The Big Macro: Inflation and Beyond - A Comprehensive Economic Outlook

The Big Macro: More Than Inflation

In this podcast, Motley Fool host Dylan Lewis and analysts Ron Gross and Bill Mann discuss: We go into the vault to hear Motley Fool CEO Tom Gardner talk with author Malcolm Gladwell in 2014 about the lessons that can be borrowed as we look at small disruptive businesses, and whether titans can hold their lead in major industries. To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video. Should you invest $1,000 in Costco Wholesale right now? Before you buy stock in Costco Wholesale, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now... and Costco Wholesale wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $787,026!* Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*. Dylan Lewis: We've got the big picture in full focus and a little preview of Fool Fest 2024. This week's Motley Fool Money radio show starts now. It's the Motley Fool Money radio show. I'm Dylan Lewis. Joining me over the airwaves, Motley Fool Senior Analysts Bill Mann and Ron Gross. Fools, great to have you both here. Ron Gross: How you doing, Dylan? Bill Mann: Dylan, it's really hot outside. Just a bit. I was not informed of this. Dylan Lewis: Listeners, I hope you're staying cool wherever you might be, especially if you're in Washington, DC. We are going to be talking through a bunch of stuff this week. We've got to look at how one chipmaker is trying to seize some of the AI action, a watershed moment in price hikes, and of course, stocks on our radar. We are going to kick off though, looking at the big macro, Ron Fresh inflation data out, we have CPI, we have PPI numbers, we have comments from Fed Chair Powell. Where do you want to start? Ron Gross: Dylan, just when you thought perhaps the data would give us some direction for interest rates, we get contradictory information this week. Interestingly, the market seems to have shrugged it off Friday, very strong market. But let's break it down a little bit. Friday's wholesale price metric which is the producer price index, or PPI, rose more than expected in June. That's basically a negative indicator unless you're a big fan of inflation. The PPI was up 0.2% last month. It was expected to be up only 0.1%. Over the last year, it's up 2.6%. We're doing pretty well relative to a year or two ago, but this was a so-called hotter-than-expected report, and the main number was also revised higher. Now, that contradicts the number we got earlier in the week, which is consumer price index or CPI, and that showed that headline inflation declined on a monthly basis and now sits at 3% year over year. That was the first time since May 2020 that the monthly rate showed a decrease. Now, just in case you're not sick of inflation metrics enough, the Fed's preferred inflation metric is the personal consumption expenditure price index, and that will be released on July 26th. Everyone hold your breath. I know you can't wait, but July 26th will be here soon enough. Bill Mann: I love the thought of someone being a fan of inflation. Dylan Lewis: Paint a chest, sign at the arena, absolutely stoked. Ron, if we look in a vacuum at the inflation side of the Fed's dual mandate, what does it portend when it comes to potential rate hikes or rate decreases? Ron Gross: Well, during the week, Fed Chairman Powell said, "Rates will likely go lower." I don't think there's any misinterpretation about that. It's a matter of when and how much, and he signaled, hey, don't get used to where we were between the financial crisis in 2008 and the pandemic when rates were close to zero or zero. It's unlikely we're going to get back to that. If you had asked me during the week, if rate cuts were coming after CPI came out, I would have said likely in September. On Friday, when PPI came out hot, I'm less sure, futures are still indicating that there will be a cut in September, one of potentially two or three maybe this year. We'll have to see how the data continues. But rates are likely going lower, but they will stay higher than we have been used to over the last decade or two. Dylan Lewis: Zooming in on some of the comments from Fed Chair Powell, one thing that jumped out to me and seemed like a little bit of a tenor shift this time around, Ron, was a focus on the employment side of the Fed's mandate. Talking about here, elevated inflation is not the only risk we face, and Powell going on to say, reducing policy restraint too late or too little could unduly weaken economic activity and employment. We've been talking so much about the inflation side of this, jobs are coming into focus here too. Ron Gross: Yes, the dual mandate. If they only had to worry about one thing, the job would be significantly easier, but they've got to worry about both. Unemployment rate currently 4.1%, that's ticked up from the three years over the last year or so. But that's what they want, the Fed is trying to slow the economy by keeping rates higher, so don't be surprised by that. Labor has been pretty good. 4.1 is still pretty much considered full employment, that's pretty good, and inflation coming down at the same time. They may have just engineered that soft landing that they're hoping for, time will tell. Bill Mann: When you hear things like this, Ron, one of the things that's important to note about the Fed is that they don't have a plasma knife, what they have is a giant sledgehammer in terms of bringing liquidity in or out of the market. One of the things that they are doing is they are predicting what the market is going to be when any of this liquidity added or subtracted matters, which tends to be six to nine months after the move so they are trying to bend their headlights around corners. Dylan Lewis: I would like to see a plasma knife from the Fed. I don't know what it would look like as a monetary instrument. Dylan Lewis: [laughs] We had comments from Fed Chair Powell, we also had comments this week from JP Morgan CEO, Jamie Dimon. We tend to pay attention when he speaks, Bill. What did you see in the commentary from Dimon? Bill Mann: Well, he did say that he saw the inflation coming down, but he has made a point, and he's made this a couple of times before that there are inflationary forces in front of us, including fiscal deficits, and one of the things that he pointed to was the restructuring of trade. One thing that we have to remember is that we have benefited, and not everybody has benefited, but we financially have benefited from being able to essentially export inflation to China over the last 40 years. One of the things that Jamie Dimon has pointed to is those days are over, both from a geopolitical standpoint and from the fact that China is simply not the cheapest manufacturing environment anymore so we don't get the benefit of being of lower prices by virtue of selling out of China. He's pointed to that in the past. He's bringing it up again because I think that he's saying we need to recognize the fact that the game has absolutely changed. Dylan Lewis: One of the other things I'm noticing, just tying Dimon's comments and Powell's comments together here a little bit, Bill, is the scope of considerations is getting larger and larger, and we are starting to put more of the overall economic machinery into focus, as we're looking at rate outlook, as we're looking at economic outlook. It's not just a matter of inflation anymore. Bill Mann: It's not just a matter of inflation anymore. I almost don't know how to think about this, except to say that Jamie Dimon and Jerome Powell are pretty smart people maybe we should assume that they know what they're talking about here. But Jamie Dimon is the one who is probably most credibly ringing the bell that, hey, look, all of the money that we have poured into the federal balance sheet, at some point, that has to be paid off, it has to be maintained, and we really should have an open conversation about it. Dylan Lewis: In addition to the commentary from Dimon, we also got some updates on the earnings results from JP Morgan and other banks, Wells Fargo and Citi. Ron, you did a dive into those results, what jumped out to you? Ron Gross: Yeah, they all started coming out on Friday, and some were better than expected but I think my feeling is overall, they were generally not that great. JP Morgan's quarterly profit fell, that is excluding some one-off gains from their stake in Visa, but their operating profits fell, and that's even as their revenue was higher than Wall Street's expected, and they had a nice jump in investment banking fees. If you move over to Wells Fargo, they had to cut their annual outlook, their profits slipped as well. They're blaming net interest income being down and short of expectations. Now, Citi was up 10%, not too bad. Interestingly, I don't think of Citi Group as a strong investment banking presence, but their investment banking numbers were strong, and that helped them post higher profits. They focused on the fact that investment grade bond issuance was strong, a rebound in the IPO market, although it's still not where it has been in past years. Merger activity is somewhat robust, that helped them as well. Kind of a mixed bag, but overall, I would say the markets, and myself included, were not that impressed by the results. Bill Mann: Some of it, though, Ron, has to do with the fact that the large banks have had a really good performance from the stock market this year, particularly as you compare them to the mid-sized banks and the smaller banks, and I think some of that has to do with still blowback coming from the Silicon Valley Bank collapse last year, in which one of the themes that came out from it was, hey, you actually may be taking more of a risk with your deposits than you thought, and one of the easiest ways to alleviate that risk is to concentrate your deposit franchises on the larger banks. They have benefited, I think, in an outsized way from the crisis from last year. Dylan Lewis: Coming up after a quick break. An acquisition shows that AMD is gunning for Nvidia and its AI opportunity. Stay right here, you're listening to Motley Fool Money. Ricky Mulvey: Ricky Mulvey with Motley Fool Money here to tell you about a vehicle that is redefining sporting luxury, the Range Rover Sport. 