mattee2264

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.

265% revenue growth in one year! And revenue expected to double over the next year. The gold rush continues.

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.

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.

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.

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.

But I do not see any real need to lower interest rates. We did just fine in the 1990s with interest rates averaging 5%. So if we are in for another decade of strong growth driven by illegal immigration (lol), AI productivity improvements, and never-ending fiscal deficits (MMT lol) then the neutral rate is going to be a lot higher than it was during the pre-GFC period when GDP growth and inflation were anaemic. The economy seems to do just fine with higher interest rates. The main people complaining are investors who need low interest rates to pump up their long duration assets such as Big Tech. And I agree it is a ridiculous situation when you have traders and investors hanging on to every word the Fed says and waiting with bated breath for every jobs report and CPI print knowing that they will determine whether the Fed cuts once, twice, three times this year and whether the cuts start in March, June, or September. It never used to be like this.

If the Fed were truly politically independent it would make it clear that the US government's full-employment fiscal deficits are hindering its battle against inflation and delaying the rate cutting cycle. It is not at all surprising that with the US economy running hot disinflation is starting to stall. If the Fed were truly politically independent it would not have teased rate cuts last year when inflation was still above target sparking a massive stock market rally and looser financial conditions. But I think this year we know the US government will keep spending big in a desperate attempt to keep the economy booming in the hope it will get Biden re-elected and the Fed will do what it can to help that goal without completely destroying their credibility.

"Inflation is always and everywhere a monetary phenomenon" is the quote I always remembered him for. Sadly it did not age so well. Asset price inflation definitely! Consumer price inflation not so much.

What makes me uncomfortable is that AI brings the Big Tech companies into competition with each other. Previously they'd all carved out niches: GOOGLE: search/Youtube META: facebook/instagram MSFT: enterprise software APPL: phones and related services AMZN: cloud but mostly storage and e-commerce Now you'd imagine they will all try to come out with some kind of AI pilot that organizes your life. They will probably all try to come out with some kind of ChatGPT equivalent which replaces search (but even with search the money is made through the adverts as in a typical search you'd click on multiple links and visit multiple websites whereas with ChatGPT equivalent you make a single prompt and it spits out results and most likely in the premium versions you pay not to have ads) The monetization seems a lot more immediate than the internet as any AI upgrades are going to result in a monthly subscription fee. But we aren't talking about new products for tiny start-ups we are talking about companies already making hundreds of billions a year in revenues and are so large that they are necessarily limited by consumer and corporate budgets of whom they have already captured considerable wallet share. And unlike cloud which was basically gravy to them because they already had all the real estate so easy to basically rent it out, these AI tools cost a lot to train (even before considering potential copyright issues) and massive amounts of R&D are required to increase the functionality and iron out the bugs and the worry will be that if they skimp on R&D another Mag7 firm will steal a technological lead and eventually establish the standard and with economies of scale you probably need a pretty big share of the market to make a lot of money and their existing core businesses are so good that there is a high bar set to ensure that additional revenue is not offset by lower average margins.

Valuations are probably less relevant than the past because a lot of buying of stocks is price insensitive e.g. corporate share buybacks. When times are good and stock prices are high companies buy back far more shares than when times are bad and stock prices are low. And with ZIRP companies have been able to use financial engineering to borrow at cheap rates to buy back shares. As interest rates come back down this practice will resume. e.g. pension contributions. there is a continual inflow of money into index funds from this. e.g. switch from active to passive strategies. In the past (in theory at least) active managers used to buy undervalued stocks and sell overvalued stocks or even short them. Now the main active investors are hedge funds and retail trades both of whom favour momentum strategies and flavour of the month investments with a good story. e.g. Fed has been doing successive rounds of QE while keeping interest rates low (until recently) so if you can only earn next to nothing in cash or bonds then you tend to be a lot less discriminate when it comes to buying stocks i.e TINA. Even with higher interest rates a 4-5% long bond yield seems unappealing when investors are using to doubling their money every year in bitcoin or Big Tech and even in index funds are making double digit returns and investors are well schooled that dips are buying opportunities and the stock market always recovers quickly and without any lasting pain. Even during COVID while the market panic was scary by the end of the summer the market had already recovered made new highs. And while the 2022 bear market was more protracted than investors were used to the index only fell about 20% as confidence in a pivot and Chat GPT turned the tide and 2023 instead of being a down year saw the market recover most of its losses with the rest made up this year. And now AI has given the perfect excuse for markets to send Big Tech stocks to the moon and price in much better prospects for the rest of the economy with the idea that there will be a productivity miracle that will shock that economy out of its post-GFC doldrums and increase trend growth rate in the same way as in the mid 90s before it all went sour. Also interesting is that markets have pretty much shrugged at the good economic data and Fed talk walking down rate cuts. I suppose they have realized that the economy is a lot more resilient to higher interest rates than previously thought and Big Tech's growth prospects are being revised upwards so that even using a higher discount rate they are still worth a lot more. So I think we are only getting started. And probably the only things that will ruin the party are: a) Big Tech results disappointing and the roll-out of new AI initiatives not living up to the hype resulting in much slower adoption b) Inflation rearing its ugly head again and forcing the Fed into rate hikes or at least convincing markets in higher for longer. The V-shaped recovery carries with it the implicit assumption that the Fed was right along and inflation was transitory and the inflation shock is over. c) A hard landing with inflation not falling enough to justify a Fed rescue and earnings across the board falling.

