Part 2: Your Index Fund Is a Bet on AI — Whether You Know It or Not

**Bethany McLean** (0:03)
Your index fund isn't your index fund anymore, meaning that the S&P 500 index funds are heavily weighted toward the hyperscalers. So your index fund is a bet on the AI economy. So if you think that your index fund is still helping you profit from a broad swath of the market, it's not.

**Rachel Warren** (0:29)
That was Bethany McLean, veteran investigative journalist and co-author of The Smartest Guys in the Room. I'm Motley Fool analyst Rachel Warren. Last week, Bethany and I talked through the psychology of corporate fraud, the bread flags investors miss, and what really separates a visionary CEO from a fraudster. This week, in part two, we turn the lens on the market right now. The AI trade, what's happening to the free cash flow of the biggest companies in the world, and why the investment you think is keeping you safe may not be doing what you think it is. We hope you enjoy.
Your book, The Big Fail, talked about what the pandemic revealed about who America's financial systems tend to protect. I'd like to talk about this from a market perspective. How did factors like government bailouts, debt interventions break that natural market cycle of creative destruction and what we see now?

**Bethany McLean** (1:17)
Yeah. I think it's a really important issue for today because it's one that Kevin Warsh, the new Fed chair, is going to have to contend with. There's much discussed as this issue of political independence, the Fed being independent from politicians. Less discussed is the issue of financial dependence, the Fed being independent from Wall Street. The reality is that the Fed did not intend it this way, but over the past couple of decades, going back to maybe even earlier, the bailout of this big hedge fund called Long Term Capital Management, the Fed has been more and more a captive of Wall Street in that the Fed is afraid to let the market break. And so the pandemic, you can argue that's exactly what the Fed needed to do because the market was breaking, but nonetheless, it provided reassurance to Wall Street that when the proverbial whatever hits the fan, the Fed will always step in. And that kind of belief in a backstop is what people call moral hazard. And I think that it is not great. And I think it is a big risk for our financial system because every time the Fed pushes the boundaries of what it can do and pushes them further and further and further, and the question is, how much further can they be pushed because the bailouts keep getting bigger in size. So I think that's a real risk. And the problem with that sort of policy is that it does benefit the big and the well-off, not the small and the less well-off. So Fed policy really benefited big corporations that needed access to the debt market in the pandemic. It benefited well-off individuals who, because the stock market soared, obviously, in the wake of the Fed's actions. So people who had exposure to the stock market did really, really well. It benefited small companies who didn't have access to the capital markets, not at all. And the government obviously tried to come up with a spending plan for them that was much better than nothing. But it doesn't benefit small companies, and then it allows the big to consolidate, which makes life even more hard on the small. And this action really didn't benefit consumers who are less, or citizens who are less well-off, who don't have exposure to the market because it helped cause inflation. The debate of how much Fed policy contributed to the inflation we experienced and are still experiencing is a raging debate, but it definitely didn't help matters.
And inflation hurts people at the lower end of the income spectrum a lot while the gains in asset prices don't do much to help them.

**Rachel Warren** (3:42)
You know, we live in an era of a lot of hype in the markets. Now here at The Motley Fool, obviously, we talk a lot about the quality of businesses to invest in, but certainly it's also a time of, you know, we've seen meme stocks, retail options trading, financial influencers. I'm curious to hear your thoughts on how the democratization of market data mixed with internet hype has really changed the speed at which corporate narratives inflating and collapse and really the ways to determine the hype from the value in that environment.

**Bethany McLean** (4:10)
Yeah, that's funny. It's just something I'm thinking about now, especially with the IPO of SpaceX and the possible coming big IPOs of OpenAI and Anthropic because this retailization of the market is a really interesting phenomenon. I think one thing that concerns me, although, you know, it is true of professional investors as well, that I just wrote a piece for the New York Times on SpaceX, and I used my favorite F. Scott Fitzgerald quote, which I'm going to mangle as I try to paraphrase it, that the true mark of genius is being able to hold two competing notions in your mind at the same time and not go crazy. And it is something that people are less and less capable of doing. And so if you're going to be a really good investor, you should be able to hold one thought in your mind, which is that, say, SpaceX might be this, it might rule the world, right? But you should be able to hold the other thought in your mind, too, which is that this company has a ton of debt and needs a ton of debt, and there's a lot of danger here. And people are just increasingly vehement and monomaniacal about one side of the equation, and that's not being a good investor. And people don't, if a short seller says something, oh, that idiot, they're biased instead of, wait, okay, what does this person say? Does it make sense?