mattee2264
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Posts posted by mattee2264
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Grantham bearish as usual on the US stock market but sees good opportunities in climate related investments
https://www.gmo.com/europe/research-library/the-great-paradox-of-the-u.s.-market_viewpoints
"Climate-related investments: With increasing climate damage and the increasing willingness of governments to take action, I believe climate investments will have top-line revenue growth that is guaranteed to be above average for the next many decades, although with no guarantees as to the smoothness of that growth. But, with all the cost of solar, wind, etc. being up front and little of the cost being operational, climate investments are exceptionally discount rate-sensitive, which has hammered them over the past two and a half years. And in its usual way, the market has overreacted to the trend of rising rates, making these investments real bargains today. Today, solar stocks are priced at over a 50% discount to the broad equity market, and some of the best clean energy companies in the world trade at levels that imply negative real growth"
Anything climate related bubbled up in the aftermath of the pandemic and then got killed when interest rates rose. But therein perhaps lies the opportunity. Especially as market
attention has switched to anything AI related and cryptos are back in favour.
Of course renewables have always struggled to stand up on their own two feet without subsidies and other government grants and the energy transition isn't going to happen overnight which doesn't jive well with investors increasingly short time horizons. But over the long term we are going to have to get a much higher share of our energy from renewables.
https://www.ishares.com/us/products/239738/ishares-global-clean-energy-etf seems a know-nothing investor way to play this theme. And the chart below shows that its price has returned to pre-pandemic levels irrespective of the fact that ESG reporting is becoming a way bigger deal and climate change is being taken increasingly serious.
But interested if anyone on here has any specific names they favour.
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Isn't it a little worrying for Mag7 investors that a start-up founded only a few years ago can release LLMs that compare favourably to the ones put out by OpenAI/Microsoft and Google? Reinforces the point that in AI no one really has a moat at this point. Mag7's ability to stockpile chips gives them an edge and they can outspend everyone on R&D. But in the internet age it was Google who ended up with the dominant search engine not AOL/Netscape/Microsoft.
Any company with a good idea/product will have little problem attracting funding and users aren't locked in to a specific LLM at this point so will switch if something better comes along.
And so far it is LLMs that are generating all the buzz and drawing in all the users and seeming to have the most practical use as a lot of people are using LLMs to write emails, assignments, research papers, marketing copy etc.
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Does seem to be a bit of a race against time. Can the supply side benefits of Artificial Intelligence and immigration get inflation down quickly enough to allow the Fed to cut interest rates to a level where debt servicing costs are more manageable? And will GDP be able to grow at a 4-5% rate over the next decade or two which would greatly help reduce debt to GDP and reduce reliance on fiscal stimulus to keep the economy firing on all cylinders?
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https://www.axios.com/2023/11/03/productivity-growth-us-economy
https://www.ft.com/content/61b8574d-724c-4486-b6b0-21191c22d476
https://www.brookings.edu/articles/machines-of-mind-the-case-for-an-ai-powered-productivity-boom/
Quite a few hints that US productivity growth is on an upswing and that is even before widespread adoption of AI by businesses. If so it really would be a holy grail as it would result in faster economic growth and lower inflation (and therefore allow lower interest rates).
Economic growth and productivity growth was anaemic for much of the post GFC period with most of the EPS growth of the S&P 500 driven by financial engineering, secular growth from Big Tech and tax cuts.
So if this isn't a false dawn then this could indeed be the roaring 20s with the S&P 500 already up almost 150% from the pandemic lows and a long bull market can take markets up 300-500%. And that is a prospect that would keep even the most hardened perma-bear up at night.
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Luca is also right. If AI results in a productivity miracle it is going to be the users who benefit.
The technology really isn't that proprietary. Lots of companies are coming out with LLMs including start ups no one has ever heard of. For now Nvidia has a technological lead in GPUs but it may not last and you are already paying a high price on the assumption it will. And while Big Tech have deep pockets that doesn't guarantee success and in recent years they've become better at monetization than ground breaking developments and the woke bureaucracy in these organizations is undermining trust and getting in the way of product development.
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I can't imagine the average low skill white collar worker has much money to buy Mag7 stocks especially with the cost of living squeeze ongoing and wage increases nowhere near sufficient to compensate for all the post pandemic inflation and even less likely now that companies are planning to automate work and reduce headcount. And if a lot of low skills do lose their jobs they will probably end up liquidating their portfolio of Mag7 stocks they bought with their stimmy checks.
