2025.08.27 Podcast Episode 1

Full Transcript​

Christa: Welcome everyone. We're excited for you to join us for our very first podcast for Co-Create Financial. I'm Christa.

Matt: I'm Matt,

Christa: and we're excited to talk to you about a couple of things. First, we're gonna cover just some general things that we see in the market right now, how we're approaching our client portfolios, and then we'll also talk about some firm updates and general things we have going on here at Co-Create Financial.

Matt: Awesome. I wanted to jump in here, and talk about a couple of things before the AI section where we're looking at some more, more broad issues that, you might see in the headlines, you might see in the news. And then we'll dive into the kind of the big topic that's the interesting one certainly one for us, as investors and just as human beings.

Christa: It's a question on everybody's mind lately, what's going on with AI? How are you implementing it? What does it look like and what's it changing?

Matt: I mean, one of the most fun things you can do is get on YouTube and watch videos of people trying to stump AI. Uh, it's, it's pretty phenomenal. If you do that, it's a good laugh.

With that, the first thing that I want to talk about is inflation. And the concept of rate cuts, because this is kind of the, this is the most common thing that you're hearing about in terms of risks. So when we look at it I wanna be clear, the Federal Reserve doesn't really control the economy.

They can kind of manipulate, some pricing and some capital flows, over the short term, but they really don't control the economy. That's businesses and profits and things like that. And if a business can borrow more effectively, then they're gonna have a better profit margin maybe for a little while, or they might invest and spend some more money to get some things flowing.

But overall, interest rates don't actually control the economy or market growth over time. They just kind of put some guardrails on it and a little bit of pressure. When we look at inflation though, inflation is really caused by an increase in the amount of money that exists in the economy.

It's the number of dollars for computers or for iPads or mugs or whatever it might be, t-shirts or dress shirts, whatever it is that, that you're buying. If there are more dollars the person selling that good can charge more for it because there's just more available. So we look at that and five years ago when we went into COVID, and we've talked about this a lot, feel free to explore some of our other content that, we've put out because we've talked about this ad nauseum since COVID hit.

But when you increase the amount of money the way that we did, that's in circulation, which has never been done, nothing's ever come close. That just simply increases inflation and you can buy less with each dollar when you do that. But what we've been kind of been saying over time is that as you have this increase in money supply, the price of goods and services has to increase until they're about it at equilibrium.

And that's kind of where we are right now. There are some other factors that are continuing to drive inflation forward a little bit but overall we're at a place where that issue's really resolved itself to some extent.

Christa: Yeah it's important to realize that during the COVID shutdown, there was just huge amounts of money that were injected into the economy, and that's really what drove these inflation issues is just needing to normalize that because inflation really is a monetary phenomenon.

And just like Matt said about how many dollars are chasing the goods and services available.

Matt: That's, that's exactly right. With all of that, the other thing we see with those, the inflation is the tariff issue, which is continuing to unfold. it is questionable how much the broad-based tariffs can be implemented, um, just based on, court rulings and the way the law is written.

Certainly with China and the trade war there, there's some issues where there is the authority to impose certain tariffs in some of those. And those do increase inflation because all that gets passed on to the end consumer to some extent or another, at least in the short term while all of that plays out.

So, we're getting a lot of information about all of these things in real time, and that's a lot of really mixed information. Some of that's delayed. So there are these issues about what's really going on in the economy is there transparency, with everything that we're learning.

And it's pretty good overall.

The information is pretty clear. Most of it's available with the government shutdown, which we'll talk about in just a moment. that really is delaying some information, but there are some side avenues to getting some clarity about what's going on.

There's always a little bit of a lack of transparency and a lack of accuracy in, economic numbers until they're really studied and revised six months a year down the line with more real data. Some of that information is saying that the economy's continuing to accelerate. We do have GDP growth right now, things like that, but we also see some other issues where it says the economy's decelerating jobs are frozen, businesses aren't spending money.

We have a actually a lot more earnings misses and, in the stock market where companies aren't hitting what their profit expectations were. Mm-hmm. then we have in recent quarter. So we're seeing more and more, issues with all of those things and leads to this question of are we headed into a recession?

