Fragile Foundations: Ross Atefi on AI Euphoria, Market Concentration & the $500K Tax Trap

In this episode of Lead-Lag Live, I sit down with Ross Atefi, Founder and Wealth Advisor at Yatra Wealth Design, to break down why he believes the market is more fragile than headlines suggest.

From AI mania to the quiet collapse in housing and jobs data, Ross explains how extreme concentration and stretched valuations have set up an environment that echoes the late ’90s bubble — and what investors need to watch next.

In this episode:
– Why the S&P 500’s “diversification” is a dangerous illusion
– How AI spending is draining the cash that used to reward shareholders
– The warning signals in housing and employment data
– Why money supply matters more than Fed rhetoric when it comes to inflation
– The $500K–$600K tax trap created by the “one big, beautiful bill” and how to avoid it

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Chapters

• 0:00 Markets At Highs, Risks Mount
• 2:50 Concentration Meets Extreme Valuations
• 5:45 AI Euphoria vs. Real Adoption
• 8:50 Capex Is Eating Shareholder Cash
• 11:45 Housing Rollovers And Job Revisions
• 16:05 Inflation Through The Money Supply Lens
• 18:55 The 500K–600K Tax Trap Explained
• 21:35 Macro Playbook: Liquidity And Cycles

Transcript

SPEAKER_00: 0:36

The one big beautiful bill, which is the new tax law that just got passed, that's directly and immediately impacting your taxes for 2025. If you're a high income earner, so if you make above$500,000 a year, you could be impacted by this tax trap.

SPEAKER_01: 1:05

I'm your host, Melanie Schaefer. Welcome to Lead Leg Live. Now, markets are at all-time highs, even as the US government remains in a partial shutdown. Even as equities are flying higher, gold is pushing past 4,000 for the first time ever as investors hedge against uncertainty. At the same time, AI optimism is colliding with stretched valuations, leaving many wondering if the foundation is as solid as the headlines suggest. My guest today is Ross Atefi, founder and wealth advisor at Yattra Wealth Design. Ross is known for his macro-driven perspective, blending insights on market concentration, housing, and jobs data. And he's been shining a spotlight on what he calls the 500K to 600K tax trap, a consequence of Trump's so-called one big beautiful bill and a critical issue for many investors that often goes overlooked. Ross, welcome.

SPEAKER_00: 2:05

Good to see you, Nelly. Thank you.

SPEAKER_01: 2:08

So uh let's start with market concentration and valuations. You've called it an uncomfortable and even fragile combination. Why do you think the current setup is so risky for investors?

SPEAKER_00: 2:20

Yeah, frankly, uh, we're in a setup that's really historically very fragile. Uh, you've got extreme market concentration that's layered on top of extreme valuations, right? So right now, the top 10 companies in the S P 500 make up about 40% of the index. So 40% of the market cap of the index. And that's the highest level ever of all times, right? So uh people may think that they're diversified when they own the S P 500, right? Because it's 500 stocks. But the truth of the matter is right now, their returns are essentially being driven by 10 companies, right? 10 giant mega cap stocks. And if just one or two of those fall or stumble, or there's some something that comes up that people didn't anticipate, causing the price to crash, the whole market can lurch. And frankly, we've seen this movie before. So the last time the market was this concentrated was during the early uh late 90s, early 2000s tech bubble, right? And um, you know, we know what happened then. The market crashed from 2000 to 2002, went down about 50%. And even tech companies went down about 85% during that crash. Um, and what's interesting is if you look back, uh, only one company from from back then, um, again, the late 90s, early 2000s bubble, only one company from that that period of time um is still in the top 10, which is Microsoft. And uh most of the other companies from or that that top 10 list, at least half of them, like Cisco, Intel, Nokia, General Electric, and Citigroup, those companies all went on to drastically underperform for the next foreseeable future. And that's really a powerful reminder that today's winners, or at least the you know, that that the market perceives as you know, can't miss, can't lose winners, are oftentimes not tomorrow's winners. And market leadership, it often looks permanent until it changes. Um that's that's the concern I have around that. And then if you layer on top, just how high market valuations are overall. So we're talking uh price to earnings ratios, we're talking price to sales ratios, we're talking cyclically adjusted price to earnings uh ratios, which you know average out the last 10 years. Those are all in either all-time high levels or you know, one of the all-time high levels. So very extreme. And that combination of market concentration along with high valuations is a very dangerous combination. It really just means the market is fragile and uh and vulnerable, frankly. So with that in mind, I think it's it's a really good idea to think about um ways of diversifying.

