VALUE: After Hours (S08 E33): Small Caps Are About to Have Their Moment | Jeff Weniger

During their recent episode, Taylor, Carlisle, and Jeff Weniger discussed:

• Is the Stock Market Already Crashing Beneath the Surface?

• Rising Bond Yields: The Biggest Threat to Stocks?

• Why the Magnificent Seven Are Holding Up the Stock Market

• Are Long-Term Treasury Bonds Finally Worth Buying?

• The Hidden Risk Behind the AI Earnings Boom

• Jake’s Veggies: What Australia’s Cane Toad Disaster Reveals About the AI Investment Boom

TRANSCRIPT

[Tobias] We are live. This is Value After Hours. I’m Tobias Carlisle, joined as always by my co-host, Jake Taylor.

Our special guest today is Jeff Weninger of Corgi. We’re interested to hear what that’s about. How are you, Jeff?

[Jeff] I’m doing great. Doing great. Thanks, guys.

[Tobias] Tell us a little bit about Corgi and what you’re doing there.

[Jeff] Sorry, Jeff. Sure, sure.

I joined Corgi about two months ago at this point. It’s an ETF firm. I think in the ETF lead tables, we’re like number 134.

[Tobias] Are you in?

[Jeff] You’ve got BlackRock over here with iShares. That’s number one.

Then I think Vanguard’s at number two. Down there at number 134, there’s Corgi, but we’re going to try to change that. It’s the new firm.

We’re less than one year in existence on the ETF side. It’s known for the spaghetti cannon of ETFs. I think we came up with the number 207 ETFs it changes with each passing day.

It’s bigger than that 30-second intro, but it’s exciting. I was at WisdomTree for 10 years before this and came over recently. I’m the chief strategist.

Let’s see if we can get this thing rolling.

[Tobias] From your perch as chief strategist, give us a little survey of what’s happening in the markets.

[Jeff] Sure. Does that survey have anything to do with that big yellow rectangle? That’s a subtle suggestion.

Well, I don’t know that we’re going to have a crash as that buy line says, but I’m fascinated to hear the synopsis on that one as well. Look, if you want to talk crash scenarios, we can game that out too. There is some number out there on a 10-year T-note or a 30-year bond where the stock market decidedly decides it really doesn’t like it.

I just don’t know what that number is. Is it six on a 10-year? Is it seven?

Where are we now, like 5.3? Is it right now? Do you turn tail on it?

It’s becoming the situation where the bond market is the decider, if you will. Remember that one, the decider from George Wood? The bond market has become the decider.

[Tobias] There’s one argument that there’s already this very broad-based crash going on underneath the surface of the indexes because there’s, I saw some statistics yesterday, there’s like 54% of Russell 3000, which is the largest 3000, is in a drawdown of 20% or more. Then the chart shows just the absolute carnage across different industries. It’s that very narrow band of AI CapEx beneficiaries and hyperscalers and semis that have avoided it, but everybody else is in some level of drawdown.

Then there are these individual stock charts out there, Nike probably being the most shocking one that they’re off 80% or more over five years for Nike. What do you think? Is it a replay of 2000, something like that, like 1990s?

Is the Stock Market Already Crashing Beneath the Surface?

[Jeff] Well, you never know, but Nike’s a good example of just the fickle nature of apparel, fashion trends. That one was so fascinating because I’m going to take a wild guess here that that thing was unstoppable for a good 15 years. That’s what it feels like.

That’s the scientific feels like 15 years and then just totally ice cold. I don’t know what the top to bottom draw is on that 60% or 70%. It’s really interesting.

I remember back in the 90s, one of the first things I remember going vertical for a long time and then just dying. This was when I was a child. I guess it’s story time now.

My father is not in the business. He was an insurance adjuster, but he was the type of guy that liked to pay attention to it. There used to be a book that he would get delivered to him in the mail.

It was a charting book. It was like 500 names in there. I would take the ruler and the pencil and do support and resistance.

I remember Gap. The Gap. We’d have to pull up the 40-year chart or something, but it went up like 500%.

I don’t know what year it was, 1992, 1993, 1994. That was the hottest thing. The Gap was really cool.

The Gap was really cool. You wanted to buy your clothes at the Gap. Then you just woke up one day and it was not cool anymore.

You see this evolution in apparel. That’s why that’s one of those areas where you got to be really careful when you start seeing premium valuations on this stuff. Here’s a more recent example.

We don’t have to go back to 1992, the Gap. Remember, Lululemon was just totally unstoppable.

[Tobias] I still remember Lululemon.

[Jeff] How much Lululemon are you wearing right now, Tobias?

[Tobias] Just on the undercarriage. Yeah, under the covers.

[Jeff] But Lululemon and then there’s Athleta. These are not areas of mine. I don’t typically engage with these thought processes.

Then there’s Vlory. It’s like the new nicer one. You come and you go in these things.

That’s one of those things about trying to think about individual stocks, thinking about modes, trying to step aside, I think, from the here and now of something is really popular now, whatever that is. I’m looking around my desk as to what that something might be. But five years from now, it’s going to be decidedly uncool.

I don’t know. Is Nike now uncool? I really wouldn’t have the…

[Jake] I don’t know. I asked my teenage boys this question just out of curiosity, and they said, no, Nike’s still cool.

[Jeff] My kids want to wear Nikes. They want to wear Nikes. But I think it got a little bit ahead of itself.

Then there was this big push with a lot of the other sneaker brands. There was a lot of new cushiony sneakers being put out, nice ankle support from some of the competitors. So, I digress.

[Tobias] I similarly took my daughter. My daughter still wears the Lululemon. My wife still wears the Lululemon.

But we did have to go shopping in the Aloe store to get an Aloe visor, and the Aloe visor was $80. I nearly swallowed my tongue. I was like, are you joking?

Fair enough.

[Jeff] Happy birthday. The other one. Yeah, my daughter’s 15 and she likes Aloe, and they’re putting an Aloe up in our neighbourhood in Chicago, and she’s really excited about that.

She’s like, well, five years from now, she won’t wear it anymore. So, it comes and goes. But yeah, look, underneath the S&P 500’s headline number, which I think we’re at 78 and change now on that index, what are we up this year?

Like 12%, 13% year-to-date? What is it? 13% year-to-date, something like that.