Mm-hmm. And we've talked about that a number of times with many of our clients. We've talked, we've kind of written some about that too. Our expectations for recession are that really that we're gonna continue in the recession that we've kind of quietly been in. I like to call it a ghost recession.

Mm-hmm. Looking at that ghost recession, you know, we've seen people struggling because the grocery budgets are increasing. We see people struggling to hire employees, because of the cost of wages and it's freezing up the labor market. We see all those things playing out, and that's really when a recession starts, is when spending starts to get tighter for people.

And so when we look at that question, we've been in it, is it gonna get worse? Is it gonna get better? That's a different question. I think that there are some reasons to be hopeful about the economy, but I also think that there are a lot of risks.

Christa: You know, one of the things that's, important to remember is that for so many of us, we think of recession as, you know, the great financial crisis of '08, and we kind of anchor to that side of it.

But the reality is most recessions are not that extreme. And so even if we're talking about being in a recessionary environment, it doesn't mean the bottom's falling out of everything like it did in '08. And I think we've seen a lot of signs of people just tightening up. And then we've also seen some divergence between higher income earners and kind of people a little bit lower end on the spectrum where there's a lot of difference in how things are hitting people.

But like Matt said, everybody feels the grocery bill and is starting to make some adjustments in their spending. There's certain things that they won't give up, but other things that they're making adjustments on, that are maybe a little bit more mild. So it's been an interesting phenomenon to watch.

Matt: Yeah. And, and I believe if, we're looking at kind of the different income, levels within, society, the top 20, was it top 25% of people that are, continuing to spend as they have been. But when we look at the bottom 75% of the income brackets, they're really compressing. They're spending, they're tight, they're feeling this.

So there are a lot of things that are kind of challenging in that front for the majority of people in our communities. Mm-hmm.

On that note, I do wanna mention with the government shutdowns. We've had a lot of government shutdowns. I don't know if you recall the number that we, that we've had.

It's escaping my mind at the moment, but we have the government shutdowns all shuts down all the time. Unfortunately it's becoming more and more common as we get more polarized and have more gridlock in Washington. But, we've never had a recession, follow a government shutdown really in close proximity at all.

So, that when we look at those government shutdowns, they don't lead to recessions. They don't lead to significant economic problems. So while we're concerned about our government's ability to get things done and our government's ability to work together, I don't think that this government shutdown is gonna drive us into a recession or an economic crisis or a catastrophe.

Certainly it affects individual lives, people working for the government, but it's not gonna cause, a significant economic issue in part because a capitalist system doesn't function on government spending. It functions on corporate profits and private business. I'm going out and making money, paying employees, people buying and selling goods.

It's not about the government telling it what to do.

Christa: Mm-hmm.

Matt: So I think that sounds really good.

Christa: Exactly. Yeah. We. You know, it's certainly concerning the government being shut down on some levels and especially as it impacts individuals, but it's not shutting down our economy and that's an important thing to remember.

So let's dive into this question on AI and what that means for investments and what we're seeing now in the current market because there has been this explosion within the stock market and anything that has anything to do with AI. So do you wanna chat some about that, Matt, and talk about how we're viewing and engaging that.

Matt: Yeah, absolutely. The AI industry, let's call 'em the hyperscalers but really this artificial and intelligence industry has driven a tremendous amount of growth, not just in these companies, but in the markets as a whole. When you look at some of these companies, you've got people that have got, 3, 4, 5, 900% returns on a singular stock. And the thing that really, it looks like the most is the .com bubble in the 1990s. When we think about that, everybody buying these, these stocks thinking, you know, this is gonna be the future. This technology's gonna change the world. and of course the internet did.

Mm-hmm. Um, but what's gonna be pets.com? And go out of business, what things are gonna survive? Even those, the companies that do survive take, I think Cisco for example, it was massive in the 1990s. Shot up in price, before the 2000 crash. And, of course, it came crashing down and Cisco's still around and it's still a great company.