SPEAKER_01: 5:21

Yeah, and speaking of the concentration, I mean, A AI has captured the market's imagination, but enterprise adoption takes time. How do you see the tension between AI euphoria and business reality shaping investor outcomes?

SPEAKER_00: 5:36

Right. So there's no question in my mind, I think most people's minds, that uh artificial intelligence is truly a game changer, right? I mean, I use it all the time uh for research and and creating content and many other things. And and I know it, you know, it's it's gonna help drive a productivity boom. Um, and and and it's you know, it's it's incredible. With that said, uh what we're seeing is what we've seen in the past with any new technology that comes along is that it takes time to figure out how to integrate it into systems and corporations um to really drive that productivity boom. We saw that with the internet in the late 90s, and and really every significant technology that comes along, um, there's an adoption period, right? And and recent studies have have shown that as powerful as AI is, um, not only, you know, only a small fraction of the AI projects that are being implemented are actually driving meaningful progress. And about 90 to 95% of them are actually not really doing anything and have kind of been ended up being a big time and money waster. And so um, you know, this euphoria about AI in the markets, I think is a little ahead of where the technology and the implementation actually is.

SPEAKER_01: 6:55

You've pointed out that the AI build out is eating up the very cash that pays investors. Can you explain exactly what you mean by that dynamic?

SPEAKER_00: 7:04

Yeah, absolutely. So these these large megacap uh tech companies, um, you know, you can think Microsoft, Google, Amazon, uh, these companies are all spending tens of billions of dollars to build out infrastructure for this AI boom, right? Uh a lot of it going into video, of course, but many other places. And, you know, they're having to build data centers, they're having to buy chips, they're having to access power, uh, water rights, so many things to enable this build-out of infrastructure. And um, you know, the reality is that cash is being spent. And so the money is being spent on these infrastructure projects and this build-out. And that cash historically would have would have been the free cash flow that these companies would have used to return that money to shareholders, right? So they would have used that free cash flow historically for buying back shares. They would have used it for uh you know, for dividend payouts, right? Um, and so right now their free cash flow, which again is is basically cash left over after spending on everything they need to spend on, is quite low. It's actually declining. So even though these mega cap tech companies, their earnings look really strong, earnings doesn't take into consideration their capex, you know, their capital expenditures, right? And so the money that's going out for this capex spending is not reflected in the growing earnings. So if you actually look at their free cash flow, which is actually declining, and you measure that against the rising stock prices, the valuations are even more extreme. And again, I think this is a real cause for concern.

SPEAKER_01: 8:51

Russ, I want to pivot for uh for a moment. Talk about, you know, the housing data is rolling over and jobs numbers are being revised sharply lower. Why do you see those as important warning signals for the broader market?