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Dylan Lewis: Welcome back to Motley Fool Money. I'm Dylan Lewis here over the airwaves with Bill Mann and Ron Gross. Chip Maker AMD went shopping this week and scooped up Silo AI, a private AI lab based out of Europe. Bill, they're going to be paying 665 million in an all-cash deal for Silo. What exactly are they getting here? Bill Mann: Why are we even bringing this up? Dylan Lewis: You wanted to break it up, it was your idea. Take us into the production process here. You were the one, Bill. Bill Mann: We're talking about a $665 million deal for a multi-hundred billion-dollar company. AMD is massive, but here is why this is important. AMD has been trying to catch up in the GPU business with Nvidia, and it hasn't ultimately up until now, been about creating a better GPU because Nvidia has a proprietary software platform called CUDA that everybody defaults to in this business. AMD bringing in Silo AI is essentially trying to get to the whole product stage, where they too will have an internal development platform to go along with their GPUs. That's exactly why we're bringing it up, and I resent the question, Dylan, because this is a big deal much bigger than the amount of money that they paid. Dylan Lewis: If we are to pay attention to the important elements of this story, Bill, I think that there is an increased focus on not just the hardware that enables AI, but the software that is layered on top of it that makes it even more useful. Bill Mann: Yeah, and it's not even just that, it's that if you have hardware and software and they operate within a single environment, it's inherently more valuable for the programmers themselves. Lisa Sue, one of the best CEOs in the industry has long seen this as something that they really needed to forge and get to the other side in order to take on what is essentially a monopoly within Nvidia. Dylan Lewis: Over to the friendly skies, results in from Delta this week, and the market didn't exactly love them. Shares down around 5% this week. Ron, What was in the results? Ron Gross: Despite record-high quarterly revenue, the fact that they missed on the earnings side really sent investors heading for the hills. Ron Gross: The main culprit is discounted airfares and there are pressuring earnings across the board. There are just too many seats now in the US market as a result of the post-COVID frenzy to increase capacity, and higher fuel costs also aren't helping and they are hurting margins, as well. The main issue is that as the COVID-19 pandemic ended, airlines tried to catch up with travel demand by buying planes, hiring staff, increasing flight plans, and now the supply of seats just exceeds the demand for them. Thus, you have discounted domestic fares and that hurts margins. For the quarter, Delta was up 5.4% on the revenue side, They are focusing on high end offerings, lounge access, better seating that is paying off for them. Those things are now a significant piece, over half of Delta's revenue comes from those sources, such as loyalty programs, and premium ticket sales. But they're earning less money per seat flown each mile. Adjusted earnings were down 12%, a result of those margin problems. CEO said they are taking pretty significant corrective action across the board, across the industries. Summer travel looks very healthy he said. They did reiterate full-year guidance. Trading at seven times, right? But the industry is also at four, five times, so it's probably the better of all of them. Seven times sounds cheap, but buyer beware when it comes to airlines. Bill Mann: Have you guys flown this summer? Yes. Here's what I want to know. Are these cheaper seats in the room with you now? Because I certainly have a seat. Dylan Lewis: They aren't for me, Bill, but I'm also notoriously a last minute traveler and last minute booker, so I don't know that I'm the right benchmark for that. That sounds like the perfect thing, though, for us to throw out to our listeners and get some boots on the ground reporting [email protected] is where you can send those stories about your own fares. All right, bringing us home for this segment. It's been a good run, but even Costco is raising its prices. The ultimate sign of the times, Ron, the company announcing it will be raising the price of its membership for the first time in seven years. Gold star members will go up $5 to $65, executive will go up $10 to $120. Did you see this one coming? Ron Gross: Yes, it's been on the radar for a while now, so certainly no surprise. As a consumer, I'm OK with it. As an investor and an owner of the stock, I'm absolutely OK with it. It's one wonderful thing about the Costco business model that they do have pricing power to continue to increase these management fees from time to time. About 56% of Costco's operating profits comes from membership fees, not selling, 200 pounds of licorice or whatever your favorite thing is at Costco. It used to be higher, it used to be maybe 75% of operating profit came from membership fees, and this hike will get that higher once again, maybe not back to the 70 or 80 mark. But it's a wonderful business model. As long as they keep us happy by giving us value priced items and keep us coming into the stores and keep us paying that membership fee, that accrues right to the bottom line, and it's a wonderfully run company. Bill Mann: Costco's a perpetual motion machine, if you think about it, right? Their membership was $25 in 1982 and today it's $65. I defy you to find a slower rising price anywhere in American commerce. This is a company that focuses so intently on the customer. There are lots of companies that claim it, but Costco lives and breathes it. Think about their $50 hot dog special and how it's never gone up in price. Costco probably loses money on that, but they make up for that choice by looking at a fast turnover item with ultra-thin margins and recognizing that it requires creativity. Where else do these sorts of things matter? Costco is one of the best deals out there for the consumer. Stock has been up a lot this year, I like the price rise. Dylan Lewis: Bill, do you think there would be more outrage if they increase the price of the hot dog rather than the membership? Bill Mann: Absolutely, people are watching that so intently that if that ever happened, I mean, first of all, there would be warfare in Costco headquarters, but yes, it would be a big deal with the dudes, too. Ron Gross: I would be remiss if I didn't mention that the shares are now trading at 50 times forward earnings as a result of the wonderful increase in the stock price over the last year. We've been saying it's expensive at 30 times, at 40 times, here we are at 50 times. It's one of my largest personal positions, I haven't sold any. Makes you wonder what returns can look like, if we're at 50 times now, I think it's worth thinking about. I just happen to think it's one of the finest run companies in America and I'm happy to be a shareholder. If you look at the numbers, you start to wonder at what price. Bill Mann: Yeah, I don't know that there's a huge opportunity in Costco now, but there's probably no other company at this valuation where you would be more confident with. Okay, they're going to grow into it. Dylan Lewis: I think, in general, given everything we laid out earlier in the show, focusing on quality businesses, ones that consumers love, probably a good place to have your money at this point. Ron Gross: That works, yes. Dylan Lewis: All right, Bill Mann, Ron Gross, fellows, we're going to see you guys a little bit later in the show. Up next, we're heading into the vault for a very special interview to kick off this summer's Fool Fest celebration. Stay right here, you're listening to Motley Fool Money.