But when you look at these tech companies, these NVIDIAs, these, Broadcom saw open AI, all these different tech companies that everybody's investing in, thinking this is gonna be the future. They've really shot up in a way that resembles that tech bubble. Mm-hmm. One of the things that we're hearing a lot is that, you know, this is different this time.

Christa: Yeah. A lot of people are saying that, they're saying, you know, AI is the future and things are moving so fast, and technology is being adopted so fast, so it's different. Right.

Matt: And because we're selling a service instead of just hopefully like having something turn out because of all the marketing hype.

There's a little bit of, there's some structural differences, going on, and we could get into how all the IPOs were going on in the nineties and if you really wanna talk about that, gimme a call. And I'm a little bit of a nerd, so I'd be happy to chat with you, but nobody wants to hear about that on a podcast.

Well, maybe some do, but not here.

Matt: So when we look at that, we have to, to really understand what's going on, and then how those are affecting, the overall market. So I'm gonna pull up a little illustration here, it's just a little chart on my whiteboard of the S&P500, which the S&P500 is a grouping of the 503.

My computer's not plugged in when you plug that in so you guys can see what we're talking about here. It's episode one. So when we're looking at the S&P500 it's the 503 largest companies that are traded on a US stock exchange. So these are all businesses that you can own.

And if, we're looking at this on my screen here, you can see the top companies of these. You've got Nvidia, Microsoft, Apple, Amazon, Broadcom, Meta, Alphabet and so going down, of course there are two different shares of Google, so Google shows up twice. But when we look at this, these are all grouped and ordered by size

so the S&P500 owns the most of the biggest companies.

Christa: That's why we refer to it as a cap weighted index. The companies at the top are a higher percentage of the index.

Matt: Yep. And so what is it about 40% if we were to look at, the top 10 or so companies here? I think that's gonna go down to about JP Morgan on my screen.

If somebody, you can count, you can see the whole, list of the top, 25 or so here on this screen. But this is about what, 40% of the S&P500, that's a massive amount of anybody that's in an index fund. That's a massive amount of what you own. It's a massive amount of market growth. The S&P500 is what people talk about when they say the stock market.

It's predominantly, they're talking about this right here, this grouping of 503 companies. And it's mostly these giant AI tech companies or tech companies that have AI exposure. If we go through it, apple doesn't, Amazon has some, but less than some of the others. Obviously Nvidia, Broadcom, Alphabet, all do, Tesla, doesn't have a ton, but, there's exposure, just with Grok AI and things like that through kind of by proxy with X. But Google, of course, so we're looking at these companies are really heavily influenced by AI and if you own an index fund, that's 40% of your portfolio. Yeah. This isn't how we invest, by the way. So when we're talking about this, we're talking about, a different strategy than what we're engaged in with our client portfolios.

Christa: Yeah, just emphasize that Nvidia alone is 7.5% of the S&P500. So, you might think you're diversified 'cause you're investing in 500 companies, but the top 10%, top 10 companies are 40%, which means that the remaining 60% is among those 490 companies. So, it's really quite focused on this AI space and the top companies.

Matt: So looking at those top companies then, when we're looking at this AI, well, I'm just gonna call it an AI bubble. I mean, Mark Zuckerberg's talked about a possibility there being an AI bubble. So is the CEO of Open AI. So like, I think it's fair to call this, to kind of call this what it is.

There's this bubble that's built around, the future of AI, it's around what need it might produce in the future, and to give you an idea of the size of this bubble, when we look at it right now, artificial intelligence is, producing about 50, 50 billion in revenue, that sector of the industry, and these are companies that people are paying

$125 or 125% of earnings. So $125 for every dollar of earnings. That's a lot of money. It's expensive. To give you an idea, it would take somewhere between 2 and $5 trillion of revenue coming in from these companies in order to cover that.

Christa: Justify the cost of the multiples that people are playing at

and just to back things up a little bit, when we look at stock prices and stock valuations, we say, you know, a company for it to be worth investing in and owning means that it has to pay you as an owner. It has to be producing profit. And that's what we're buying. We're buying an income stream for the company.