There is a notable breakdown in breadth. But I would point this out, guys, is that these breadth breakdowns, really, really thinking, just to put a guess on it here, it’s last month, we had up until the beginning of summertime or thereabouts, generally speaking, of the 11 GIC sectors in the S&P 500, probably nine or 10 of them were in a state of advance. It’s just the September and October action has been tough going.

There has been this narrowing. There’s the MAG-7 working. That might be in anticipation of the Anthropic IPO.

That could be something that’s a little supportive, that run up into an IPO, that excitement of something like that. If it’s, well, we’ll see if it’s a successful IPO or not. That could be something that can help the October and into November action.

That should be about mid-November if the tea leaves are being read correctly on that IPO. But yikes. I mean, in 2025, here’s a good example of a group, if you have deteriorating breadth or concern about the macro environment, you would think this would a decent performer.

Utilities, yikes. In 2025, utilities, that was part of the AI trade. It was all about the data centres are going to need electric power and the utilities were going to be a beneficiary.

It was the first time in any of our lives where utilities were risk on. Risk on. I mean, I have a chart out there somewhere where it’s the MAG-7, like an equal way to MAG-7 and like the XLU.

Those were going up and down together throughout 2025. And then around about a month after the Iranian war, so let’s call it March 31st just to end the first quarter with that, there started to be a big split between the MAG-7 and utilities. And this goes back to what we’re starting with.

I mean, the bond market is deciding everything for this stock market right now. If the bond market wants to keep selling off, then we’ve got big problems in things like utilities, REITs. I mean, these are oftentimes areas that you, I don’t know, shelter in REITs, but yeah.

Rising Bond Yields: The Biggest Threat to Stocks?

[Tobias] What do you make of rates jacking up around the world? We’ve been watching the 10-year, it just sort of going vertical in the States, but it’s not just the States where that’s happening. It’s like the developed markets all over the world.

Japan, I think is the bellwether. I think they’re at a 30-year high now or something like that. Which is over 100.

That is true. It’s an awful low base. Got off the mat.

But France, Germany, everybody’s seeing REITs climb. What do you think that is? Is that just over-indebtedness in developed nations with sort of ageing populations or is that some- Well, I’ll tell you what.

[Jeff] I mean, you’re saying Japan’s the bellwether and traditionally it is, but I wonder, like in the fourth quarter of 26 right now, is the country to be watching, is it France? You just mentioned it. I think France is more important right now because of implications for, I can’t even believe we’re doing this in 2026, talking about the European project for crying out loud.

It’s so bizarre because if you look at the news cycle from the last, let’s go with two weeks or so, there was the whole concept of, all right, well, we’ve got this bipolar world theoretically between the US and China. Now, what the heck are we, the EU, going to do about this? I know, let’s ingratiate ourselves with the Canadians and we’ll make the Canadians, what was the phrase that they put together?

Basically say, will you be in our club too? You’re on the other side of the Atlantic Ocean, but we’re going to let you in as being an honorary member of the EU, which is really weird, but just creating a customs union with the Canadians. So that seems to be the EU all getting together and singing Kumbaya, one big happy family.

And then also the Brits to some extent saying, hey, can you let us back in? Can you let us back in pretty please? You know, this Brexit thing, it’s been 10 years since the Brexit vote, by the way, guys, so you want to feel old.

[Jake] I still don’t understand what it’s all about, but nobody knows.

[Jeff] Nobody knows what the heck the European commission does. Nobody knows what a Eurocrat does from nine to five. Nobody knows any of this stuff.

But meantime, as Tobias was pointing out, JGB’s blowing out and French Oats blowing out. French Oats, so these are like the words we use to describe these things. You compare them to German boons.

The spread there is like split up the European Union. And this goes back to 20, well, you know, think about it. Did the Greek crisis, was that a 2011 Greek crisis or did Lehman Brothers have something to do with that back in 08, right?

I mean, so the Greek crisis was really just a continuation of that saga. But you’re now 15 years back. And at the time it was never about Greece.

You guys know this well. It was never about Greece. It was about if Greece leaves, then it takes some of those G7 economies maybe with it, namely Spain and Italy, because those were also the fiscally profligate at the time.

Italy, you know, still kind of is. And then if Greece left the Eurozone that it would take those countries with it and a few others. And then somewhat in that conversation, but not nearly as much as Spain and Italy was France.

France was a little bit in that conversation because I remember typing the word Frexit. And it was not as big as Spain or Italy. Do you know who else was in that?

Remember in the PIGS acronym? P-I-I-G-S. Do you remember what the other I was other than Italy?

It was Ireland. Remember because they had the banking system was imploding.

[Jake] Yeah, real estate crash.

[Jeff] Yeah, that’s right. They had that nasty housing. But I mean, the old housing bubble stuff is now like 20 years ago.

[Jake] Yeah, isn’t that getting old, guys?

[Jeff] So I’m thinking you would have to pull it up, pull it up on the other screen, maybe when you want to. You guys are talking, but French spreads over German booms. The other day it got to like 150 or thereabouts.

And that’s either meeting or exceeding where we were in the summer of 11 on that spread. And I mean, the theory goes that if you’ve created a monetary union, I mean, so I live in a monetary like we live in a monetary union whereby South Carolina is a monetary union with California, who’s in a monetary union with Maine and is in a monetary union with Texas. There’s 50 of us, 50 states in a monetary union.

And we have the U.S. dollar. Now imagine a circumstance where that all just kind of splinters. Right.

And so, I mean, that’s one of the things that’s really bizarre, but it should be that there is no spread between France and Germany. Now, I say that as a resident of Cook County and there’s Chicago.

[Jake] Yeah, you guys should definitely have to have higher rates.

[Tobias] The argument was always that there were the more sober Western European countries that would lecture the Southern European countries on their fiscal profligacy. And I think it’s been funny. I think the Greek finance minister said something like he was lecturing the French or the Germans about getting their fiscal house in order, which I thought was pretty funny.

[Jake] But what’s crazy now is Greece is borrowing at lower rates than the U.S. now. Wow.

[Jeff] Well, look, I mean, Greece was an interesting one because it had it had austerity just absolutely levied on it. And it did end up and Spain did also get its act together in the years after that crisis. And so you can turn these things around.