Oh I know how you feel. Q4 GDP growth for USA came in at 3.3%. 2023 GDP growth was therefore a very healthy looking 2.5%. CPI inflation for 2023 is 3.4%. USA economy is at full employment. It is picture perfect until you remember that government ran a deficit of $1.7TR in fiscal year 2023. And is on course to run a $2TR deficit in 2024. And most of the hiring in 2023 has been by government while left right and centre big companies are laying off workers. High GDP growth rates can be achieved if the government spends a lot of money. But if it was that simple then socialism and communism would have succeeded and the richest countries in the world would be Russia and China. And it is not just government. Consumer debt has reached all time highs when you would think that with higher interest rates consumers would be trying to pay down debt. Consumer spending has contributed to the strength of the US economy but they also seem to be spending beyond their means. And both the government and the consumer are desperately hoping for lower interest rates to make their debt more affordable and easier to roll-over/refinance and although that is probably what they will get it does not feel like a healthy situation. Perhaps the AI productivity miracle will save the day and result in high growth and low inflation which will allow interest rates to stay low and for the US to ease its debt burden through economic growth the same way it did post WW2. But that seems a lot to ask for when the current AI offerings just seem to be glorified chat-bots and search engines that spout a fair amount of nonsense. Or maybe the wave of immigration will achieve a similar effect. Although there does seem to be a paradox in welcoming mass immigration at a time when a lot of jobs are supposedly about to be displaced by AI and if we are running $2TR a year deficits at full employment how big are deficits going to get when AI results in mass layoffs and the economy eventually succumbs to recession? So I am also very cynical about the health and strength of the post-COVID economy. But the stock market is not the economy and so long as America's strongest companies can continue to grow earnings and investors are still enthusiastic about their prospects then stocks will continue to go up. At some point there probably will be some kind of reckoning and the good times will end. But who knows when that will be and if the market can double again before that happens then even a severe 30-40% bear market isn't going to allow you to buy at lower prices.

I think the bottom line is that: -Mag7 are distorting market valuations. So to say the S&P 500 is overvalued you need to be able to say with confidence that Mag7 are overvalued -Mag7 are what Benjamin Graham would call speculative growth stocks. Speculative not because of their quality as most of them are incredibly high quality and have very strong financial positions. But speculative because they are selling at double the market multiple which implies a lot of confidence in future growth. If that confidence is warranted then is hard to say that they are overvalued. -Outside Mag7 valuations are fairly average by historical standards. Perhaps slightly above because if you took out 7 of the top 10 companies out of historical indices it would have lowered the resulting average valuation. And the winner takes all dynamic makes many old economy stocks less valuable and there is a greater obsolescence risk which is a negative valuation factor. Also over the last decade economic growth has been anaemic and companies have relied on financial engineering taking advantage of ZIRP to grow EPS faster than earnings. Economic growth should be better over the next decade especially if AI fulfils its promise but markets seem too ready to assume that interest rates will return to very low levels. They may do in the short run if the economy slows down but over the economic cycle I would expect interest rates to be around neutral which is usually proxied at nominal GDP growth or around 4-6% and I don't think the rest of the market (or Mag7)are priced for that). -The outlook for economic growth and interest rates is very uncertain especially over the next decade but I suspect they will have a big influence as to whether the next decade is good or bad for stocks. Probably you are counting on a fairly benign outlook of low-to-moderate inflation and healthy economic growth but so far betting against the US economy has been a mistake. In other words we are probably in what Buffett called "a zone of reasonableness". Perhaps at the upper end of that zone. There is an interesting asset allocation debate over whether the high concentration of the top 10 firms in the S&P 500 and of the USA in global indices warrants some attempt to rebalance either by shifting some funds to an equal weighted S&P 500 index or to small caps and shifting some funds to say an EAFE or EM index. There would be a diversification benefit but the risk is that in doing so you are reducing expected returns. Also a top heavy S&P 500 is nothing new and part of its design and with a S&P 500 you are getting a lot of global exposure anyway as well as owning most of the world's best companies. There is a continuity between the past and the future and over the long past a market-cap weighted S&P 500 index has been the winning strategy. That has been true in spite of its greater propensity for bubbles and painful 50% market declines or maybe because of it because those things are inevitable features of a capitalist economy and capitalism is still the best of the many imperfect economic systems out there.