And sometimes there's, you know, a lot of people invest in kind of the speculative side of investing, which is saying, Hey, maybe this company doesn't make money now. Or maybe they don't make a lot of money now, but we think they will in the future. And that's what people are doing on the AI side. But the thing is, is that we have to eventually get to the point where it produces enough revenue to justify those costs, because otherwise it's just eating up all that money and that's gonna come crashing down at some point. And so that's the fundamentals of how we view investing in the stock market, is what is the cash flow and what's that gonna pay you as an owner and how are you gonna get a return on your investment?

And it's not just hopefully it goes up more. There has to be a reason it's gonna go up more and that's cash flow.

Matt: Yep. So there's this massive expansion in revenue that AI needs. We're seeing some other challenges within the AI world, let's call it. MIT just released a study, recently that reported that 95% of AI startup, or implementations pilot programs is the term,

that 95% of those fail to deliver or return on investment. So all of this adoption of artificial intelligence and companies saying we're gonna make things efficient, streamlined, we're gonna generate profit, reduce the number of jobs that we need to have, which is an entirely different side of this conversation.

But they're looking at all this information. They're saying, we're gonna make this work for us, and it's not happening. And so this revenue growth, 50 billion to five, two to 5 trillion. We're struggling to have the productivity on the front end, on the user end in order to drive that growth. That's not that it won't be there, just like the internet changed the world.

Artificial intelligence can change the world, but we have to have that start, have it start to be functional and useful. The MIT study also looked into what it was gonna do to jobs since I brought it up and it's probably not going to end up eliminating very many jobs, at least not for the foreseeable future according to that perspective.

We're also right about at peak data. Which that means that we've used all the data that it needs to train on. There's not a lot more out there and so we have this impending crisis of running out of information for AI to learn. And if you watch some of the YouTube videos about people [00:18:00] stumping AI, how many Rs are in strawberry or is 9.11 bigger than 9.9?

Things that seem like easy questions that AI can't pull together. We're running out of data for it to learn from, and it's starting to supplement that with AI produced content, which is unreliable yet. And so there's this a big issue that's kind of coming down the pike with that component of it.

Christa: So Matt, so we've kind of covered that. You know, we certainly have concerns about investing in the AI space. We recognize that it will have profound implications for the future, but we're not seeing a clear path to justifying the current prices for these companies. And we do expect the valuations on those at some point.

We don't know when. We can't know when we'll come back down to earth. How are we approaching this from within our investment philosophy and what we're doing for our clients and how are we mitigating these risks and what can people kind of look to and see in their portfolios?

Matt: Yeah, absolutely. So first thing we're doing is we're looking for the appropriate exit points. We don't have a lot of exposure to artificial intelligence directly these hyperscalers. We do have some that was coincidental because we bought them as best in class businesses before this AI trend took off.

And so some of that we've been able to ride along and we've been able to take some profits out as we go. That's a really important thing is you're making money in the stock market, is to know when to take profits. out so that you're not overexposed. But with that, we're, we're looking for, you know, what are the exit points for these companies where you have a 500% return on whatever AI stock, when do you get out and what's gonna change it?

In the 1990 to two, uh, late nineties led to the 2000 bubble coming down and really it was kind of this turning point where it was, you know, feds changed some interest rates and started kind of unraveling and it was just, there was this tipping point and we don't know what that's gonna be. So we're looking to de-risk in our portfolios from the AI exposure so that we're not dependent on this massive increase of AI data.

I have a chart on my screen here that we can share AI the orange line here is the S&P500, and the purple line is the S&P500 as well. But remember how we talked about that, the top companies being the biggest ones, and they're about 40%. Well, the purple line is if you just took them at an equal part of the S&P500, instead of having it weighted like that.

And functionally, what this does is this gives us a really good idea of the difference in pricing between AI and the rest of American businesses.

Christa: We've really seen, you know, it seems like so many things have gone up together in this AI level, but when you get into the data, if there's really been a clear divergence between companies in this tech AI space and companies that are just doing other business and good business.

And so that's one of the things that we're watching is that divergence in the space.

