Part 2: Your Index Fund Is a Bet on AI — Whether You Know It or Not
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What is the main topic discussed in this episode?
your index fund isn't your index fund anymore. Meaning that the S&P 500 index funds are heavily weighted toward the hyperscalers, so your index fund is a bet on the AI economy. So if you think that your index fund is still helping you profit from a broad swath of the market, it's not.
That was Bethany McLean, veteran investigative journalist and co-author of The Smartest Guys in the Room. I'm Motley Fool analyst Rachel Warren. Last week, Bethany and I talked through the psychology of corporate fraud, the red flags investors miss, and what really separates a visionary CEO from a fraudster. This week in part two, we turn the lens on the market right now, the AI trade, what's happening to the free cash flow of the biggest companies in the world, and why the investment you think is keeping you safe may not be doing what you think it is. We hope you enjoy. Your book, The Big Fail, talked about what the pandemic revealed about who America's financial systems tend to protect. And I'd like to talk about this from a market perspective.
How did factors like government bailouts, vet interventions break that natural kind of market cycle of creative destruction and what we see now?
Yeah. And I think it's a really important issue for today because it's one that Kevin Walsh, the new Fed chair, is going to have to contend with. There's much discussed is this issue of political independence, the Fed being independent from politicians. Less discussed is the issue of financial dependence, the Fed being independent from Wall Street. And the reality is, is that the Fed did not intend it this way. But over the past couple of decades, going back to maybe even earlier, the bailout of this big hedge fund called Long-Term Capital Management, the Fed has been more and more a captive of Wall Street. in that the Fed is afraid to let the market break. And so the pandemic, you can argue that's exactly what the Fed needed to do because the market was breaking.
But nonetheless, it provided reassurance to Wall Street that when the proverbial whatever hits the fan, the Fed will always step in. And that kind of belief in a backstop is what people call moral hazard. And I think that it is not great. And I think it is a big risk for our financial system because every time the Fed pushes the boundaries of what it can do and pushes them further and further and further. And the question is, how much further can they be pushed because the bailouts keep getting bigger in size? So I think that's a real risk. And the problem with that sort of policy is that it does benefit the big and the well-off, not the small and the less well-off. So Fed policy really benefited big corporations that needed access to the debt market in the pandemic.
It benefited well-off individuals who, because the stock market soared, obviously, in the wake of the Fed's actions. So people who had exposure to the stock market did really, really well. It benefited small companies who didn't have access to the capital markets, not at all. And the government obviously tried to come up with a lending plan for them that was much better than nothing. But it doesn't benefit small companies. And then it allows the big to consolidate, which makes life even more hard on the small. And this action really didn't benefit consumers who are less or citizens who are less well-off, who don't have exposure to the market because it helped cause inflation. The debate of how much Fed policy contributed to
The inflation we experienced and are still experiencing is a raging debate, but it definitely didn't help matters. And inflation hurts people at the lower end of the income spectrum a lot, while the gains in asset prices don't do much to help them.
You know, we live in an era of a lot of hype in the markets here at The Motley Fool. Obviously, we talk a lot about the quality businesses to invest in, but certainly it's also a time of, you know, we've seen meme stocks, retail options trading, financial influencers. I'm curious to hear your thoughts on how the democratization of market data mixed with Internet hype has really changed the speed at which corporate narratives inflating and collapse and really the ways to determine the hype from the value in that environment.
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Chapters
4 chapters
1
What is the main topic discussed in this episode?
0:03–5:43
2
How did pandemic-era bailouts change the Fed’s relationship with Wall Street?
5:43–8:11
3
Why does moral hazard from Fed interventions risk financial stability?
8:11–20:31
4
How has retail access to market data and hype changed investment behavior?
20:31–24:07