[MUSIC] Welcome back to Motley Fool Money. I'm Dylan Lewis. This summer here at the Fool, we're returning to a time-honored tradition, Fool Fest. This Sunday through Tuesday. We'll be with Motley Fool members here in Washington, DC, talking stocks and learning a little bit about how the world works and where it's heading. This year's Fool Fest is a particularly special one, we're celebrating our tenth. As part of the pre-event festivities, this week on the radio show, we're revisiting one of the interviews from that first Fool Fest back in 2014. It's Motley Fool CEO Tom Gardner, and author Malcolm Gladwell talking through his book, David and Goliath, and pulling lessons out that we can borrow as we look at small disruptive businesses and whether titans can continue to hold their lead in major industries. Tom Gardner: Malcolm, what would be great is just to have you start by. First of all, thank you so much for coming and spending time with us. Just outline the overall premise of the book. Malcolm Gladwell: Well, I was interested in a book in describing an asymmetrical conflicts, or more generally in this notion of, is our understanding of what an advantage is accurate? That's the theme that runs throughout the whole book. If our understanding of what an advantage is, is so accurate, why does the weaker party in a war win as often as it does? Because the weird thing about, if you look at histories of warfare, is that the underdog, the much smaller party in any conflict wins an astonishing a number of times, which suggests that maybe we're fixating on the wrong variables in explaining conflict. Then I run with that idea and talk about schools and education and dyslexia and all kind of entrepreneurialism and all kind of things along those same lines, wondering whether our intuitive accounting of these things is accurate? Tom Gardner: What I want to do now is search for patterns in your work, in the book that might overlay nicely to looking for disruptive smaller companies might succeed when we make the assumption that Microsoft will, of course, squash every business that gets in its competitive space 15 years ago, and then that doesn't end up happening. Or we assume that Apple must win because Apple is of the size and scope that it is today. We're going to look for more disruptive companies, smaller companies and see if these principles help us find them. Number one would be occupy a spot off the beaten path, so maybe the story of the impressionists and the salon. Malcolm Gladwell: Yeah, so the impressionists are a really interesting group. They come along at a time in the art world, where in Paris, where in France, where there was something called the salon, which was the big art show every year. What every artist did was they competed to get accepted into the salon. The salon was very conservative and had very strict ideas about what was an acceptable painting and the impressionists were doing something radical, and they faced this choice of should they try and get their paintings into the salon, which would mean they would have to dumb them down and make them more conventional, or should they go off on their own and give up all of that prestige and do their own thing. They decide to give up on the salon and do their own thing, and they start their own little show, which in the beginning, no one goes to, which is just in a little upstairs in some little room. That ends up being the greatest thing they ever did because they privileged the freedom to do what they wanted over conforming to a, as it turned out, dying set of standards about what art represented. That is a a tried and true principle for revolutionaries, that before you can challenge the status quo, you need to leave the status quo, right? You need to find a safe haven where you can pursue what you think is the right answer, free of the deadening constraints of conventional thinking. Tom Gardner: Warren Buffett, Omaha, Nebraska leaving New York. Unable to get a job in a way, in New York City and goes off to Omaha where he can carve his own space out, a little bit of the IKEA story in Poland. Malcolm Gladwell: Yeah. Well, I love that story. Inova Kamprad, who has this brilliant idea which is, if you make furniture and don't assemble it, you can ship it flat. You can save on assembly on the manufacturing line, you can ship it flat and save on shipping and sell it for much less. Then he gets shut down in the late 50s by his competitors. He's basically blacklisted in Sweden and facing bankruptcy, and he has his second great idea, which is Poland across the Baltic Sea. Really cheap labor, lots of trees and IKEA. Tom Gardner: In communism. Malcolm Gladwell: Yes, in communism. He's able to pull it off to build up. It's an extraordinary story of how he manages to build his first plant in Poland, because it wasn't easy to build a modern manufacturing facility in Communist Poland in early '61. But it is that notion that he had to and also it's the height of the Cold War and he goes to the enemy. It's like going to North Korea today, essentially the same thing. But he is so convinced of his vision, of his business model, that he's willing to thumb his nose at everyone and leave the country where he came of age. He's never gone back. Tom Gardner: Third factor, you don't overplay your greatest strength. I've phrased it that way from your discussion of the inverted U-curve, and maybe explain that concept. Should a David, even though he has his strength, not think about overdoing it, or is it he's still on this side of the U-curve and should be anchoring hard on his strength as far as he can take it? Malcolm Gladwell: Yeah, the inverted U is a chapter where I talk about how I think one of the mental models we use to describe relationships between resources and outputs, leads us astray. We have this notion that if a little bit of resources, money, makes the problem better, then a lot of money will make the problem best of all go away the most. The answer is no, that I most of the things that of situations where we look at relationships between what you put in and what you get out, the curve does not look like that. The curve looks like that or the curve looks like a U. That in the beginning, things get better, and then they flatten out and then they get worse. I use the example of class size. It is absolutely the case that if classes are very large and you make them smaller, kids will do better. But then there's a long stretch between probably the high 20s and the low 20s, where you could make a class smaller and you will see no effect on kids performance. If you go too far below 20, kids are worse off. There's interesting and compelling evidence of this that it is not a good thing for a child to be in a class with 14 children, 14 other students. One, you cannot get a discussion going with not enough voices in the room. Two, one bad apple can totally ruin a small class, because there's nowhere for that person to hide. Thirdly, that children who are struggling what they need most of all is not more attention from the teacher. What they need most of all is another person a peer who is learning at the same pace as they are, so they don't feel marginal and isolated. You need to have someone who's asking the same question, struggling with the same problems. If a class gets too small, the struggling kids are just wiped out. That's something, a lesson that is so routinely violated. I made fun of expensive private schools in my book, because I'm sorry, they deserve it. They take $50,000 of your money, and they boast to you that your kid is in a class with 12 other students. Whoever said that's a good thing, right? Malcolm Gladwell: All they're doing is justifying the fact that they took 50 grand of your money. Tom Gardner: They have 20 Steinway pianos. That was the Hotchki school. I thought brilliantly pointed out that a school like that is often serving its primary customer, which is the parent. Not actually the outcome for the student, it's to impress the parent that we have the very best of every piece of equipment. Malcolm Gladwell: Where is it written? I even find the whole notion that the point of a classroom is to maximize the attention that a student gets from a teacher is insane. A student has to go through extended periods where they are forced to solve the problem in front of them by themselves. That's called life. The teachers should be there for when you are truly stuck and also should be there to get you to the point where you can solve it on your own. It is not a good thing to have a teacher hovering over your shoulder at all times. That's debilitating. It goes this idea that we sought to make a mistake where we push our use of resources well past the point where they are useful. Tom Gardner: There's a business writer named Elise McCune, and he was the first person to make me see that a company with too much cash, that can be a weakness. Because, of course, as an investor, you're thinking, well, at least I know they've got this huge safety net of billions and billions of cash set aside. But in fact, one of the lines from the local wealth, shirt sleeves or shirt sleeves, and a few generations is that having too much money actually can create a lot of problems and bad incentives inside. Ron Gross: I'm convinced this is at the heart of the R&D drought in Big Pharma. I think that they have overspent on R&D. If you compare, if you look at it, it's really fascinating. We know