Matt: Yep. So our portfolios and the investments that we hold much more closely reflect the S&P500 equal weight index than they do the S&P500, in part because we have investments that are balanced appropriately and diversified in an appropriate mix versus being concentrated and AI or any other given or necessary specific industry.

The other thing that we're looking at is, just having consistent and steady cash flow coming in, and not relying on future promises of revenue that aren't gonna come. I mean that all these AI companies are relying on, you know. Hundred, $500 billion investments from one another. And they're dependent on all of these.

And it's kind of the circular mix of capital that they need in order to survive. And products that they wanna buy from other companies that are needing their own investment. And this big kind of circular problem. In fact, I think I have a quote somewhere in our notes about that. I don't know

If that's in here, but it's pretty great. This was from a JP Morgan, research analyst. It says, Oracle stock jumps by 25% after being promised $60 billion a year from Open AI. An amount of money that open AI doesn't earn yet to provide cloud computing facilities that Oracle hasn't built yet.

And which require 4.5 gigawatts of power, the equivalent of 2.25 Hoover dams or four nuclear power plants, as well as increased borrowing by Oracle whose debt to equity ratios already 500% compared to 50% for Amazon or 30% for Microsoft, and even less at Meta and Google. In other words, the tech capital cycle may be about to change.

Christa: So we've seen a lot of excitement around how these companies are investing in each other. But none of it's come to fruition yet, and we're very concerned about that.

Matt: Yep. So what we do in our portfolios then is we own these dividend yielding companies. Predominantly we're looking at companies that have free cash flow.

We're looking at companies that have a profit margin, that have a product that people are buying. That is something that's different than the AI industry in this AI cycle, and it doesn't look as exciting. It's not as fun to, to kind of do the slow and steady, especially when things are taking off in a bubble like this.

But we're really trying to go to the tried and true the things that are gonna give you a good long-term return, a rising stream of income from dividends where that's safe and secure. I mean, there, there are always risks that exists in the market and in business ownership. So something could happen to one of these, but we diversify our portfolios and measure that

so that we're making sure that we're not too exposed to anything in particular that's gonna cause our clients to have a lapse in cash flow or any kind of long-term issue with growth kind of going forward. So we're expecting that to be a much more responsible, tried and true way to get a good return over

the long haul and asking when do we get out of the things that have this excess risk.

Christa: Yeah. Absolutely. So, kind of to recap there, it's just important to remember as you hear the bad talk around AI there are concerns there. There are major risks, and we are actively mitigating those in our client portfolios and making sure that our clients are set up for success on the long haul with tried and true research backed methods, not chasing the next hot stock.

So you don't have to be afraid that you have this exposure that the S&P500 does. We've already mitigated that and are constantly working on that in our portfolios.

Matt: Yeah, we do believe that there's growth opportunity out there and that there's a way to, make money in our stock markets and our other financial capital markets.

So this isn't a, we should pull the rip cord and get out. We need to be very strategic and very careful about how we measure risk and reward in our portfolios as we manage those on a company by company basis. And we do that and measure that every month by the way, we get together and sit down as a team and review every holding that we have and make sure that,

all of the financials look good and that everything is squared away and we're confident in its ability to continue to perform like we need it to for our clients.

Before we talk about the last topic that I think is a really significant concern right now in our economy, in our markets, I just kind of wanted to talk about a couple of the things that we have going on around our firm.

We've been doing a lot of work. Yeah. Over the last year.

Christa: Yeah. We've been doing a lot of building out infrastructure within our firm and some exciting things that are coming up.

Matt: Yeah, our goal is always to make a really great experience for you as the end client and being a small business, we have the ability to adapt and do a lot of fun things.

The first thing that,I wanna talk about is kind of my passion project, and maybe you can talk about, the addition of Altruist just a little bit after that. We have added the ability to vote client proxies. Which I'll tell you what that means. Okay. Because there's gonna be a new agreement that we're gonna start working into our client conversations and talking about with individually as we sit down with each of you.

But investments can change the world. The stock market is actually a democracy. Everybody likes to complain about corporate America and what it's doing in our world, but we actually have the ability as business owners of these companies to have a voice and you get a vote and there are all kinds of things that show up on these ballots that come from the owners of a stock that are really significant.

