and he writes the Unhedged Newsletter. He also co-hosts a podcast by the same name. Previously, he was the FT's US Financial Editor and Chief Editorial Writer. Before becoming a journalist, he worked in finance and studied philosophy. Rob, uh, thank you so much as always, and thank you for standing in for Scott.

• 1:16:33Robert Armstrong?

  Yeah, this was fun. It's great talking to you.

• 1:16:35Ed Elson?

  Absolutely. This was fun. Thank you, Rob.

• 1:16:41Ed Elson?

  This episode was produced by Claire Miller and Alison Weiss. Mia Silverio is our research lead. Our research associates are Isabella Kinsel, Dan Shalan and Kristin O'Donoghue. Benjamin Spencer is our engineer. Drew Burrows is our technical director and Catherine Dillon is our executive producer. Thank you for listening to Prof G Markets from Prof G Media. Tune in tomorrow for a fresh take on the markets.

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