looking over the last 25 years that the bulk of innovation in the pharmaceutical arena has come from smaller biotech companies, who are spending over the course of developing their products, a fraction of what the big companies are spending. The reaction of big Pharma of that problem is to spend even more money. As opposed to asking, does having virtually unlimited resources available for R&D change the nature of the questions you ask and change the nature of the strategies you pursue and change the nature of what you consider to be a worthwhile product. I think that a lot more time should be spent on wondering whether they have gone too far when it comes to it. Tom Gardner: One last David principle that we might apply to looking at leaders and companies, they truly have nothing to lose. Malcolm Gladwell: I'm always really interested by the difference in the strategies that you pursue when you are in a position of relative strength and when you are in a position of weakness. There is a marked difference, we know that. We all know that intuitively that when our backs to the wall, we consider a wider range of options than when we're in a comfortable position. We all know that the cornered rat is a very, very dangerous opponent, not that struggling companies are rats. Tom Gardner: We have to close to let you get on your way, but could you just close by sharing a little bit about how you think about how we should think about our disadvantages in life? Anyone in the room that sees I have this weakness, I have this flaw, I have this thing that's held me back or this shortcoming, or I see it in my child, I see them struggling with this, how should we think about disadvantages? Malcolm Gladwell: Well, it is a cliche, but as learning opportunities, you can learn by capitalizing on your strengths or you can learn by compensating for your weaknesses. The compensation path is far more difficult, it's far more rare, but it's way more powerful. The things you learn as you are working around or through adversity are lessons that are deeply felt than the things you learn because of your ranks. I chose dyslexia in my book for a reason because there are just so many examples of people who refused to deal. That is just about the most serious impediment you can throw in the path of a child. The idea that there are lots and lots of really successful people who when faced with that impediment at the age of six and seven. Just we're undaunted by it. Just found another way to go about the business of getting through school, and then ultimately through life. That to me is such a beautiful example of how we radically underestimate our ability as human beings to deal with adversity. I think we are much better at it than we think. Tom Gardner: In fairness to the Goliaths, Microsoft and Apple have continued to win over the past decade by pushing into new nascent markets like the Cloud and subscription services, but David has logged a few major victories too. Companies free of the status quo like Tesla and electric vehicles, Netflix and Streaming, Adobe and Salesforce and softwares of Service have all transitioned from Davids to Goliath in their own right since this conversation happened at our first Fool Fest back in 2014, and we think many more Davids will come in the next decade. Listeners, we excited to track them and bring them to you here on the show. Motley Fool members, you can catch the conversations from this year's Fool Fest on our premium site, and podcast listeners, we'll be bringing some of the highlights and interviews from Fool Fest like Cava CEO, Brett Schulman and Morgan Housel, here to you on Motley Fool Money. Coming up next, we've got Ron Gross and Bill Mann coming back to bring us a couple of stocks on their radar. Stay right here. You're listening to Motley Fool Money. Dylan Lewis: As always, people in the program may have interests in the stocks they talk about and the Motley Fool may have formal recommendations for or against so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis joined again by Ron Gross and Bill Mann. The week is coming to a close, gentlemen, but our work is not going to wrap Friday afternoon. We're going to be meeting up with Motley Fool members this weekend at Fool Fest in Washington DC, keeping a long held tradition. Moving forward, Ron, we got members coming into the city, what are you most excited about? Ron Gross: It is so wonderful. One or two times a year, we actually get to hang out and talk with and present to our members. It's literally energizing. It's so wonderful to see everyone. Some faces year after year after year. You see the same folks, you catch up. It's almost like seeing family at a family reunion. It's always a wonderful time. Dylan Lewis: Bill, what about you? Bill Mann: My wife all the time makes fun of me because I describe people as my friends who I've only met online through the Motley Fool until we get to the Fool Fest. If you're not part of that environment, maybe it sounds a little bit weird, but yes, we are seeing people for this one event a year that we truly love, and Ron's exactly right. It's so energizing to be able to interact directly with our friends, some of whom have been with us now for 20 plus years. Dylan Lewis: It's going to be great. We have the members coming in. We also have some of our contributors and some of our fellow analysts and Fools from all over the country coming in. It's gonna be really awesome time. We'll be taking some of those conversations and airing them here on the podcast over the next week or so. If you're not at Fool Fest, you'll be able to get some of the content too. Let's move over to stocks on our radar this week. We've got the OG engineer of Motley Fool Money, Steve Brodo, behind the scenes, and he is going to be the one hitting you with a question. Ron, you're up first. What are you looking at this week? Ron Gross: Steve, I've been hearing a lot of talk about Elf Beauty, E-L-F, which I know nothing about, so I decided to take a look. I think I might actually like what I see. They specialize in cosmetics and skincare. E-L-F is eye, lip, face makeup. They do it at a really attractive price point. They're capturing market share from lots of the bigger players. They're growing really significantly. Last quarter's sales jumped 71% year over year. They use viral marketing, affordable pricing. As I said, they're really gaining market share pretty significantly. They see opportunities overseas. They're growing very quickly there. Now, it's trading at 61 time forward earnings. Growth better continue at a pretty significant clip there for a value guy like me to really be interested, but it looks interesting to me. Dylan Lewis: Steve, a question about Elf beauty. Steve Brodo: You bet, there's a big movement in skincare to move it all online, so you're subscribing a subscription service. Is this in Elf's future to subscriber of Elf's products? Ron Gross: From what I understand, it is in their present and their future in a big way, yes. Dylan Lewis: Bill, what is on your radar this week? Bill Mann: A company that I've liked for a long time. Charles Schwab in 2023 was one of the latent victims of the collapse of Silicon Valley Bank where people naturally went and said, who's next? Charles Schwab suffered from something called cash sorting, which basically meant people had all their money at the brokerage sitting in non interest bearing vehicles, because why bother? There was no such things as interest, and have moved it. Charles Schwab is in a much better place now, but the stock has not fully recovered. I'm really interesting to see they report on Tuesday, they've been showing net new increases in assets that's money coming into the company. I'm really interested to see the developments at Schwab. Dylan Lewis: Steve, a question about Schwab, ticker S-C-H-W. Steve Brodo: You bet, do you think there's any regret around fees and eliminating them? Bill Mann: They make it up on volume, exactly. Thank you. That absolutely is the case. Holding on to those cash assets really matters. Dylan Lewis: That's going to do it for this week's Motley Fool Money Radio Show. Appreciate Bill and Ron being here. Steve, appreciate you weighing in. I'm Dylan Lewis. Until next week, thanks for listening, we'll see you next time JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Citigroup is an advertising partner of The Ascent, a Motley Fool company. Bill Mann has positions in Charles Schwab and Costco Wholesale. Dylan Lewis has positions in Salesforce. Ricky Mulvey has positions in Charles Schwab and Netflix. Ron Gross has positions in Advanced Micro Devices, Apple, Charles Schwab, Costco Wholesale, JPMorgan Chase, Microsoft, and Nvidia. Steve Broido has positions in Adobe, Apple, Citigroup, Microsoft, Netflix, Nvidia, and Salesforce. Tom Gardner has positions in Netflix, Salesforce, and Tesla. The Motley Fool has positions in and recommends Adobe, Advanced Micro Devices, Apple, Charles Schwab, Costco Wholesale, JPMorgan Chase, Microsoft, Netflix, Nvidia, Salesforce, Tesla, and e.l.f. Beauty. The Motley Fool recommends Cava Group and Delta Air Lines and recommends the following options: long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short September 2024 $77.50 calls on Charles Schwab. The Motley Fool has a disclosure policy. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The Big Macro: More Than Inflation