A recent one that comes to mind was related to Facebook and children getting access to pornography. Some of these might be about environmental stewardship. Some of these might be about a lot of other different topics that people are passionate about and that you think are important.

What people don't realize is that most of the time you're giving your vote, especially if you own a fund and you don't work with us, where we own the investments directly, you're giving your vote to somebody else and most of the time you're probably not gonna agree with them.

Christa: Yeah. So if you own a mutual fund or an ETF, if you're in those vehicles, that fund manager gets to vote your shares.

Matt: Yeah. So to talk about this Facebook example, about 95% of the votes that went in aligned with management and said that we're not gonna do any investigating or work on this issue that pertains to children receiving access to pornography. And it was somebody who owned Meta stock that brought that to their attention.

And you don't have to even own a lot to do that. Well, one of the things that we've done is we've gotten set up so that we can actually engage with you so that you can authorize us to go through those ballots that you receive in the mail and say, this looks like junk mail. And you check it. Those are actually really important to you.

If you want to, we can vote that for you and help give voice to things that really matter. Things that are important that can direct, kind of the future of our society and help set culture here, right here in our country and our community. o we're really, really excited about that.

Christa: Yeah. So we'll be talking more with our clients about how we started that process and roll that out over time here.

The other update we wanna share with you is currently we've been in this situation where we custody all our client accounts at Charles Schwab and we are going to continue to contract with Charles Schwab and custody client accounts at Charles Schwab.

However, we have also onboarded an additional custodian to enhance our client experience. Many of our clients have a great experience at Charles Schwab, but some of them, it can be a little clunky. And so we have onboarded with a firm called Altruist that offers a more tech forward streamlined experience that I think for some of our clients is going to be a better fit and a better experience than what they're currently receiving on Charles Schwab.

There are some nuances as to what types of accounts are a better fit for one or the other. So this is not a blanket sweep. If you're happy with Charles Schwab, we're happy to keep you there, but if for some reason there's some challenges with just how you're feeling about the paperwork processes or updates to your accounts, it might be a good time for us to transition you to our other custodian Altruist because we're excited about what that'll mean for the future.

Or junk

Matt: mail or junk mail,

Christa: less junk

Matt: mail,

Christa: and it'll just be a more streamlined experience for our clients.

Matt: Yeah, we're really excited about that. It's just gonna help us optimize even more. And of course, if you're on one or the other, it's always gonna be available through your co-create login or on our app.

So you can access all of your information and data there at any time.

So the last thing on the agenda is to talk about the final piece. And I think this is one of the bigger risks over the long term to our economy. Kind of even more than the AI bubble that's gonna come back down to Earth and probably skyrocket again and come back down to earth in this up and down cycle.

But I think one of the biggest risks that we actually see, right now that I just wanna bring attention to is what I would call the degradation of the free markets. We're seeing a lot of government influence, and this is not just this current administration, it's also the previous one and the one before that this has been going on for a while.

And so when the government gets involved in business it slows growth, it creates bureaucracy. That's not to say that we don't need any regulation, or any government involvement whatsoever, but it's saying we need to balance that very carefully and very appropriately. And one of the things that we're seeing is, a shift in how the government and gets engaged with business and owning golden shares of, say, Intel or negotiating for ownership stakes in these businesses.

The Communist Party in China actually owns golden shares in every business that's Chinese. So when we talk about owning golden shares or government owning business, we're actually socializing a lot of the free market economy that we have. Whether that's good or bad. We will find out someday.

We don't know, but it is a fundamental shift in the way that our capital markets work and the way that our government systems and our investing strategies can integrate it. And so it's something that we're gonna be paying attention to over the next decade. I'm very carefully is how the government's inter engaging in the capital markets

because it has a significant impact on the long-term performance. I mean, for better or worse.

Christa: Thank you for joining us for our very first podcast. We appreciate all of you and please feel free to reach out with any questions if anything you wanna chat about more and we look forward to sharing with you again soon.

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