This is a longer than usual podcast with myself, Travis, and David Titus. Hopefully this helps spark some thinking and discussion. Also, quietly, the iShares Russell 2000 ETF $IWN is up 23.0% YTD, outpacing the returns of the Invesco QQQ Trust $QQQ , which is up 15.3% YTD, and the SPDR S&P 500 ETF $SPY , which is higher by 7.5% YTD. The return numbers I quoted in the podcast were slightly different due to dividends, etc. So, quietly, we are starting to get a little bit (maybe just a start) of a reversion to the mean in one of my favorite long-term charts, which is the Invesco QQQ Trust, $QQQ, plotted versus the iShares Russell 2000 Value ETF, $IWN. Visualizing that chart above, growth started to outperform quietly in 2007, and large-cap growth even outperformed in 2008 and 2009, when the SPDR S&P 500 Index declined roughly 60% from its peak in 2008 to its low in 2009. Ironically, at the time, many investors were worried about QE in 2009 sparking inflation. In fact, as a relatively much younger man with a period of substantial success as an investor in 2008 and 2009, I was invited to a panel discussion with Marc Faber, Gary Schilling and others at a New England farmhouse, sponsored by a wealthy investor who wanted to hear both sides of the inflation versus deflation debate. Now pushing 50 years old, we know that with the benefit of hindsight, the QE that was introduced in 2009 and thereafter didn’t spark inflation, in large part due to the fact that we had a tremendous run from the large-cap growth companies, specifically, in alphabetical order, Alphabet $GOOGL , $GOOG , Apple $AAPL , Amazon $AMZN , Microsoft $MSFT , $META , then later Nvidia $NVDA , and Tesla $TSLA . These were asset light, monopolistic companies that dominated markets, and absorbed the price insensitive and valuation insensitive rivers of passive fund flows with aplomb. Somewhat improbably, the price insensitive and valuation insensitive passive money funneled itself in businesses that had tremendous return on equity, and these businesses were deploying capital smartly. Largely, they were asset light, with the exception of Amazon, who had perhaps the best growth in operational cash flow, and they all had persistently higher margins as they conquered the world. Learning from the playbook that had worked for over a decade, policymakers turbo-charged QE when the COVID scare caused politicians to shut down large parts of the economy in 2020, which was a mistake (both the shutting down of the economy and the money printing which led inflation, unbridled speculation, that has since been popped, and the SPAC/IPO bubble peak), especially with the benefit of hindsight. That accelerated money printing led to inflation this time, markedly different from what we saw in 2009-2020. If 2020 to 2026 was the inflationary era, which we will know with time, the next era might be identified by two things. First, the momentum trade has increasingly funneled capital into the semiconductor and memory sectors, which together are now roughly 20% of the market indices, and these sectors are historically cyclical, and extremely volatile. Second, the hyper scalers, who are doing a large majority of all this spending, they are now transitioning from asset light businesses that dominated their monopolistic corridors to asset heavy businesses that are competing against one another. If this was an opera, and it was the third act, we are building to a final climax that is going to be worth watching as price discovery battles price insensitive and valuation insensitive fund flows. The silver lining is that a lot of companies stand to benefit as fund flows are redirected, similar to what we saw in 2000-2008, so this should be a golden age for active investing. Get full access to TK The Contrarian at tkthecontrarian.substack.com/subscribe