Same way most people aren't buying BTC because of considered concerns about the explosion of the money supply post GFC and unsustainable path of US government debt. When inflation was in the double digits everyone was dumping bitcoin.
To the extent people are buying perceived AI beneficiaries and bitcoin it is because people like to chase what is hot and going up. And this is especially true of retail investors who do not have the patience to hold something like Berkshire that will get you rich slowly compounding 10% a year like clockwork.
The main fear that drives investors in a bull market is FOMO. And that is helping to drive up multiples.
Case in point there is apparently a huge increase in custodial accounts being set up with brokerages that allow teenagers to buy stocks because they don't want to miss out on the action.
But yeah there is a broader point here that capitalism is a bit broken when it is difficult to get ahead doing honest work with wages barely increasing in real terms prior to COVID and post COVID probably falling in real terms (who's had 20-30% wage increases over the past few years?) while anyone with a stock portfolio has been making double digit real returns over the last 15 years and anyone owning real estate has been building huge amounts of equity given their interest payments were next to nothing for much of the GFC period.
Putting whatever meagre savings low skill workers have into Mag7 stocks which they will probably have to sell to feed their families when their jobs get automated and they become redundant isn't the solution.
What we really need is to find a better way of taxing corporations and HNW individuals who will milk it if AI fulfils its promise so some of the wealth created can get redistributed via a universal basic income or at least generous benefits until a way can be found to repurpose low skill workers.
Of course tech optimists talk about agriculture and industrialisation and de-industrialisation and say that new jobs will be created. But that ignores the issue of structural unemployment. Think about all the mining towns and factory towns that decades after de-industrialisation still have high unemployment rates?
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GRANOLAS is the buzzword driving European indices to all time highs. Their version of the Magnificent 7.
GSK, Roche, ASML, Nestle, Novartis, Novo Nordisk, L’Oreal, LVMH, AstraZeneca, SAP and Sanofi
Internationally exposed quality growth compounders. Now account for around a quarter of the Eurostoxx 600. And are up 60% over the last three years keeping pace with Mag7.
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Something I have seen doing the rounds on Fin Twit is the idea that the release of Chat GPT is equivalent to the launch of the first web browser in the early 90s which means that we are only just getting started.
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Yeah that is the bull case. That AI will lead to a productivity miracle. Much needed considering that for much of the post-GFC period US GDP growth has been sub-3%. And it will also dampen inflationary pressures as wage increases will be offset by headcount reductions and some of the efficiency improvements from AI can be passed along to consumers in the form of lower prices. So that will allow central banks to lower interest rates before the strain on the economy becomes too much. And if GDP can grow rapidly that will help to ease the debt burden over time. And of course if every IT department starts to allocate a sizeable chunk of its budget to AI then Big Tech can continue to grow earnings at a double digit rate and at 30% of the S&P 500 that is going to be a major kicker to S&P 500 EPS growth. So I am not surprised that bulls are talking about the Roaring 20s and setting targets for SPY 8000.
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Couple of reasons.
Firstly, Berkshire isn't promotional. Most big companies will get into bed with investment banking analysts and give them guidance in return for coverage and employ investor relation departments.
Secondly, Berkshire is complex to understand being a conglomerate and an insurance company. Really you are just placing faith in Buffett's ability supported by his team to grow intrinsic value over time. Smart investors aren't usually capable of that leap of faith. They prefer something where they can come up with a complex investment thesis with extensive models and presentations running hundreds of pages.
Thirdly, people hyperfocus on Berkshire's stock picking which has been a bit hit and miss over the last few decades (although Apple demonstrates he can still swing hard at a big pitch) when more of the value comes from the operating businesses and the well-run insurance operations.
Also I think that markets generally have been buoyed over the last few decades by very interventionist monetary policy. Berkshire's business growth especially over a 20 year period has probably been in the top 5% but because it continues to trade around 1.5x book value you aren't getting the multiple expansion you get in other stocks.
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I also find it ridiculous that people use Apple as evidence that Buffett is now a tech investor. Apple is a luxury consumer goods company and Buffett understands consumer goods well and easily grasps the idea of the Apple ecosystem and the associated switching costs. It doesn't mean we can expect him to go piling into AI stocks.