[Jake] But in the case of France, I mean, I was looking at what do all the MMT people say about that? I’m curious, like Iceland, like if you actually take the medicine, what you know, what happens? Do we have actual control groups or anything scientific about this?

Or is it all just hand wavy?

[Jeff] I mean, you know, it’s the problem with with many of those concepts is you try to inflate it all away. But we already have an inflation. Is quagmire the right word?

It’s an inflation. It’s problematic inflation. And I mean, you know, if you start thinking about transitory.

[Jake] Right. I thought it was transitory.

[Jeff] Yeah.

[Jake] Everything’s transitory. Yeah. In a cosmic sense.

Sure.

[Jeff] You know, what’s what’s not transitory is if you think about inflation, some of the prints we’ve had in the U.S. We’re just abruptly taking this away from France and Germany to now U.S. inflation dynamics. We can go back if you guys want. Did you guys see the prices paid inside the ISM manufacturing and non-manufacturing?

It’s one of those two was at like first quarter of twenty twenty one levels was in the high 70s. So one of them was like seventy eight. So just as everybody knows on these on these diffusion indexes, generally speaking, any line item in an ISM manufacturing diffusion index, um, any subcomponent, it usually is this stuff is like between forty five and fifty five because you’re asking a bunch of people a question and it hovers around the median like our prices that you’re paying going higher or not.

When you get stuff in like below 40 or above 60 in any of these series, you got to really pay attention. That’s basically for the viewer. And one of them, I think it might have been services prices pay was like a seventy eight.

And manufacturing, one of them was a seventy four. One was seventy eight. The other was seventy four.

It’s like, yikes. Yikes. I mean, I mean, yeah.

[Tobias] You you’ve been posting some very interesting ratio charts of comparing one time series to another that seems, you know, seems to identify these extremes where there should be a rebound. Have you got any have you got any lined up?

[Jeff] You got any good ones you can discuss last week? So I have no fresh charts. We’ll just think of the ones that are in my mind.

I’ll tell you, I’ll tell you one that’s now, you know, this is like the tail wagging the dog. What’s causing what you can do if somebody were to and I’ll update it if there’s demand for it. If you want to do Senate probabilities, Republicans versus Democrats, what you do is you find that does correlate with the fortune of the S&P 500 energy relative S&P 500 industrials.

But is that one of those was like, duh, duh, of course, man, to the extent that that. All right. Today’s October 6th.

When are the midterms? What’s the date? Do we have a specific date on midterms?

Let’s go with first or second. Yeah, November. Let’s say it’s the first week in November.

I have no idea. Let’s say we got 30 sessions or 30 days between that. Well, if energy outperforms industrials in the next 30 days.

Well, then, yeah, of course, the Democratic probability of the Senate, it’s because the oil price is going up. And if energy is underperforming industrials in the next 30 days, well, then they got the oil price down, they did something, they got the diesel price down and the Republicans had a better November than anticipated. So I wonder whether or not that’s a coincident indicator or if there’s some predictability.

But you can find some of that in there. You could fear you could theorise that from that perspective, if you are in the minority predicting Republican fortunes in that election, that you might want to be long industrials on account of the Republicans might be be more deregulation, more in manufacturing renaissance, that type of thing. That could be a concept.

But I’ve always been stunned that I’ve been unable to find relationships between like, let’s say, health care compared to the broad market. Oh, if this party wins, then that’s going to be good for health care. That party wins.

It’s going to be bad. Can’t find that much relationship ever. And sometimes you wonder, is it because the stances of these two parties with respect to drug pricing or socialised medicine or these things have changed through time?

You can sometimes, depending on the cycle, sometimes you can get a favorability rating on big banks where Republicans tend to be more favourable towards big banks, Democrats, less favourable. You can do those. But right now.

So here’s the thing, guys. Interest rates again. Interest rates, again, ruling the roost in financials.

We don’t really have any other than the France situation. And I mean, there’s some stuff going on at junk bonds and you do have some circumstances like Oracle was investment grade, wink, wink.

[Tobias] Are they junk bond now? I think junk state or something. CBS is saying that real close.

[Jeff] Yeah, I thought that was a triple B, but it’s wink, wink, wink, triple B. Take a look at the spreads. It’s really more like a double B on those.

But you really do kind of have a tame credit situation. I know people don’t really like to say that, you know, but things aren’t so bad from that perspective. But.

You know, you just wonder with with rates being so high like this, does it grind up the economic cycle and then there’s there’s not much marginal propensity to lend.

[Tobias] One of the charts that I like that I like to post, I don’t know if this was one of yours that I stole or where else I got it from, but just equal weight S&P 500 versus market cap weight S&P 500 has been there’s a drift towards equal weight in the same way that there’s a drift towards smalls and value. But you get these very extended periods of time where the market cap wildly outperforms the equal weight. And we’re in the middle of those right now.

And there’s some suggestion that this is the biggest outperformance of market cap over equal weight that we’ve seen bigger even than 2000. So there was a chart doing the rounds yesterday that trended the or detrended the that relationship. And it shows that we’re in the biggest drawdown for equal weight relative to market capitalisation or the biggest, you know, if you want to think of it the other way, the biggest draw up for market capitalisation rate of equal weight.

Do you think that that’s one of those things that I mean, where are we post singularity? Are we just, that’s never turning around or is that a main reverting series?

[Jeff] Well, you know, it’s, there was various times in the last 36 to 48 months where the heck, I mean, this is going back to where we’re calling the mag seven, the fangs where, and you can also think about five or 10 year windows of time where you had, if you had a risk off episode, the money was flowing into the fangs, which is weird because it’s common stock and tech stocks at that. And now, I mean, I don’t know that I want to say that this is a risk off episode, what with the S and P showing out here at like 7850, basically an all time highs, but certainly inside the bowels of the market, there’s some risk off going on. And there’s almost like this embrace of, well, you know, I just, I know tomorrow that these magnificent seven stocks will be going concerns.

And so let me hover into those right now. It’s almost something like that. That’s happening inside the market.

But again, it’s really, really weird because staples and utilities, these don’t want to get out of bed. Healthcare is a group that’s been all right. It’s probably, you know, trying to think in the last three months or so, healthcare is probably a top two or three sector of the last three months.