We also take a look at two stocks worth watching: e.l.f. Beauty and Charles Schwab. In this podcast, Motley Fool host Dylan Lewis and analysts Ron Gross and Bill Mann discuss: We go into the vault to hear Motley Fool CEO Tom Gardner talk with author Malcolm Gladwell in 2014 about the lessons that can be borrowed as we look at small disruptive businesses, and whether titans can hold their lead in major industries. To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video. This video was recorded on July 12, 2024. Dylan Lewis: We've got the big picture in full focus and a little preview of Fool Fest 2024. This week's Motley Fool Money radio show starts now. It's the Motley Fool Money radio show. I'm Dylan Lewis. Joining me over the airwaves, Motley Fool Senior Analysts Bill Mann and Ron Gross. Fools, great to have you both here. Ron Gross: How you doing, Dylan? Bill Mann: Dylan, it's really hot outside. Just a bit. I was not informed of this. Dylan Lewis: Listeners, I hope you're staying cool wherever you might be, especially if you're in Washington, DC. We are going to be talking through a bunch of stuff this week. We've got to look at how one chipmaker is trying to seize some of the AI action, a watershed moment in price hikes, and of course, stocks on our radar. We are going to kick off though, looking at the big macro, Ron Fresh inflation data out, we have CPI, we have PPI numbers, we have comments from Fed Chair Powell. Where do you want to start? Ron Gross: Dylan, just when you thought perhaps the data would give us some direction for interest rates, we get contradictory information this week. Interestingly, the market seems to have shrugged it off Friday, very strong market. But let's break it down a little bit. Friday's wholesale price metric which is the producer price index, or PPI, rose more than expected in June. That's basically a negative indicator unless you're a big fan of inflation. The PPI was up 0.2% last month. It was expected to be up only 0.1%. Over the last year, it's up 2.6%. We're doing pretty well relative to a year or two ago, but this was a so-called hotter-than-expected report, and the main number was also revised higher. Now, that contradicts the number we got earlier in the week, which is consumer price index or CPI, and that showed that headline inflation declined on a monthly basis and now sits at 3% year over year. That was the first time since May 2020 that the monthly rate showed a decrease. Now, just in case you're not sick of inflation metrics enough, the Fed's preferred inflation metric is the personal consumption expenditure price index, and that will be released on July 26th. Everyone hold your breath. I know you can't wait, but July 26th will be here soon enough. Bill Mann: I love the thought of someone being a fan of inflation. Dylan Lewis: Paint a chest, sign at the arena, absolutely stoked. Ron, if we look in a vacuum at the inflation side of the Fed's dual mandate, what does it portend when it comes to potential rate hikes or rate decreases? Ron Gross: Well, during the week, Fed Chairman Powell said, "Rates will likely go lower." I don't think there's any misinterpretation about that. It's a matter of when and how much, and he signaled, hey, don't get used to where we were between the financial crisis in 2008 and the pandemic when rates were close to zero or zero. It's unlikely we're going to get back to that. If you had asked me during the week, if rate cuts were coming after CPI came out, I would have said likely in September. On Friday, when PPI came out hot, I'm less sure, futures are still indicating that there will be a cut in September, one of potentially two or three maybe this year. We'll have to see how the data continues. But rates are likely going lower, but they will stay higher than we have been used to over the last decade or two. Dylan Lewis: Zooming in on some of the comments from Fed Chair Powell, one thing that jumped out to me and seemed like a little bit of a tenor shift this time around, Ron, was a focus on the employment side of the Fed's mandate. Talking about here, elevated inflation is not the only risk we face, and Powell going on to say, reducing policy restraint too late or too little could unduly weaken economic activity and employment. We've been talking so much about the inflation side of this, jobs are coming into focus here too. Ron Gross: Yes, the dual mandate. If they only had to worry about one thing, the job would be significantly easier, but they've got to worry about both. Unemployment rate currently 4.1%, that's ticked up from the three years over the last year or so. But that's what they want, the Fed is trying to slow the economy by keeping rates higher, so don't be surprised by that. Labor has been pretty good. 4.1 is still pretty much considered full employment, that's pretty good, and inflation coming down at the same time. They may have just engineered that soft landing that they're hoping for, time will tell. Bill Mann: When you hear things like this, Ron, one of the things that's important to note about the Fed is that they don't have a plasma knife, what they have is a giant sledgehammer in terms of bringing liquidity in or out of the market. One of the things that they are doing is they are predicting what the market is going to be when any of this liquidity added or subtracted matters, which tends to be six to nine months after the move so they are trying to bend their headlights around corners. Dylan Lewis: I would like to see a plasma knife from the Fed. I don't know what it would look like as a monetary instrument. Dylan Lewis: [laughs] We had comments from Fed Chair Powell, we also had comments this week from JP Morgan CEO, Jamie Dimon. We tend to pay attention when he speaks, Bill. What did you see in the commentary from Dimon? Bill Mann: Well, he did say that he saw the inflation coming down, but he has made a point, and he's made this a couple of times before that there are inflationary forces in front of us, including fiscal deficits, and one of the things that he pointed to was the restructuring of trade. One thing that we have to remember is that we have benefited, and not everybody has benefited, but we financially have benefited from being able to essentially export inflation to China over the last 40 years. One of the things that Jamie Dimon has pointed to is those days are over, both from a geopolitical standpoint and from the fact that China is simply not the cheapest manufacturing environment anymore so we don't get the benefit of being of lower prices by virtue of selling out of China. He's pointed to that in the past. He's bringing it up again because I think that he's saying we need to recognize the fact that the game has absolutely changed. Dylan Lewis: One of the other things I'm noticing, just tying Dimon's comments and Powell's comments together here a little bit, Bill, is the scope of considerations is getting larger and larger, and we are starting to put more of the overall economic machinery into focus, as we're looking at rate outlook, as we're looking at economic outlook. It's not just a matter of inflation anymore. Bill Mann: It's not just a matter of inflation anymore. I almost don't know how to think about this, except to say that Jamie Dimon and Jerome Powell are pretty smart people maybe we should assume that they know what they're talking about here. But Jamie Dimon is the one who is probably most credibly ringing the bell that, hey, look, all of the money that we have poured into the federal balance sheet, at some point, that has to be paid off, it has to be maintained, and we really should have an open conversation about it. Dylan Lewis: In addition to the commentary from Dimon, we also got some updates on the earnings results from JP Morgan and other banks, Wells Fargo and Citi. Ron, you did a dive into those results, what jumped out to you? Ron Gross: Yeah, they all started coming out on Friday, and some were better than expected but I think my feeling is overall, they were generally not that great. JP Morgan's quarterly profit fell, that is excluding some one-off gains from their stake in Visa, but their operating profits fell, and that's even as their revenue was higher than Wall Street's expected, and they had a nice jump in investment banking fees. If you move over to Wells Fargo, they had to cut their annual outlook, their profits slipped as well. They're blaming net interest income being down and short of expectations. Now, Citi was up 10%, not too bad. Interestingly, I don't think of Citi Group as a strong investment banking presence, but their investment banking numbers were strong, and that helped them post higher profits. They focused on the fact that investment grade bond issuance was strong, a rebound in the IPO market, although it's still not where it has been in past years. Merger activity is somewhat robust, that helped them as well. Kind of a mixed bag, but overall, I would