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Buffett knows that bitcoin is a speculation. That doesn't mean it cannot go a lot higher especially if institutions decide they all want 5% of assets in bitcoin. But it is absolutely bizarre to call bitcoin a hedge for cash when it is so volatile and no actual real world transactions take place in bitcoin. It isn't even a good inflation hedge as 2022 showed. It is basically just another high beta play on the stock market and a sign that markets are still very speculative which Buffett alluded to in his recent letter.
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Amusing that during the pandemic Green Energy was such a massive investment theme. Now speculators have moved on to cryptos and AI both of which are going to use a huge amount of energy and other resources.
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Isn't this the worry really?
The basic technology behind AI is out there and not proprietary. Mag7 companies have advantages because they are stockpiling chips, have the biggest R&D budgets by a huge distance, have existing capabilities in related technologies such as data analytics, machine-learning etc.
It may be though that the practical real-life applications in the near term at least might be more niche and the niche markets just do not move the needle for Big Tech and they are instead going to waste a lot of money on overly ambitious projects such as AI co-pilots which don't add enough value to companies to allow them to be able to recoup their massive investments in AI.
And the whole appeal of companies like Microsoft, Meta, Google etc is they were so capital light and gushed FCF. Now all that FCF is diminishing because AI is very capital intensive with all the chips and so on. And they are cutting staff and risk neglecting their core businesses because they are seduced by the holy grail of AGI.
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Another dot com comparison point:
The big tech PE multiples are far less crazy (even Nvidia if you project its growth out a few years) but Mag7 market cap compared to other sectors and even other countries is incredible and unprecedented.
Deutsche Bank found the Mag7's combined market cap alone would make it the second-largest country stock exchange in the world, double that of Japan in 4th and Microsoft and Apple individually have similar market caps to all combined listed companies in each of France, Saudi Arabia and the UK.
And already the Mag7 has had a pretty impressive run-up with a 5 year annualized return of 24% from 2018-2023. That is
Granted the world is becoming very technocentric and the best tech companies are concentrated in the USA. But markets can carry even something basically true to extremes.
Another dot com comparison point. During the dot com there was a lot of value in old economy stocks.
https://www.ft.com/content/92fe31a2-35a6-4d4a-bb10-ffed4f1a017d
FT article above suggests that S&P 500 has a forward PE ratio of around 25x if you exclude financials, stocks without earnings and Mag7. Mag7 has a forward PE ratio of around 29x and much better growth prospects. So hard to say that Mag7 are very overvalued without saying the rest of the market is also very overvalued.
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I do not think that interest rates or what happens this year and next in the economy really matters that much anymore. So even if the bears are right and the US follows the eurozone and Japan into recession this year it won't make a jot of difference. Even a second wave of inflation probably will only result in a mild correction.
Markets are looking through to anticipated productivity gains from AI to the Roaring 20s with the expectation that it will solve most of the problems in the economy as well as extending the growth runway for Big Tech.
Productivity increases will increase GDP (reducing the debt to GDP ratio) and lower inflation (allowing lower interest rates). Old economy stocks will benefit as their fortunes are closely tied to GDP growth and GDP growth has been anaemic post-GFC and pre-pandemic stimulus. New economy stocks will benefit not only from AI related revenues but also from lower interest rates. And lower interest rates will also ease pressures on the financial and real estate sector.
Of course the question is whether AI really will generate a near term productivity miracle. And worth remembering that even if there were near term productivity benefits from the IT spend during the dot com bubble (and growth was actually pretty amazing in the mid 90s and didn't require 7% full employment government deficits to achieve or massive increases in the money supply to achieve) it did not prevent the bubble bursting and taking the rest of the market down with it.
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'Generative A.I. has kicked off a new investment cycle to build the next trillion dollars of infrastructure of A.I. Generation factories.'
Nvidia CEO understands what it is all about. Big Tech are gonna invest and so are all the start-ups that will easily be able to attract funding to invest in AI. And even if the resulting product is rubbish after sinking so much money into it they are going to market the hell out of it. And the C-suite and IT department of every company is going to want to invest in AI as well and so it goes.
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I think it is getting the point where it no longer matters what the Fed does, or what the economy does, so long as AI beneficiaries continue to beat expectations the market will keep going higher. Especially as at some point AI optimism will be translated into optimism for general economic prospects over the rest of the decade aka Roaring 20s.