But generally speaking, this year, it’s just tech and energy. And so you have this weird situation where you have the energy shock that’s shocking energy prices or energy stocks higher, but not necessarily shocking the system. Truth of the matter is, guys, 3.4% inflation is not wildly outlandish. Like in the 1990s, the chunks of our lives, 3.5% was just what inflation was. So that’s not half bad. But what’s really weird for trying to figure out outperformance, for trying to figure out growth versus value is, oh crap, well, tech tends to be growth.

Energy tends to be value. There’s some funky things going on inside the S&P 500 and the Russell 1000 with the rebalances, where it’s like some of these names are showing up in the value index. But it’s hard to get a little bit of a grip this year on which one to like more.

But, you know, the reality is oftentimes you have a narrow market. Stick with that narrow thing that is working. And I would end it with this concept is usually this idea of shooting the generals is what you want to get worried about.

And that’s basically, I mean, just trying to think about any given cycle. It’s the five or 10 stocks that are leading the market or the biggest companies. It’s usually the ones leading, but sometimes it’s the biggest ones.

[Tobias] And the generals get shot last. Is that the idea?

Why the Magnificent Seven Are Holding Up the Stock Market

[Jeff] Well, sometimes you get the generals get shot first too. That’s how you can see a market deteriorating when the generals start to go. But the generals are the things holding it up.

And the reality is they are such a heavyweight in there. So if you’re doing individual stock selection, you’re probably in a lot of pain, but there’s probably a lot of people that haven’t even noticed that the market’s been deteriorating. I think that one of the things, I mean, I’m looking at my calendar here.

It’s October 6th. What’s happening with portfolio rebalancing this year? Because if you’re in like a 60, 40, right?

So let’s say you’re in a 60, 40, like a financial advisor. And what did we just say? The S&P is up like 12.

Let’s just say it’s up 12. Well, what is the performance year to date on aggregate bonds? I don’t know.

[Tobias] Not great, Bob. I think they’re down. I think they’re being punished.

It’s pat. So that’s like sell stocks into bonds. So you think that rotation, that rebalancing puts some pressure on stocks potentially?

[Jeff] I mean, that’s what I’m getting at is, I mean, I’m just thinking about TLT, which is the long bond. Most people in their 60, 40, in like an advisor capacity, they don’t have TLT. They’ve been shorter duration than the aggregate for years, but nonetheless, three to seven years, five to tens, and corporates, treasuries.

That’s one of the concepts that I think is pretty intriguing is you just naturally in a 60, 40, you might be by accident, 64, 36, or something like that. And it’s getting to that portfolio rebel time. And there is also the other side effect in here that I’m trying to gauge.

I don’t have the answer, guys. Is when it comes to tax loss selling, you got to sell the bonds. That’s the only thing.

I mean, if you’re in generally in cap weighted indexes, despite the fact that Nike is dying on the vine, right? Like talk about Nike and talking about it’s doing poorly. Most people have black ink on the equity side of their ledger.

So I think that there could be a lot of machinations within fixed income portfolios where they can take tax losses on the stuff that’s red ink and then switch to someone else’s competitor product. We’ll see. But that’s the other dynamic here.

I think people are going to have a pretty busy November and December.

[Tobias] Ag negative 5.5%. Thanks, Brian, for letting us know that in the comments.

[Jeff] And what’s TLT? Yeah, no news on TLT. We don’t even want to know how much that one’s down.

But, yeah, and this, I mean, think about if you guys want to talk like the psych of bond market investing. Remember, we had 19 trillion in negative yielding bonds during COVID.

[Tobias] Those were the days.

[Jeff] And remember, Austria launched the they did 100 year piece of paper. And I don’t even remember if there was a coupon on that. And now that 100 year maturity is like 94 years left on this thing or whatever it is at this point.

And things.

[Tobias] TLT negative 11.

[Jeff] I’m surprised it’s only negative 11. I think it’s more.

[Jake] I think it’s 50 from the high. Or you today. Yes, you’re today.

[Jeff] Yeah, well, and so now, OK, so start thinking about start thinking about the long bond. I mean, at Corgi within due time, we’re going to have a bond ETF for everything. We just don’t have all the maturities yet.

But if you start thinking about the long bond. All right. Where’s the quote on that one right now?

If we’re at 3.4 on moment in time inflation. You know, you’re a couple percentage points above that. In Rio.

Are Long-Term Treasury Bonds Finally Worth Buying?

Now, again, this is where this requires forecasting where inflation goes from here. But if it can hang out at 3.4, then suddenly that’s not the worst prospect in the world. But to go back to France right now, this is see, we just did that.

We came back to close the loop to go. So France is going to run something like a 5.6 or 5.8 percent budget deficit to GDP ratio this year. And they’re going to they’re going to come up with a series of tax hikes and spending cut where they’re going to try to.

And let’s call that like 50 billion euros, which is a lot of money. And that’s only going to take the deficit to GDP ratio from, let’s say, like five, six, five, seven down to like five. And five is still a very bad deficit.

It’s not like it’s a good, oh, we balanced it. No, you just took a bad situation and made it not as bad. But still really bad.

So and we have it here in the US, right? It’s six, six percent budget deficit to GDP ratio. So we do have to take these things with a grain of salt.

But I was like, I was looking at the Barons this weekend. Dan Fuss, was it Dan Fuss? Somebody was saying it.

I wouldn’t buy, I wouldn’t. I wouldn’t buy something longer than 20 years. I’m so misquoting whoever said this.

I think it was Dan Fuss. I wouldn’t buy something with 20 years with your money or something like that. Oh, oh, is it that bad?

I’ll put it to you guys. Is it that bad?

[Tobias] Let me, let me, I think, I think, you know, the time to make those moves was when I was running negative. But then there was a suggestion that US was running negative, was going to go negative too. Like there was no clear, it wasn’t clear that that was all going to turn around.

Let me just do a quick shout out around the horn. And then JT is going to give us some veggies. Orlando, Florida, Boise, Toronto, Breckenridge, Gothenburg, Sweden, Sugarland, Texas, Valparaiso, Indiana, Snohomish, Los Altos, London, Tallahassee, Jupiter, Florida, River Falls, UK, London, Bangalore, India, Toronto, Barrow-in-Furness, Paris, France, Tampa, Oklahoma, Hartford, Alabama, Tillamook, Lausanne, Switzerland, Lausanne, Rochester, Port Arthur, Singapore, Zagreb, and take it away, JT.