say the markets, and myself included, were not that impressed by the results. Bill Mann: Some of it, though, Ron, has to do with the fact that the large banks have had a really good performance from the stock market this year, particularly as you compare them to the mid-sized banks and the smaller banks, and I think some of that has to do with still blowback coming from the Silicon Valley Bank collapse last year, in which one of the themes that came out from it was, hey, you actually may be taking more of a risk with your deposits than you thought, and one of the easiest ways to alleviate that risk is to concentrate your deposit franchises on the larger banks. They have benefited, I think, in an outsized way from the crisis from last year. Dylan Lewis: Coming up after a quick break. An acquisition shows that AMD is gunning for Nvidia and its AI opportunity. Stay right here, you're listening to Motley Fool Money. Ricky Mulvey: Ricky Mulvey with Motley Fool Money here to tell you about a vehicle that is redefining sporting luxury, the Range Rover Sport. The first thing I noticed when I sat down in the driver's seat that I felt like I was in a cockpit. You're up off the ground in a focused interior that promotes exhilarating driver engagement. I also really appreciated the overhead 360-degree cam review that let me know exactly where I was going as I was backing out of the parking space. I went for a drive in the Range Rover Sport out in Littleton, Colorado, and tested the accelerator just a little bit and felt the performance and agility. It's an instinctive drive with engaging on-road dynamics and effortless composure. To put it plainly, the Range Rover Sport is powerful. It's also quiet and comfortable, advanced cabin technologies such as active noise cancellation and cabin air purification offer new levels of comfort and refinement. The third-generation Range Rover Sport is the most desirable, advanced, and dynamically capable yet. I'd like to invite you to visit landroverusa.com to learn more about the Range Rover Sport. Dylan Lewis: Welcome back to Motley Fool Money. I'm Dylan Lewis here over the airwaves with Bill Mann and Ron Gross. Chip Maker AMD went shopping this week and scooped up Silo AI, a private AI lab based out of Europe. Bill, they're going to be paying 665 million in an all-cash deal for Silo. What exactly are they getting here? Bill Mann: Why are we even bringing this up? Dylan Lewis: You wanted to break it up, it was your idea. Take us into the production process here. You were the one, Bill. Bill Mann: We're talking about a $665 million deal for a multi-hundred billion-dollar company. AMD is massive, but here is why this is important. AMD has been trying to catch up in the GPU business with Nvidia, and it hasn't ultimately up until now, been about creating a better GPU because Nvidia has a proprietary software platform called CUDA that everybody defaults to in this business. AMD bringing in Silo AI is essentially trying to get to the whole product stage, where they too will have an internal development platform to go along with their GPUs. That's exactly why we're bringing it up, and I resent the question, Dylan, because this is a big deal much bigger than the amount of money that they paid. Dylan Lewis: If we are to pay attention to the important elements of this story, Bill, I think that there is an increased focus on not just the hardware that enables AI, but the software that is layered on top of it that makes it even more useful. Bill Mann: Yeah, and it's not even just that, it's that if you have hardware and software and they operate within a single environment, it's inherently more valuable for the programmers themselves. Lisa Sue, one of the best CEOs in the industry has long seen this as something that they really needed to forge and get to the other side in order to take on what is essentially a monopoly within Nvidia. Dylan Lewis: Over to the friendly skies, results in from Delta this week, and the market didn't exactly love them. Shares down around 5% this week. Ron, What was in the results? Ron Gross: Despite record-high quarterly revenue, the fact that they missed on the earnings side really sent investors heading for the hills. Ron Gross: The main culprit is discounted airfares and there are pressuring earnings across the board. There are just too many seats now in the US market as a result of the post-COVID frenzy to increase capacity, and higher fuel costs also aren't helping and they are hurting margins, as well. The main issue is that as the COVID-19 pandemic ended, airlines tried to catch up with travel demand by buying planes, hiring staff, increasing flight plans, and now the supply of seats just exceeds the demand for them. Thus, you have discounted domestic fares and that hurts margins. For the quarter, Delta was up 5.4% on the revenue side, They are focusing on high end offerings, lounge access, better seating that is paying off for them. Those things are now a significant piece, over half of Delta's revenue comes from those sources, such as loyalty programs, and premium ticket sales. But they're earning less money per seat flown each mile. Adjusted earnings were down 12%, a result of those margin problems. CEO said they are taking pretty significant corrective action across the board, across the industries. Summer travel looks very healthy he said. They did reiterate full-year guidance. Trading at seven times, right? But the industry is also at four, five times, so it's probably the better of all of them. Seven times sounds cheap, but buyer beware when it comes to airlines. Bill Mann: Have you guys flown this summer? Yes. Here's what I want to know. Are these cheaper seats in the room with you now? Because I certainly have a seat. Dylan Lewis: They aren't for me, Bill, but I'm also notoriously a last minute traveler and last minute booker, so I don't know that I'm the right benchmark for that. That sounds like the perfect thing, though, for us to throw out to our listeners and get some boots on the ground reporting [email protected] is where you can send those stories about your own fares. All right, bringing us home for this segment. It's been a good run, but even Costco is raising its prices. The ultimate sign of the times, Ron, the company announcing it will be raising the price of its membership for the first time in seven years. Gold star members will go up $5 to $65, executive will go up $10 to $120. Did you see this one coming? Ron Gross: Yes, it's been on the radar for a while now, so certainly no surprise. As a consumer, I'm OK with it. As an investor and an owner of the stock, I'm absolutely OK with it. It's one wonderful thing about the Costco business model that they do have pricing power to continue to increase these management fees from time to time. About 56% of Costco's operating profits comes from membership fees, not selling, 200 pounds of licorice or whatever your favorite thing is at Costco. It used to be higher, it used to be maybe 75% of operating profit came from membership fees, and this hike will get that higher once again, maybe not back to the 70 or 80 mark. But it's a wonderful business model. As long as they keep us happy by giving us value priced items and keep us coming into the stores and keep us paying that membership fee, that accrues right to the bottom line, and it's a wonderfully run company. Bill Mann: Costco's a perpetual motion machine, if you think about it, right? Their membership was $25 in 1982 and today it's $65. I defy you to find a slower rising price anywhere in American commerce. This is a company that focuses so intently on the customer. There are lots of companies that claim it, but Costco lives and breathes it. Think about their $50 hot dog special and how it's never gone up in price. Costco probably loses money on that, but they make up for that choice by looking at a fast turnover item with ultra-thin margins and recognizing that it requires creativity. Where else do these sorts of things matter? Costco is one of the best deals out there for the consumer. Stock has been up a lot this year, I like the price rise. Dylan Lewis: Bill, do you think there would be more outrage if they increase the price of the hot dog rather than the membership? Bill Mann: Absolutely, people are watching that so intently that if that ever happened, I mean, first of all, there would be warfare in Costco headquarters, but yes, it would be a big deal with the dudes, too. Ron Gross: I would be remiss if I didn't mention that the shares are now trading at 50 times forward earnings as a result of the wonderful increase in the stock price over the last year. We've been saying it's expensive at 30 times, at 40 times, here we are at 50 times. It's one of my largest personal positions, I haven't sold any. Makes you wonder what returns can look like, if we're at 50 times now, I think it's worth thinking about. I just happen to think it's one of the finest run companies in America and I'm happy to be a shareholder. If you look at the numbers, you start to wonder at what price. Bill Mann: Yeah, I don't know that there's a huge opportunity in Costco now, but there's probably no other company at this valuation where you would be more confident with. Okay, they're going to grow into it. Dylan Lewis: I think, in general, given everything we laid out earlier in the show, focusing on quality businesses, ones that consumers love, probably a good place to have your money at this point. Ron Gross: That works, yes. Dylan Lewis: All right, Bill Mann, Ron Gross, fellows, we're going to see you guys a little bit later in the show. Up next, we're heading into the vault for a very special interview to kick off this summer's Fool Fest celebration. Stay right here, you're listening to Motley Fool Money.