What's More Likely: A Rally Or Rout From Here? | New Harbor Financial

**Adam Taggart** (0:01)
And we should be live. Welcome to Thoughtful Money. I'm Thoughtful Money founder and your host, Adam Taggart here. Welcoming you for the monthly check-in that we do with the team from New Harbor. They're one of the endorsed financial advisory firms that appears every week with me on this channel. Month, we'd like to give them a full opportunity to share their full outlook with us. I'm joined today by Mike Preston and John Lodra, as usual, the two lead partners for New Harbor.
Gentlemen, how are you guys doing?

**John Lodra** (0:29)
Hello, Adam. Great to be with you. Thanks for having us.

**Mike Preston** (0:32)
Good to be here, Adam. Doing great and I hope you are too. Thanks for having us here.

**Adam Taggart** (0:36)
Thanks. Yeah, I know it's interesting days. I've got a bunch of questions I want to ask you. I'm fresh off this conversation with Fred Hickey of the high-tech strategists that set my hair on fire about the risk that the AI complex poses to markets going forward.
We can start with that or we can start with anything that's burning brightly on your guys' radars. I know we've got some positive inflation data that's come out. We've got the resumption of kinetics against Iran for nights of, I think, full out attacks there. So we can start anywhere you want. What are you guys looking at most? John, why don't we start with you?

**John Lodra** (1:17)
Yeah, Adam, I'm glad you raised the Fred Hickey interview. I actually listened to it on my community to work today, and I thought it was a great take. He's always a very insightful observer, and some of that has been in the tech industry for as long as he has, and written about it, and put his reputation online. I think folks should give good heatings to what he has to say about the space, and I thought it was a great interview.

**Adam Taggart** (1:43)
Yeah, it's amazing. I've been interviewing Fred for a couple of years now, and for a guy who's made his career following the tech space, he sure is bearish on AI.
And I don't necessarily mean on the technology, although I know he does have some issues with some of the crazy hopes people are placing on it. But the sense that I have from him is, he thinks that this is a real technology transition, just like the Internet was, but the valuations have just gotten way far ahead of the true value of these companies right now and that there's going to be a hell of a hangover when the market wakes up for that. So a couple of things that I took from that conversation that I think are worth discussing here with you guys.
Valuations are crazy, no huge surprise. I think everybody, we've been talking about that forever. But the argument that many people I've interviewed have made is, yeah, but when you look at the earnings of these companies, the earnings of the hyperscalers, they're growing like crazy. And so on a PE basis, a forward PE basis, they actually don't seem that overvalued. And as long as this is real earnings, real profits, you can build great share prices on top of that. But what Fred is saying is, yeah, but those earnings are dramatically overvalued here for a couple of reasons. But the big one that he was really focused on is that when you're a hyperscaler, you're taking your cash flow, you're investing in all this data center capex, there's a bunch of ongoing depreciation costs that you're going to have to bear that aren't hitting the P&L today. And so they make profits look higher than they're going to be in the future. And Fred was saying that if you adjust P-E ratios for the coming depreciation expense, he said that their adjusted P-E ratios are like 65 times, which is like crazy, right? So you've got these companies that are trading at kind of insane multiples of sales, but they're getting away with it because they're saying, well, our multiple of earnings is pretty good. But Fred is saying, no, no, no, no, if you really do the math, the multiple of earnings is just as crazy as the multiple of sales. You're nodding here, John.

**John Lodra** (4:08)
Yeah, I think to put it simply, you did a great job, Adam. And the takeaway is, there objectively are bubble multiples being paid for companies right now. If you look at the very robust multiples on the market or companies in general. But there's also a bubble in earnings, and that's very much the point of what you just pulled out. I'd like to share a couple of charts here that hopefully can give some perspective on that.