What Australia’s Cane Toad Disaster Reveals About the AI Investment Boom

[Jake] All right. So it’s June 1935, and we open on a steamer chugging out of Honolulu bound for Carnes in Australia. And somewhere below deck is a government entomologist named Reginald Montgomery.

He’s resting his hand on a big wooden crate in a very self-satisfied way. And inside that crate, he’s collected 102 cane toads, a surprisingly small number of toads for what would prove to be a continent-sized mistake. So Queensland’s sugar cane at that time was being eaten alive by beetle grubs.

And this crate holds the plan to fix that. Montgomery’s toads came with a glowing reference from the Hawaiian sugar industry that was suffering from a similar beetle blight. And unfortunately, nobody actually checked whether the toads would eat Australian beetles, but no matter.

Once reaching their southern destination in Australia, the biologists bred these toads to ramp up their numbers. And a few months later, 2,400 toadlets were let go into the cane fields around Gordon Vale. I have no idea where that is.

Still not sure if Australia was a real thing or not. But as a funny aside, one of the federal entomologists was named Walter Froggett, which gets further, which I thought was another funny case of nominative determinism. That’s right.

[Tobias] Determinism. Thank you.

[Jake] Yep. And he had actually tried to get this release banned, and it worked for like a year. But then the prime minister lifted Froggett’s ban, and now we’re back to the toad plan.

So only the toads don’t actually eat the beetles. The beetles live up in the cane stock, and the toads can’t jump that high. Whoops.

But the toads do eat everything else, though. And 90 years later, there’s something like 200 million of them across a million square kilometres. I don’t know.

Toby, do you have any toad stories to fill in here for some colour?

[Tobias] So this is the state that I come from that they call us the cane toads. And it’s not a national sport, a state sport. You take your nine iron out, and you hit the cane toads.

I think some predator has finally started eating these things. They’re absolute monsters. They’re the ugliest toad you’ve ever seen.

And they have a poison on their back that kills dogs and pets and other things like that. Very nasty creatures.

[Jake] Wow. The gift that keeps on giving. All right.

So I want to focus on how the toad front moves, as one does. So for the first 30 years, this invasion front moved about 10 kilometres per year. So that’s like 27 metres per day.

Basically, these guys are hopping away from each other. Today, it moves at 50 to 60 kilometres per year, which is like 150 metres per day. Five times faster.

So a team at the University of Sydney went to the front and measured the toads there to see what was going on. And they found that the toads at the front have longer legs and bigger bodies, and they move in straighter lines towards virgin territory. The toads 1,000 kilometres back towards the beginning have shorter legs than the front line brethren.

So now this sounds kind of like the obvious explanation of just natural selection. You know, the fast toads were fitter, so they won, right? But the research team says no.

It’s something else. And in 2011, they gave it a name. They called it spatial sorting.

And at an expanding front, the only toads you meet there are the ones who got there fast with you. So the fast toads breed with the other fast toads. And it’s like a dating app where the only filter is like near me.

And so, you know, their kids end up being faster. And those kids then reach the new front where they meet again only the other fastest toads. And this front really only exists because there’s open country ahead of it.

You know, Queensland, then I think it went to Top End and then Kimberley. I don’t know if those mean anything to you, Toby. They always have somewhere new to hop to, right?

But behind the front, the country’s full already. And every pond already has a toad in it. And, you know, they’re trying to kill your dog and whatever.

But when the country’s full, that spatial sorting then stops. So over 60 years, the legs actually shrink back to normal size. And the long legs were never really about like living somewhere well.

They were about arriving somewhere. And researchers called this the Olympic village effect, which is presumably based on whatever athletes get up to after their events are over. I’ll let you fill in the blanks there.

But in this case, it doesn’t mean the front line toads were any healthier or live longer or raise more tadpoles. The front doesn’t really ask that question about health. It just asks, like, did you arrive yet?

But actually, that arrival carried a very painful cost. A troubling percentage of the big toads at the front have spinal arthritis. And not just because their legs wear out or they’re bigger, but some of it is contributed to the changed physiology.

But it’s because the energy budget goes towards hopping forward, depriving their immune systems. And there’s the soil bacteria that get into their spines and cause damage. So the trait that gets them to the front is also the trait that actually kind of breaks them down.

So let’s see, with all this baloney, if we can torture 200 million toads into a state of the union about the venture capital industry. So wow.

[Jeff] OK, OK. I thought you were doing long bonds. I was over here getting a quote on the long bond.

OK, go ahead.

[Jake] Could be. Yeah, well, we certainly could go in that direction later. Some friends of mine, these couple guys, Tim and Justin, shout out to them at Edition Venture, sent me their quarterly letter.

And the headline is basically, like, by the numbers, the venture industry’s never looked healthier. US startups raised over $400 billion in the first half of this year, more than any full year in history. So this is, like, very open country.

More fresh capital than the industry’s ever had. But if we look at where it went, it took a lot. It looks a lot like that spatial sorting of toads jumping forward.

Four out of five venture dollars went to AI. Probably not a big surprise. Nine out of $10 raised by new funds went to firms that were already there on the last front.

So it’s, like, kind of the winners keep winning here. And so the toad front is really like AI. It’s very San Francisco orientated.

And it’s rounds over $50 million and with brand name VCs, basically. And it has this kind of, like, same Olympic Village problem, perhaps. The firms at the front syndicate with each other.

They tranche rounds together. One group is in at one price. And then the next group a week later is in at a higher price.

You know, the company is a week older, which apparently counts as traction these days. It’s all up and to the right, basically. And the first group gets to market up and the company grabs headlines and everyone keeps hopping forward.

And even, like, the liquidity in the secondaries markets, you know, 20 companies are 86% of everything that’s traded. So it’s all just this biggest stuff. And the marks go up.

The next fund gets raised. The access gets renewed. And, like, these fast VC firms are basically breeding with the fast companies.

And you can see that the long legs and the short legs actually kind of side by side. So at seed stage this quarter, which is, like, the small company smallest, like, earliest funding rounds, the hottest companies in the 95th percentile raised at a $200 million valuation, which is massive if you know anything about venture. The median company, so 50th percentile, was at $29 million.