[MUSIC] Welcome back to Motley Fool Money. I'm Dylan Lewis. This summer here at the Fool, we're returning to a time-honored tradition, Fool Fest. This Sunday through Tuesday. We'll be with Motley Fool members here in Washington, DC, talking stocks and learning a little bit about how the world works and where it's heading. This year's Fool Fest is a particularly special one, we're celebrating our tenth. As part of the pre-event festivities, this week on the radio show, we're revisiting one of the interviews from that first Fool Fest back in 2014. It's Motley Fool CEO Tom Gardner, and author Malcolm Gladwell talking through his book, David and Goliath, and pulling lessons out that we can borrow as we look at small disruptive businesses and whether titans can continue to hold their lead in major industries. Tom Gardner: Malcolm, what would be great is just to have you start by. First of all, thank you so much for coming and spending time with us. Just outline the overall premise of the book. Malcolm Gladwell: Well, I was interested in a book in describing an asymmetrical conflicts, or more generally in this notion of, is our understanding of what an advantage is accurate? That's the theme that runs throughout the whole book. If our understanding of what an advantage is, is so accurate, why does the weaker party in a war win as often as it does? Because the weird thing about, if you look at histories of warfare, is that the underdog, the much smaller party in any conflict wins an astonishing a number of times, which suggests that maybe we're fixating on the wrong variables in explaining conflict. Then I run with that idea and talk about schools and education and dyslexia and all kind of entrepreneurialism and all kind of things along those same lines, wondering whether our intuitive accounting of these things is accurate? Tom Gardner: What I want to do now is search for patterns in your work, in the book that might overlay nicely to looking for disruptive smaller companies might succeed when we make the assumption that Microsoft will, of course, squash every business that gets in its competitive space 15 years ago, and then that doesn't end up happening. Or we assume that Apple must win because Apple is of the size and scope that it is today. We're going to look for more disruptive companies, smaller companies and see if these principles help us find them. Number one would be occupy a spot off the beaten path, so maybe the story of the impressionists and the salon. Malcolm Gladwell: Yeah, so the impressionists are a really interesting group. They come along at a time in the art world, where in Paris, where in France, where there was something called the salon, which was the big art show every year. What every artist did was they competed to get accepted into the salon. The salon was very conservative and had very strict ideas about what was an acceptable painting and the impressionists were doing something radical, and they faced this choice of should they try and get their paintings into the salon, which would mean they would have to dumb them down and make them more conventional, or should they go off on their own and give up all of that prestige and do their own thing. They decide to give up on the salon and do their own thing, and they start their own little show, which in the beginning, no one goes to, which is just in a little upstairs in some little room. That ends up being the greatest thing they ever did because they privileged the freedom to do what they wanted over conforming to a, as it turned out, dying set of standards about what art represented. That is a a tried and true principle for revolutionaries, that before you can challenge the status quo, you need to leave the status quo, right? You need to find a safe haven where you can pursue what you think is the right answer, free of the deadening constraints of conventional thinking. Tom Gardner: Warren Buffett, Omaha, Nebraska leaving New York. Unable to get a job in a way, in New York City and goes off to Omaha where he can carve his own space out, a little bit of the IKEA story in Poland. Malcolm Gladwell: Yeah. Well, I love that story. Inova Kamprad, who has this brilliant idea which is, if you make furniture and don't assemble it, you can ship it flat. You can save on assembly on the manufacturing line, you can ship it flat and save on shipping and sell it for much less. Then he gets shut down in the late 50s by his competitors. He's basically blacklisted in Sweden and facing bankruptcy, and he has his second great idea, which is Poland across the Baltic Sea. Really cheap labor, lots of trees and IKEA. Tom Gardner: In communism. Malcolm Gladwell: Yes, in communism. He's able to pull it off to build up. It's an extraordinary story of how he manages to build his first plant in Poland, because it wasn't easy to build a modern manufacturing facility in Communist Poland in early '61. But it is that notion that he had to and also it's the height of the Cold War and he goes to the enemy. It's like going to North Korea today, essentially the same thing. But he is so convinced of his vision, of his business model, that he's willing to thumb his nose at everyone and leave the country where he came of age. He's never gone back. Tom Gardner: Third factor, you don't overplay your greatest strength. I've phrased it that way from your discussion of the inverted U-curve, and maybe explain that concept. Should a David, even though he has his strength, not think about overdoing it, or is it he's still on this side of the U-curve and should be anchoring hard on his strength as far as he can take it? Malcolm Gladwell: Yeah, the inverted U is a chapter where I talk about how I think one of the mental models we use to describe relationships between resources and outputs, leads us astray. We have this notion that if a little bit of resources, money, makes the problem better, then a lot of money will make the problem best of all go away the most. The answer is no, that I most of the things that of situations where we look at relationships between what you put in and what you get out, the curve does not look like that. The curve looks like that or the curve looks like a U. That in the beginning, things get better, and then they flatten out and then they get worse. I use the example of class size. It is absolutely the case that if classes are very large and you make them smaller, kids will do better. But then there's a long stretch between probably the high 20s and the low 20s, where you could make a class smaller and you will see no effect on kids performance. If you go too far below 20, kids are worse off. There's interesting and compelling evidence of this that it is not a good thing for a child to be in a class with 14 children, 14 other students. One, you cannot get a discussion going with not enough voices in the room. Two, one bad apple can totally ruin a small class, because there's nowhere for that person to hide. Thirdly, that children who are struggling what they need most of all is not more attention from the teacher. What they need most of all is another person a peer who is learning at the same pace as they are, so they don't feel marginal and isolated. You need to have someone who's asking the same question, struggling with the same problems. If a class gets too small, the struggling kids are just wiped out. That's something, a lesson that is so routinely violated. I made fun of expensive private schools in my book, because I'm sorry, they deserve it. They take $50,000 of your money, and they boast to you that your kid is in a class with 12 other students. Whoever said that's a good thing, right? Malcolm Gladwell: All they're doing is justifying the fact that they took 50 grand of your money. Tom Gardner: They have 20 Steinway pianos. That was the Hotchki school. I thought brilliantly pointed out that a school like that is often serving its primary customer, which is the parent. Not actually the outcome for the student, it's to impress the parent that we have the very best of every piece of equipment. Malcolm Gladwell: Where is it written? I even find the whole notion that the point of a classroom is to maximize the attention that a student gets from a teacher is insane. A student has to go through extended periods where they are forced to solve the problem in front of them by themselves. That's called life. The teachers should be there for when you are truly stuck and also should be there to get you to the point where you can solve it on your own. It is not a good thing to have a teacher hovering