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Other thing about Nvidia is the "gold rush" analogy. In the short term it doesn't matter how much gold there actually is in AI. So even if you are sceptical about the practical value of AI, so long as Big Tech, consumers and businesses are fascinated by it and paranoid that if they don't invest in it they will get left behind they will pay whatever it takes to stockpile as many of Nvidia's chips as they can.
Over the medium term it seems quite likely that Nvidia will fall back to earth once they either lose their technological lead or good-enough products at lower prices force them to cut prices and margins and Big Tech have got through the initial investment phase and their annual demand for chip diminishes. But in the short term Nvidia is going to keep going higher until they disappoint investors.
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265% revenue growth in one year! And revenue expected to double over the next year.
The gold rush continues.
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Markets aren't stupid. They are seeing evidence of a soft landing and expect that will deliver interest rate cuts and an eventual return to growth (it is better to have a landing so long as it is soft than keep having the landing postponed with the associated lingering uncertainty)
The first leg of the bear market was multiples reacting to higher inflation and rate cuts and at the time things looked pretty grim with double digit inflation and uncertainty as to how high interest rates would go and for how long. That leg seems to be over now (barring an unexpected second wave of inflation) and therefore markets are pricing in lower interest rates with a major benefit to P/E multiples. And note that if earnings are $1 then even PE multiples going from 15 to 20 is enough to increase stock prices by over 30%. So it is a pretty powerful impact even if outside of AI there still isn't much evidence of improving earnings.
The second leg of the bear market was supposed to be earnings falling as a result of higher interest rates and falling consumption in response to cost of living crisis etc. Not a huge amount of evidence of this. Earnings have been pretty resilient and held up better than most would have expected. And while Big Tech earnings growth has been a lot weaker over the past few years and increasingly relied on cost-cutting/restructuring with the AI hype investors are looking forwards to a return to fast earnings growth.
The few bears left standing continue to argue that every landing looks soft until it turns into a hard landing and cite various factors that are delaying the recession (US fiscal deficit spending, pandemic era excess savings, benefits to corporations from locking in cheap long term debt during ZIRP, loosening of financial conditions due to much higher stock prices etc).
But even if there does end up being a mild cyclical recession the negative impact on earnings will be offset by lower inflation and interest rates and as we saw during COVID the market are comfortable buying the dip and looking through mild recessions.
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I don't think market cares that much about the timing of rate-cuts so long as economy stays resilient and inflation doesn't take off to the point that rate hikes are back on the table.
Fed will look through any inflationary increases due to the Red Sea situation. They will also ignore any month to month fluctuations. And when it becomes apparent that inflation won't go much lower than 4% without a weakening of the economy (which won't happen so long as deficit spending is $2TR a year) then Fed will probably find a way to change its target or wait patiently for hoped for AI productivity improvements.
Still it is a little bizarre to see UK, Germany and Japan surprising markets with negative GDP growth and seeing their stock markets shoot higher. Either market is prophetic and looking through to a robust recovery in 2024. Or more likely the market figures bad news = quicker rate cuts and the rate cuts will produce the desired economic improvements.
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I'm British. The welfare state is very hard to roll back. The USA is trying to have its cake and eat it by expanding the welfare state while keeping taxes low. The numbers do not add up so you are getting these huge budgets at full employment. And now you are having millions of illegal migrants who will probably end up on the benefit system. And if AI fulfils its promise you are going to get a lot of structural unemployment.
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What I always find scary is how correlated the S&P 500 is to the Fed balance sheet. Since 2009 the Fed balance sheet has increased fourfold. And the S&P 500 has as well.
It does beg the question as to how much of this long long bull market is simply just the result of asset price inflation.
And of course the Fed has no serious intention of decreasing its balance sheet especially as the banking system will continue to need bailouts and the market will taper tantrum if QT ever picked up any kind of speed.
Have We Hit The Top?
in General Discussion
Posted
https://www.bloomberg.com/opinion/articles/2024-03-12/nvda-vs-csco-a-bubble-by-any-other-metric-is-still-a-bubble?utm_source=website&utm_medium=share&utm_campaign=twitter
Bit of a more balanced commentary from John Authers. Agree with the general point that a big question is whether the acceleration of earnings growth of Mag7 post-pandemic and in the case of Nvidia over the last year or so is sustainable and that probably matters a lot more than valuation which are rich but not to the same extent as Nifty Fifty or Dot Com levels.