Doug Kass' bearish view; More on the power of long-term compounding; Big implications with a contract dispute between OpenAI and Microsoft; Onward to Italy!

1) Every so often, usually when the markets are frothy and hitting all-time highs, I share a bearish view from my friend Doug Kass of Seabreeze Partners...

That's not because I agree with him (though as I've said numerous times, I think investors should have modest expectations for the next five years). Instead, it's because I like to share alternate perspectives with my readers.

Part of being a good investor is hearing out the opposite argument or thesis from other smart folks. And even if you don't reach the same conclusion, you can probably find some pieces of evidence or insight that could make you reevaluate or temper your own stance.

Doug kindly gave me permission to share some excerpts from his latest essay, "Examining the Bullish Case," in which he states:

Investors are now almost universally bullish. However, during the past month I have argued that investors are overly positive.

Doug also shares a list of some of his bigger concerns:

• We face the highest geopolitical risks in many decades (which will not be resolved quickly).
• We face the largest level of social and political risks in the U.S. since the Vietnam war.
• We face the greatest chance of "slugflation" (slowing economic growth and sticky inflation) since the 1970s.
• We face the biggest threat that the U.S. dollar and capital markets will no longer be a "safe haven" in modern history.
• We face the greatest debt load and deficit ever – and neither party seems to favor any fiscal discipline whatsoever.
• We face the largest capital spending spree in history (on artificial intelligence) – though the return on that investment is less certain (dot-com, it feels like deja vu all over again).
• We face a viable alternative to equities in fixed income (for the first time in 15 years) as bonds present an equity-equivalent yield with limited risk and volatility.

Doug doesn't buy the argument bulls make that "there is a Fed Put: President Trump has announced that he will replace Fed Chairman Jerome Powell with a dove, leading to lower short-term interest rates."

Instead, he believes:

The Fed now expects inflation to rise over the next few months, which is not an ideal setting for lower rates.

A Fed Chair monitored and under the watchful eye of President Trump will likely produce a more uncertain monetary policy. I am not sure that a Fed Chair (with a committee of Board of Governors) will be as closely influenced by a Fed chief that works close or is even at the beck [and] call of the President.

The capital markets could grow quite worried (with a dependent and not independent Fed); American Exceptionalism might be threatened with the selling of our currency and bonds, especially if the inflationary backdrop grows more problematic. Institutional credibility and independence will be challenged in a very public (and market!) way. Finally, wasn't there a lesson to be learned in 2024 when a one-percentage point cut in the Fed Funds rate produced higher intermediate and longer term Treasury and mortgage rates? If this occurred, the equity risk premium would narrow ever more (with reduced S&P profits and higher risk free interest rates).

Doug also worries that the rate of earnings growth for S&P 500 Index companies "likely peaked in 1Q 2025." As he says:

Who pays for higher tariffs, consumers or corporations? An estimated $400 billion of tariffs represent 20% of total corporate profits. It's a Sophie's Choice: The imposition of tariffs will likely deliver either higher inflation or lower corporate profits.

Lastly, he's skeptical that "AI will provide a fountain of corporate productivity, additive to revenues and profits." Rather, he writes:

Thus far the commercial applications and user sets of AI are minimal, though this will likely change. But it is unclear whether the trillions of dollars of capital investment (by the hyperscalers and others) will result in an adequate return on invested capital. Moreover, the AI trade started in 2023 and is almost three years old.

Thank you as always for your insights, Doug!

Overall, I think these are some good points. But Doug is making a prediction about what will happen the rest of this year, while I'm looking out much further...

2) To wit: here's a smart article by Jeff Sommer of the New York Times, who recently interviewed index-fund pioneer Charles Ellis on the power of long-term compounding: A Recipe for Doubling Your Stock Returns, Again and Again. Excerpt:

"The secret to investing, in my view, is time," Mr. Ellis, 87, told me in a telephone conversation. "How much time is there between now, when you invest the money, and when you're going to spend the money. By 'long term,' most people think six months, maybe a year, maybe even a few years."

I've said in many columns that, based on history, a long-term investor needed to stay in the stock market for at least a decade, and preferably longer, to have a high probability of an excellent return. Mr. Ellis said that's still too short to enjoy all the benefits of long-term investing. Instead, Mr. Ellis advised, think 60 years – or longer.

Really, I asked? Who has that kind of investing horizon?

"Actually, many of us have," he said. "Say you start in your mid-20s and you continue through your mid-80s. And then, if you're lucky, you can go longer than that."

Obviously, you don't need a 60-year horizon to invest in stocks. But you shouldn't need any money you're putting into the market for at least three years, and ideally five or more.

3) The debate over how advanced artificial intelligence ("AI") has become has multibillion-dollar implications in a contract dispute between AI leader OpenAI and its deep-pocketed partner, Microsoft (MSFT).

Here's a recent Wall Street Journal article with the story: OpenAI, Microsoft Rift Hinges on How Smart AI Can Get. Excerpt:

The contract between the tech partners, who have been locked in acrimonious negotiations, stipulates that when OpenAI's systems reach "artificial general intelligence," or AGI, the startup will be able to limit Microsoft's access to its future technology. Microsoft is fighting hard to prevent that.

Many AI experts see AGI as the point at which generative AI systems achieve humanlike intelligence, but OpenAI and Microsoft are at odds over the issue. OpenAI executives including Sam Altman believe they are close to being able to declare that their AI tools have achieved the AGI level of proficiency, according to people familiar with the matter.

And as the article continues:

Microsoft Chief Executive Satya Nadella has expressed skepticism that reaching such a benchmark is possible. Their disagreement mirrors a debate among Silicon Valley's elite about just how sophisticated cutting-edge tools can become...

The two companies are working to renegotiate their commercial agreement as OpenAI seeks to convert itself into a for-profit company. The conversion will unlock tens of billions of dollars in new funding to advance its artificial intelligence tools.

I'm not an expert here. But based on what I've seen and read, I tend to agree with Altman (and the consensus in the industry) that AI is on the verge of reaching AGI...

4) Here's the latest with my adventures in Europe...

Yesterday, my wife Susan and I took two trains and a bus for eight hours traveling from Zurich to the magnificent Italian city of Siena.

There, we had planned to watch the famous Palio di Siena. It's a bareback horse race around the Piazza del Campo – a tradition dating back to the 17th century.

Unfortunately, it rained earlier in the day – making the track too dangerous to run the race.

However, we still enjoyed walking around the piazza and city. And I had the pleasure of meeting Andriy Shevchenko, who in his two-decade career ending in 2012 was among the best soccer players in the world (he's in the photo on the middle right below).

Also in the pictures, note the scarf I am wearing is from "Chiocciola" (snail) – one of the 10 "contrade" whose riders compete in the race:

After dinner, we drove all night to Trani – where, today and tomorrow, I'm co-hosting the Value Investing Seminar for the 21st year (I shared details in my March 21 e-mail).

I'll be sharing the best ideas from the conference in upcoming e-mails, so stay tuned!

Best regards,

Whitney

P.S. The Stansberry Research offices will be closed tomorrow in observance of Independence Day, so look for my next daily e-mail on Monday, July 7, after the Weekly Recap. Enjoy the holiday!

P.P.S. I welcome your feedback – send me an e-mail by clicking here.