over your shoulder at all times. That's debilitating. It goes this idea that we sought to make a mistake where we push our use of resources well past the point where they are useful. Tom Gardner: There's a business writer named Elise McCune, and he was the first person to make me see that a company with too much cash, that can be a weakness. Because, of course, as an investor, you're thinking, well, at least I know they've got this huge safety net of billions and billions of cash set aside. But in fact, one of the lines from the local wealth, shirt sleeves or shirt sleeves, and a few generations is that having too much money actually can create a lot of problems and bad incentives inside. Ron Gross: I'm convinced this is at the heart of the R&D drought in Big Pharma. I think that they have overspent on R&D. If you compare, if you look at it, it's really fascinating. We know looking over the last 25 years that the bulk of innovation in the pharmaceutical arena has come from smaller biotech companies, who are spending over the course of developing their products, a fraction of what the big companies are spending. The reaction of big Pharma of that problem is to spend even more money. As opposed to asking, does having virtually unlimited resources available for R&D change the nature of the questions you ask and change the nature of the strategies you pursue and change the nature of what you consider to be a worthwhile product. I think that a lot more time should be spent on wondering whether they have gone too far when it comes to it. Tom Gardner: One last David principle that we might apply to looking at leaders and companies, they truly have nothing to lose. Malcolm Gladwell: I'm always really interested by the difference in the strategies that you pursue when you are in a position of relative strength and when you are in a position of weakness. There is a marked difference, we know that. We all know that intuitively that when our backs to the wall, we consider a wider range of options than when we're in a comfortable position. We all know that the cornered rat is a very, very dangerous opponent, not that struggling companies are rats. Tom Gardner: We have to close to let you get on your way, but could you just close by sharing a little bit about how you think about how we should think about our disadvantages in life? Anyone in the room that sees I have this weakness, I have this flaw, I have this thing that's held me back or this shortcoming, or I see it in my child, I see them struggling with this, how should we think about disadvantages? Malcolm Gladwell: Well, it is a cliche, but as learning opportunities, you can learn by capitalizing on your strengths or you can learn by compensating for your weaknesses. The compensation path is far more difficult, it's far more rare, but it's way more powerful. The things you learn as you are working around or through adversity are lessons that are deeply felt than the things you learn because of your ranks. I chose dyslexia in my book for a reason because there are just so many examples of people who refused to deal. That is just about the most serious impediment you can throw in the path of a child. The idea that there are lots and lots of really successful people who when faced with that impediment at the age of six and seven. Just we're undaunted by it. Just found another way to go about the business of getting through school, and then ultimately through life. That to me is such a beautiful example of how we radically underestimate our ability as human beings to deal with adversity. I think we are much better at it than we think. Tom Gardner: In fairness to the Goliaths, Microsoft and Apple have continued to win over the past decade by pushing into new nascent markets like the Cloud and subscription services, but David has logged a few major victories too. Companies free of the status quo like Tesla and electric vehicles, Netflix and Streaming, Adobe and Salesforce and softwares of Service have all transitioned from Davids to Goliath in their own right since this conversation happened at our first Fool Fest back in 2014, and we think many more Davids will come in the next decade. Listeners, we excited to track them and bring them to you here on the show. Motley Fool members, you can catch the conversations from this year's Fool Fest on our premium site, and podcast listeners, we'll be bringing some of the highlights and interviews from Fool Fest like Cava CEO, Brett Schulman and Morgan Housel, here to you on Motley Fool Money. Coming up next, we've got Ron Gross and Bill Mann coming back to bring us a couple of stocks on their radar. Stay right here. You're listening to Motley Fool Money. Dylan Lewis: As always, people in the program may have interests in the stocks they talk about and the Motley Fool may have formal recommendations for or against so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis joined again by Ron Gross and Bill Mann. The week is coming to a close, gentlemen, but our work is not going to wrap Friday afternoon. We're going to be meeting up with Motley Fool members this weekend at Fool Fest in Washington DC, keeping a long held tradition. Moving forward, Ron, we got members coming into the city, what are you most excited about? Ron Gross: It is so wonderful. One or two times a year, we actually get to hang out and talk with and present to our members. It's literally energizing. It's so wonderful to see everyone. Some faces year after year after year. You see the same folks, you catch up. It's almost like seeing family at a family reunion. It's always a wonderful time. Dylan Lewis: Bill, what about you? Bill Mann: My wife all the time makes fun of me because I describe people as my friends who I've only met online through the Motley Fool until we get to the Fool Fest. If you're not part of that environment, maybe it sounds a little bit weird, but yes, we are seeing people for this one event a year that we truly love, and Ron's exactly right. It's so energizing to be able to interact directly with our friends, some of whom have been with us now for 20 plus years. Dylan Lewis: It's going to be great. We have the members coming in. We also have some of our contributors and some of our fellow analysts and Fools from all over the country coming in. It's gonna be really awesome time. We'll be taking some of those conversations and airing them here on the podcast over the next week or so. If you're not at Fool Fest, you'll be able to get some of the content too. Let's move over to stocks on our radar this week. We've got the OG engineer of Motley Fool Money, Steve Brodo, behind the scenes, and he is going to be the one hitting you with a question. Ron, you're up first. What are you looking at this week? Ron Gross: Steve, I've been hearing a lot of talk about Elf Beauty, E-L-F, which I know nothing about, so I decided to take a look. I think I might actually like what I see. They specialize in cosmetics and skincare. E-L-F is eye, lip, face makeup. They do it at a really attractive price point. They're capturing market share from lots of the bigger players. They're growing really significantly. Last quarter's sales jumped 71% year over year. They use viral marketing, affordable pricing. As I said, they're really gaining market share pretty significantly. They see opportunities overseas. They're growing very quickly there. Now, it's trading at 61 time forward earnings. Growth better continue at a pretty significant clip there for a value guy like me to really be interested, but it looks interesting to me. Dylan Lewis: Steve, a question about Elf beauty. Steve Brodo: You bet, there's a big movement in skincare to move it all online, so you're subscribing a subscription service. Is this in Elf's future to subscriber of Elf's products? Ron Gross: From what I understand, it is in their present and their future in a big way, yes. Dylan Lewis: Bill, what is on your radar this week? Bill Mann: A company that I've liked for a long time. Charles Schwab in 2023 was one of the latent victims of the collapse of Silicon Valley Bank where people naturally went and said, who's next? Charles Schwab suffered from something called cash sorting, which basically meant people had all their money at the brokerage sitting in non interest bearing vehicles, because why bother? There was no such things as interest, and have moved it. Charles Schwab is in a much better place now, but the stock has not fully recovered. I'm really interesting to see they report on Tuesday, they've been showing net new increases in assets that's money coming into the company. I'm really interested to see the developments at Schwab. Dylan Lewis: Steve, a question about Schwab, ticker S-C-H-W. Steve Brodo: You bet, do you think there's any regret around fees and eliminating them? Bill Mann: They make it up on volume, exactly. Thank you. That absolutely is the case. Holding on to those cash assets really matters. Dylan Lewis: That's going to do it for this week's Motley Fool Money Radio Show. Appreciate Bill and Ron being here. Steve, appreciate you weighing in. I'm Dylan Lewis. Until next week, thanks for listening, we'll see you next time