So same stage, same quarter, seven times apart between median and 95th percentile. So what about kind of toad arthritis and the analogy here? You know, my friends, in addition, have observed that there’s a real perception now that diligence is thinning.

There’s a lot of fear of just missing the next anthropic, which outweighs measurements of maybe founder quality or technical rigour or realistic outcome size. I mean, after all, to really make the fund math work for a VC fund, you need to capture your share of the grand slams. So basically, if we’re kind of being uncharitable, nobody’s checking whether the toads actually eat any damn beetles at this point.

So to summarise, spatial sorting is not natural selection as we usually think about it. It runs ahead of selection and only while there’s open country, which is an important part of it. There’s $5.3 trillion of unicorn value still sitting in private hands right now. Anthropic and open AI going public, I think it’s going to be really interesting and important because we’ll finally get a chance to see if these toads are eating any beetles or are they just hopping at a breakneck speed into open country. The front is incredibly exciting, but it’s also very fragile. The biggest toads, the longest legs, but also kind of the worst backs.

So in 500 kilometres back from the front, the legs are shorter, the toads are fine, and nobody’s, I don’t know, nobody’s raising seed rounds in Gordonville, I guess, Toby. But when you eventually run out of open country, the survivors live behind that front, and now you’re selecting for something different, which is profitable survival. So 90 years on now, the cane toads are still pushing forward in Australia, and the beetles, for the record, are still doing just fine.

[Tobias] Amazing, JT.

[Jeff] Thanks. I like that. What do you make of that, Jeff?

What do we think? What do I think? Well, I work at a unicorn, guys.

[Jake] I didn’t mean to disparage the unicorns yet.

[Jeff] But I love the analogy. I thought the analogy was pretty cool. So take it into, think about in markets, and I’m thinking out loud about, you know, like with those VC rounds, and just regular investors, public equity investors, that type of thing, people who are not living in Silicon Valley, don’t have a network in Silicon Valley.

Maybe is that why MagSeven is outperforming, right? Like, oh, you know, Anthropic is private. We have a fund that’s got total return swaps in Anthropic, right?

But like, most people don’t have any exposure to the vagaries of that which is private, Anthropic, at a couple trillion dollars. Whether it’s worth two trillion, who knows? So I don’t have any exposure to it, but I want to be correlated to it in case the two trillion goes to some higher number.

Let me just go out by gook. Is that why the MagSeven has been getting attention this summer? Is it that kind of like the proxy for OpenAI and Anthropic?

I pose it to you guys.

[Jake] They compete. They also coordinate together. So, and actually, I mean, it’s probably even more direct in some cases where I think Amazon and Google, you know, there’s a big chunk of Anthropic write-ups that comes through their income statements from investments that they made a while back.

So yeah, I mean, you’re, it’s not just even like a tangential, like, oh, these seem related, but like actually literally showing up in an income statement. So I don’t know.

[Jeff] And that’s the big, that’s the big thing. Like, if you look at, I mean, what a lot of the bears will point out with respect to just big broad market earnings and now deviating off of the VC, but it’s hyper correlated to it. What you’re just saying was the incestuous relationship.

We’ve all seen like the circular financing. And then also you have this thing called net income. And part of the value of your net income is the appreciated shares of the Anthropic that you got into several years ago.

And that in the event, so then you can have, the bears will point out there’s, you can have a spiral, right? In that, oh crap, the $2 trillion being accorded to Anthropic, the thing IPOs, it ends up being a flop, let’s say. And now the valuation is some number, let’s say, let’s go with a lot lower than 2 trillion, right?

But 1 trillion, right? I think it’s 2, is it 2 right now in private markets? On that name, let’s say it’s 2.

[Jake] And it goes down. It’s Tuesday, so it might be 3.

[Jeff] Yeah, yeah. Colossal bear market. Things are, it’s a horrible 2027.

Everything across the board is going down. The VIX is at 40. Anthropic and OpenAI IPOs end up not materialising to the benefit of everyone’s hopes and dreams.

And then what ends up happening is now you are also a publicly traded company like Alphabet. I believe it’s Alphabet has the big stake in Anthropic. And then now you’re also taking a hit to your earnings.

So maybe your stock is correlating with those stocks deteriorating. And then also, you can’t even rely on your earnings coming through. That’s what a lot of the bearers would point out.

And I think it’s a critical, it’s probably the number one consideration that I have with respect to S&P 500 earnings growth. It’s supposed to, if, and I mean, heck guys, it’s almost Thanksgiving at this point. Let’s go almost Halloween at this point.

We’re going to have something like 25, 26% year-over-year earnings growth at the S&P 500 level this year. And then another 15 if the streak has it right. What’s that?

[Tobias] Extraordinary.

[Jeff] Yeah, and it is. And let’s give the market credit. If the market’s up like 12 and earnings growth this year is going to be 25 or 26 or 27.

[Jake] Yeah, the previous high multiples were reasonable, more reasonable than they looked at the time.

The Hidden Risk Behind the AI Earnings Boom

[Jeff] Yeah, and so let’s say then there’s this other case that I always want to think about. So like Anthropic at $2 trillion. Let’s game this out.

Anthropic’s $2 trillion. Bearers say down to $1 trillion. Bulls say up to $3 trillion.

What about these people who say chill out at $2 trillion? Right, that’s between one, two, and three, that’s probably the most likely scenario. The thing hangs out at $2 trillion.

And so if that’s the case, then all right. So then you have 25% earnings growth this year. And then next year’s 15 ends up being only like 10, something like that, because you can’t have the earnings growth from the appreciation from your open AI in Anthropic.

And that’s the case. Then you can have the S&P under those circumstances go up like the 10 next year. And if it does come through at 15, we’re doing this like a few days ago.

So I think we had it at like 18 and a half times 2027 earnings. For the broad market. But now, guys, this is all presupposed when we’re talking about calendar 27 earnings, that there’s five quarters between now and then.

Kevin Warsh has something to say about that. Yeah. The bond market.

Jake, when you started doing the toads, I thought you were going to do the long bond. So I looked over on the computer. We had it at 563 on that long bond.