SPEAKER_00: 9:05

Absolutely, Melanie. So housing and uh employment are oftentimes very indicative of the health of the economy today, as well as where the economy is headed. And what we're seeing in the housing market, for example, is really all major aspects of the housing market are rolling over and in decline. So we're seeing um everything from uh essentially all-time low transaction volume, meaning very little buying and selling is happening. Um, we're seeing even price declines in the housing market. Uh, we're seeing uh a reduction in building of homes. And so, you know, if you if you look at basically all the major metrics, you're seeing a decline in the housing market, right? And when you have a decline in the housing market or a slowdown at a minimum, that has uh tendrils that that affect a lot of other areas. So you have you know less transactions happening, less homes being bought and sold. That means that people are spending less on furniture, they're they're they're they're not moving as much. Um, you know, the new construction is going down. That means that uh the construction industry is being impacted. And um, you know, there's real realtors that are that are making less. There's mortgage companies that are making less, right? So there's a lot of different um you know impacts along the way. And of course, that um reduction eventually that leads to reduction in employment in the construction industry and the real estate industry overall. And then that feeds through into a larger and larger piece of the economy. Um, and and eventually leads to what we're seeing right now, which is weakness in the labor market. Uh, and and that's another area of the economy that we're seeing kind of roll over and really weaken right now. Um and so you know, you have the housing market declining, that's that's impacting the you know, the rest of the economy over over time. And then we're seeing employment even um rolling over, which you know, employment is even more of an indicator of what's actually happening today. So oftentimes housing is a leading indicator. If if it's going down, it means the economy is you know eventually gonna decline, you know, broader sloth because it kind of leads the charge. Um, but employment is already declining. And and we've seen uh with the recent employment revisions, um, so there was a very large revision from March of 2024 to March of 25, where the BLS or the Bureau of Labor Statistics basically said, oh, you know, we actually got it wrong and we had to take away almost a million jobs over that period, right? So that those a million jobs, they didn't, they actually don't exist, right? And then um in the most recent uh two non-farm payroll reports, which is uh the monthly report that the BLS puts out, they also did a massive revision of, I think, over 200,000 jobs. Um and then in the most recent ADP report, uh jobs report, it was actually showing uh a negative month-over-month change in jobs. And so, you know, we're seeing these consistent negative, large revisions in employment. And then we're also seeing actually negative employment across a variety of um, you know, data as well currently. So what that tells me is, you know, the economy is a lot weaker than people realize, and and certainly what the stock market is pricing in. Um and I think that weakness will continue and eventually uh feed through into asset markets.

SPEAKER_01: 12:40

For us, inflation has remained as stubbornly above target for years now. How do you think about inflation risk today? And what's your playbook for investors who need to navigate that uncertainty?

SPEAKER_00: 12:52

Yeah, so the key to understanding inflation is to look at what actually drives it, right? And that starts with the money supply, not just interest rates or supply chains. One quick example. So we saw massive and sticky inflation after the pandemic in 2020 through 2022. And that's because the money supply, so the money supply is simply this the number of dollars that exists in the system, that exploded by more than 40% in just those two years. So again, you had a certain amount of money that was in the system in 2020, and then in 2022, that was up by 40%. And when that much money enters the system, the value of each dollar is diluted. And so it's not that goods or services suddenly became more valuable or so difficult to come by, it's just that the purchasing power of the money fell. Uh, and so you have way more money chasing after the same amount of goods and services, right? Um, and you know, for in fact, research has shown that there's never been a significant inflation anywhere in the world without a preceding significant increase in the money supply. So, really, the two move together uh over time. And so over the last year, the uh inflation rate has moderated. So, again, the inflation rate means the increase in prices. Um and so the inflation rate has moderated and slowed. And that's because the money supply has pretty much been stable for the last couple years. So, you know, prices in aggregate are still really high compared to a few years ago because the money supply went up so much from 2020 to 2022. So this the stock of money is still a lot higher than it was, you know, five years ago. But the rate of change has gone down. And so the rate of inflation, the rate of increasing prices is relatively stable in that 2 to 3% range. And we think it'll stay there for the foreseeable future until we see some sort of big change in the money supply. Uh, and I think this is important for consumers, but also uh for our investment process, because you know, where inflation is and where it's headed, um, you know, different asset classes do better in higher inflation environments and worse in low inflation environments, and vice versa. So we're always tracking both inflation uh and and the money supply, as well as liquidity, which is a little bit different, um, but we track both of those because those um directly impact uh, you know, our asset selection.

SPEAKER_01: 15:32

Roger, I want to ask you something for that will be of big interest to the higher earning households uh that are watching us right now. And that's the 500k to 600k tax trap. Can you explain what it is, who it affects, and what steps investors should be thinking about now in order to avoid it?