I think I pulled, in my mind, it was like 545. And it’s just so quickly. So if you’re at 18.6 times earnings. That’s I mean, that’s not bad, but it’s not the greatest thing in the world. And there’s also there’s probably some people saying, you know what? 563 for 30 years.

I think I can live with that. So there’s a real opportunity cost to buying stocks here now. Now that suddenly bonds are competitive.

I mean, people don’t want to hear it. Everybody’s a bond bear, but 563 is a lot better than it used to be. Frankly, a lot better.

[Jake] Yeah.

[Tobias] I sort of factoid that if you count SpaceX, Anthropic and OpenAI in total market capitalisation at the time of their IPO, it’s something like 5 point something. And if you then add up every IPO. Trillion.

If you then add up every IPO that’s ever come public beforehand, you only get to like three or four trillion dollars worth of total market capitalisation. So in three, we’re going to have more than we’ve had in like 100 years of IPOs.

[Jeff] What’s going on with that yellow rectangle behind you?

[Tobias] So this is my new book, Crash Test Dummy. I did a survey of the history of crashes looking at valuation and other catalysts, like what were interest rates doing? What was the equity risk premium like?

And then looked at whether there were different types of crashes, inflationary crashes, deflationary crashes, and what you can do. I looked at Minsky moments and things like that. So it’s just a survey of like 100 years of crashes and what an investor can do.

I think that the advice is much more sober and sensible than this provocative cover suggests that it might be. But yeah, anybody who knows me, and I’m sure everybody who’s watched this podcast for a while knows that I’ve got a fair bit of crash anxiety. So in this sort of cathartic effort to like figure it all out, I sat down and took like 20 years of my writings on CAPE and other things like that.

[Jake] Toby’s Crash Journal wasn’t a good selling name, I guess.

[Tobias] Or Asset Allocation for Dummies, something like that.

[Jeff] I thought it was a biography of that group that sang that. Yeah, that was the dummies, the crash disc dummies. You know, thinking about crashes, I got a chart circulating out there.

You know, let’s just go with like 530 or something on a 10-year T-note. Because I mean, going back like a month ago to when I did this, you guys know that the dividend yield on the broad market is like 1.1 right now.

[Tobias] I thought it got under 1. Yeah, 1.06 was the last thing I saw.

[Jeff] Now, here’s the thing. We’ve done this research for years at various firms that I’ve worked at. 1.06 or 1.1 is horrendous, horrendously bad and indicative of overvaluation. But we do need to give an acknowledgement to society in 2026, which is you’re more likely to have a buyback programme than in 1986 or 1996. And so when you start doing the sum of dividend yield plus buyback yield, you’re in like the mid twos, which is not very good. But buybacks do exceed dividends in corporate America at this juncture.

Nonetheless, if you do that 5.25, 5.30, 5.35 on a 10-year T-note in a 40, 50-year time series, and then run that up against the S&P’s dividend yield only with the asterisk laid on the table, you’re like 400 over in getting a 10-year T-note yield over and above the coupon you can clip on a dividend yield. And then the last time that was the case, guys, 1998, 1999. In fairness, I would agree.

[Jake] I would say if you own the S&P 500 and the businesses inside of there do end up producing, I don’t know, 20% returns on equity or something, if all this AI spend turns good, then you shouldn’t really want any money back. You want it to stay internally invested and compounding at a 20% rate. And you’d gladly forego a dividend if that was on offer.

Now, lots of caveats on that, lots of asterisks.

[Jeff] But you’re exactly right. I mean, if the three of us had opened up, I don’t know, a plastic cup manufacturing business, and our ROE is 20, we probably should not pay ourselves a very high salary. We should take as little out of the business and see if we can grow the plastic cup manufacturing business next year.

We should really take money out. We can’t find any other opportunities. I think you’re nailing that.

What is the ROE on the U.S. broad market? Is it like 18 or 19, isn’t it?

[Jake] Probably. I mean, if you’re profit margins of 17 right now, and you’ve bought back a tonne of stock, which lowers book value, you might even be over 20 at this point. I don’t know.

[Jeff] I’m sure the high side is- What do you guys think of all that with the profit margins? And can they ever mean revert? Why do they never mean revert?

I never have a good answer for that.

[Jake] Permanently high plateau, I think is the…

[Tobias] Jake does this annual review where he looks at all of the levers that drive those profit margins from marginal tax rates to interest rates. And I think he concluded last year, basically, that we pulled every lever about as hard as we could in favour of margins. And if any of them started going back the other way, you’re likely to see some compression.

[Jake] And when Toby says Jake, he means Chris Bloomstran.

[Tobias] Maybe you’re quoting Bloomstrand. Sorry.

[Jake] Stealing from, I think, is- Stealing from Bloomstran. Yeah.

[Tobias] But that hasn’t been the case. I think that we’ve… Here, rates are up.

Tax rates are low.

[Jake] Bloomstrand said it. In 21, margins were at 13.3. That was a new record.

[Tobias] More than twice the long run average of six.

[Jake] Yeah, more than two X to six that Buffett had said that you couldn’t expect to experience for a long time, that Grantham has pointed out.

[Tobias] Houseman.

[Jake] Yeah. Anybody who’s ever read a history book basically said- That’s what’s holding you back. That’s what’s holding you back.

You can’t go 13.3 and expect it to stay. It did come down a bit in 22 and 23. I think inflationary pressures hurt margins some.

But now we’re at 17, which is absolutely mind-boggling. Now, we talked already about the… I think it’s a full two percentage points of that is from write-ups of things flowing through the income statement.

That’s obviously not super high quality earnings there.

[Tobias] Right.

[Jake] And then the other part of it, I would say, is the… Again, it just goes back to the circularity part as well, which is one guy’s revenue is another guy’s depreciation expense that’s spread out over 10 years. And so there’s a tonne of expense on the come in the future margins that is baked into the cake already.

So I think maybe we’re pulling forward some profitability if I had to guess, but who knows?

[Jeff] Well, and then the other issue is, I mean, you guys saw average hourly earnings just pointed down to 3% year over year the other day when that was released. And inflation is what? 3.4. So again, you have that situation where inflation is out. Now, I say inflation is outpacing wages, but tell it to the Atlanta Fed wage growth tracker, which I think is still plus 4.1. So which indicator do you want to take? But let’s go with the 3.4 in inflation and the three on wages. Well, there’s the gap right there.