SPEAKER_00: 15:49

Yeah, so the one big beautiful bill, which is the new tax law that just got passed, um, that's directly and immediately impacting your taxes for 2025. And uh if you're a high income earner, so if you make above$500,000 a year, you could be impacted by this tax trap. And essentially what it is is um the new the one big beautiful bill caused the state and local tax deduction to go from 10,000 to 40,000. But if you earn above 500,000 of income, you start to get phased out of that state and local tax deduction. So if you're in a high tax state, especially like California, New York, Connecticut, New Jersey, et cetera, um, you you could be significantly impacted in a negative way by losing that state and local tax deduction or at least getting phased out back down to from from 40,000 down to 10,000. And the impact of that could mean tens of thousands of dollars of unnecessary taxes, right? Uh and so we suggest that doing some proactive planning right now, so during 2025 tax year, while you you can make a bigger impact is uh is a critical strategy and something that we help our clients with.

SPEAKER_01: 17:05

Yeah, and and sort of getting to the into the end of things, but I want to ask you about your investment process, which is macro driven. You you track liquidity and economic cycles as part of your approach. Can you break down in plain English what that means and how it guides your playbook in this environment?

SPEAKER_00: 17:22

Sure, Melanie. So at Yatra, uh, we use a macro investing framework that's really designed to help us navigate the natural cycles in the markets and the economy. And one of the key things that we track is global liquidity, because global liquidity tends to lead global asset crises. And you can think of liquidity as fuel or sort of oxygen for the financial system. So when it's abundant, money's flowing easily, markets tend to rise, and the economy tends to expand as economic activity activity grows. Uh, when that liquidity tightens, that flow or that spigot slows down, and it's uh often sets the stage for downturns, right? Um and so as liquidity markets and the economy move through the different phases. So let's say, just to keep it simple, expansion, slowdown, contraction, and then recovery, uh different types of assets tend to outperform or underperform depending on where we are in that in that cycle. Uh and so you know, by tracking those shifts and the changes in liquidity and the cycle, we're able to adjust our portfolios to over-allocate or underallocate in the different asset classes that should outperform uh depending on where we're at in the cycle. So for example, you know, when liquidity is rising, you'll often see growth and tech lead because uh credit's easy and investors are willing to pay higher prices for future earnings, which is what we've been seeing for the you know, re in the recent past. Um and when liquidity tightens, uh real assets tend to do pretty well because investors start to look for real assets could be in you know real estate, it could be in infrastructure, things that are producing meaningful cash flows today. So as liquidity's liquidity starts to tighten a little bit, investors are saying, okay, I'm not just looking for cash flows five, 10 years from now. I want cash flows today, right? Um, and then as liquidity really tightens and starts to contract, that's when um asset markets could start to fall and the economy could start to contract. And that's where you start to want to overallocate into more conservative investments like cash and bonds and gold as well. Uh and so, you know, across all of that, we keep a strong valuation tilt, meaning, you know, we want to also consider how expensive or cheap are different asset classes relative to their fundamentals, because that's one of the most critical determinants of long-term returns. And we also always stay diversified. So, you know, stocks, bonds, real estate, real assets, gold, commodities, et cetera, uh, we always stay diversified across a range of asset classes. But again, this tracking of the cycles and liquidity helps us to determine how much to put into the different asset classes. And, you know, we find that that doing this can help us to see a higher return and lower risk for our clients.

SPEAKER_01: 20:32

Torres, for anyone who wants to follow your work and learn more about your approach at Yatra Wealth Design, where's the best place for them to go to connect with you?

SPEAKER_00: 20:40

Yeah, so go ahead and check out our website. It's Yatra Y-A-T-R-A Wealth Design D-E-S-I-G-N.com. And you can learn more about what we do and how we help our clients. If you'd like to reach out to me directly, you can email me at Ross at YatraWealth Design.com.

SPEAKER_01: 20:59

Perfect. So especially for our high earning viewers, make sure to head over to Ross's website. And Ross, thanks so much again for joining me. And thanks to everyone for watching. Be sure to like, share, and subscribe for more episodes of Lead Leg Live. See you next time.