That rhymes with profit margin. That rhymes with K-shaped economy type concepts.

[Jake] Rhymes with Democrats winning in November.

[Jeff] Yeah. You know, somebody was putting out a, you know, taking a look at those probabilities and saying, you know, it seemed woefully underpriced for the Dems. But the issue is, is let’s say you’re steadfast.

Like I said, you really think the Dems are going to be victorious or you’re on the opposite side of it. You think the Republicans are going to have a better November. I struggle to figure out how to play it in the market.

I mean, I guess you could say the Republicans being victorious would be more helpful. This is, I never thought I would have said this because I usually associate Silicon Valley with blue state California and that type of thing. But the AI, you know, Trump holding the line on, no, we need to be all in on AI.

We need to compete with China. Whereas the rest of the constituencies between Republicans and Democrats both trying to one up each other on how anti-data centre they are. And so, you know, I don’t know.

I mean, do you guys feel like who’s more anti-data centre? Is it Republicans or Democrats? I think it’s equal.

But you can theorise that if the Republicans have a surprise November to the upside, that that empowers Trump and is now on for AI, the AI trade. And that if the Democrats come through, that weakens Trump’s power. He might have to acquiesce on data centres and then tech goes off.

Does that line of reasoning? How’s that line of reasoning? We like that or no?

[Tobias] I like the line of reasoning, but I just wonder if it’s like, it’s the economy stupid kind of event where like people are squeezed at the pump and student loan repayments are back on, inflation’s running red hot. Like, does anybody believe those CPI figures that they’re like, I can look at my repeat purchases in my budgeting app and I can see how much everything is up. You know, it’s nowhere near three, like I would say 10 or 15 year over year.

And then that’s been for four or five years. So cumulatively, it’s, you know, it’s, it’s a double.

[Jake] Yeah.

[Tobias] It feels like, yeah, I was going to say 50%, but I didn’t want people to think I’m too nuts, but it’s a lot. It’s a big number.

[Jake] And I’ll tell you what, that guy was way ahead of his, way ahead of the game.

[Jeff] I was saying this to somebody the other day. It’s like today, we were just talking about this October 6th and between the three of us, none of us, not one of the three of us knew the exact date of the midterm elections. And I feel like in other cycles, we were, we were spending the summer talking about midterms as it pertains to the market.

But now it’s like, oh yeah, midterms are happening. There’s a lot going on. Republicans are going to get wiped out, but we’re just talking about Anthropic and Kevin Warsh.

Like, why aren’t we talking about it? Why aren’t we, as an industry, trying to at least figure out what the implications are? And it just seems like it’s not in the news cycle as much, this go around.

You guys feel that?

[Tobias] Well, how about Warsh? Powell was getting lambasted by Trump for not putting rates, not reducing rates. And then Warsh seemed to be his guy and he was supposed to come in and cut rates.

But I was looking at the two-year yield has been a pretty good predictor of where rates go, the federal funds rates go. And that was trading a huge premium to where federal funds rates were. And you know, lo and behold, he comes in and he raises and there’s like a 78% probability of another raise before the end of this year.

So, you know, that’s squeezing people at some point. It plays out. It must have an impact somewhere.

I haven’t, I haven’t seen it yet other than, you know, the rest of the market other than the…

[Jake] Well, your mortgage at seven now is, that’s, that’s…

[Tobias] But it’s back to what it was in 23. Like, it’s not like it’s historically high. It’s not…

[Jake] I know. We’re just going back to a lot of data that were normal.

[Jeff] Yeah. Here’s the other thing, you know, theoretically, and this goes back to the GFC. Theoretically, you should be conspiring with your global central bank peers in engaging policy.

Now, at the risk of conflating central banking with treasury operations, the United States certainly did not do that with the Yen, the Ministry of Finance.

[Jake] I was going to say, I don’t even think our monetary and fiscal coordinate much less outside of each other.

[Tobias] That’s what they’re supposed to do, right?

[Jeff] But when the ECB put up rates, I don’t know, four months ago, I think it was a while back now at this point, when they did that, I came on to Twitter and I basically said, well, there’s a high correlation between if the ECB does something with rates that soon thereafter, the Fed doesn’t. It’s like, I got, you know, people came after me. How could they ever do that?

And then suddenly in the last 60, 90 days, we got this consensus as you were talking to us about, oh yeah, I mean, the two years pricing and some pretty heady hiking between now and the back part of 27. But that was not where people were at the beginning of summertime. And here’s the reality.

We started this call off. I know, like, you know, it’s more fun to talk about the FAANGs and the Mag 7 and all this stuff or what have you. But I hate to go back to the French situation right now.

But the more you hike in the United States, the more you’re really putting the heat on the ECB to hike into a situation where there is already on the fiscal side. I mean, right now we have fiscal austerity in France and that starts, that is going to beg the question among many other players there. They’re all in total violation of the Maastricht Treaty.

They’ve been in violation for a quarter century. Fiscal austerity is in the conversation and the United States is going to push the ECB to tighten policy into that. That’s the bear case, guys.

I think that’s, people should be paying attention to Eurozone. That’s my opinion on, if you want to be bearish on equities, pay attention to Eurozone.

[Tobias] On that note, Jeff, if folks want to follow along with what you’re doing or get in touch, what’s the best way of doing it?

[Jeff] Well, you got to come to the Corgi website because nobody knows us yet. We’re going to take over the world. And so that’s Corgi, the ETF house.

We have 207 of them now and we will, assuming everything goes according to plan, have many more than 207 by Halloween. And so we’re super excited about that. And Tobias, I kind of think, when people ask me where to find me, you guys think the answer is Twitter, I guess.

That’s the best. I usually say Twitter. So I like to believe that I’m known for being a macro chart person, 40 and 50 year time series on this variable against that variable.

That’s where I’ve built the career. And so find me on that thing we used to call Twitter that we now call X. Awesome.

[Tobias] JT, any final words?

[Jeff] Thanks, Jake.

[Jake] Yeah, I just want to tell everyone to go buy Toby’s book, support our fearless leader. And I think obviously Toby’s a great writer and anything he puts out is going to be worth reading. So don’t be shy about buying it.

[Tobias] Thanks for that kind endorsement. Thanks, folks. We’ll be back next week.

Same time, same bet.