Perhaps the analogy doesn't work with China. But for the USA at least I have a healthy respect for the power of shock-and-awe bailouts/stimulus to lift markets. And for the know-nothing investor index funds are probably the vehicle of choice with the added benefit that if the plunge protection team decides it wants to support markets it will buy index funds. MSCI China is at levels last seen almost 15 years ago. While some of that does reflect that GDP growth has been offset by massive dilution of shareholders with probably some more to come especially in financial/property institutions because the bath has been thrown off with the bathwater if you buy the index you'll end up owning some of the companies that will see an impressive recovery when the crisis is over.

What I mean is that if you amortise the PE compression over a longer period its impact on your overall returns greatly diminish. Over the next decade I do not think it is unreasonable to expect S&P 500 earnings to grow 10% per annum for the following reasons. 1) Inflation will probably be stuck in the 3-4% range and we've already seen companies in the S&P 500 can pass on cost increases fairly easily and the companies that dominate the indices can use their monopoly power to push through above inflationary price increases 2) There probably will be some productivity benefits from AI which could mean real GDP growth will be stronger over the next decade than the last decade. There will also be some support from much higher investment in areas such as AI, renewable energies, onshoring etc. 3) The indices are dominated by quality growth companies and double digit earnings growth is easy for these kind of companies Even if you knock off a few percentage points to reflect earnings compression (to reflect the increasing maturity of tech companies and the likelihood interest rates will settle at a level higher than pre-COVID) you still could get 7-8% returns. That is a lot better than the 4% you get on long bonds and you get more of an inflation hedge. In real terms it would probably be only about 4-5% which is much less than the double digit real returns investors have been used to this cycle. But that is all the CAPE model really tells you. Whether there is any benefit from lightening up on equities at this point depends on how much volatility there is and whether the next bear market is a few years or ten years away. Very difficult to predict. A lot depends on whether we are entering into a new economic cycle or whether a recession is still in the pipeline over the next year or two. Also depends on whether AI lives up to its promise as that has extended the growth runway of market leaders and helping investors ignore the possibility of higher for longer and overlook that in recent years there have been some signs of incipient maturity

Shiller PE has become less and less helpful over time. Perhaps if it was adjusted for interest rates and the long-run upward trend in valuations over time it would be more useful. But all it is really designed to do is give some indication of likely expected stock market returns over the next decade. Problem is that economic and market cycles are so protracted that it is little use as a timing indicator. Even if the basic concept that valuations eventually revert to the mean is true it makes a big difference whether they do so within 1 year, 5 years, 10 years because over that period earnings and stock prices will continue to grow. And over long periods the positive impact of period earnings growth increasingly dominates any negative impact from PE multiple compression. Are we in the late stages of a bull market? Or are we at the start of a new cycle powered by an investment boom resulting from AI advancements, onshoring etc? Has recession merely been delayed resulting in a major rug pull later this year or next year? Or have we already had the soft landing and starting to see grass shoots? Really tough to tell and that's why uncomfortable as it may be you have to accept that as a buy-and-hold investor (especially one concentrated in index funds) the long term market returns come from continuing to hold through periods of low valuations and high valuations and suffering through 50% market declines every decade or two.

Stock markets are leading indicators so the real pain in the Chinese economy is likely to come. What I find odd is there hasn't been much in the way of contagion. There must be some global banks with some exposure to Chinese RE. If anything the failure of China's re-opening has been bullish by suppressing global inflationary pressures especially in relation to commodities etc.

People get confused between the price level and inflation. Prices have gone up at least 20-30% since before COVID. Probably more in certain categories. If all the inflation was just the result of supply chain disruptions then prices should have gone back down. But while companies were quick to pass on cost increases to consumers they haven't lowered prices once input costs started to come back down. Helped in part because the economy has been strong and unemployment low thanks to fiscal largesse. So I can understand why a lot of people are still complaining about inflation even as inflation rates have come back down into the low single digits. Obviously if you own stocks your wealth has doubled since the pandemic which makes paying 20-30% more for groceries, entertainment, restaurant meals, holidays etc a small price to pay. But for the common man they've been stuck with much higher rents, much higher prices of basic necessities like groceries, and their credit card interest has gone through the roof and they are understandably miserable.

Not a huge amount of evidence of pain. Euro stocks have been on a bit of a tear lately with a 1 year return of almost 20% and that was without the benefit of having Mag7 or equivalent to do all the heavy lifting. While the eurozone narrowly avoided recession in 2023 their inflation rate is down to 2.9% so they will probably able to start cutting sooner than USA. And the interest rate transmission mechanism works faster in Europe so they've probably already felt a lot of the pain from higher rates and adjusted to them. Of course Europe has a lot of regulations and so on but it also has a high concentration of quality multinational companies.

It probably does have something to do with the top. A major factor in the resilience of the US economy is unprecedented deficit spending. That can continue to be justified if there is a large influx of immigrants who wind up on benefits. Perhaps at some point tax rates will go up but for now the USA does not have to balance the books because the USD is the global reserve currency.

American Dream was that you could come to America, work hard, and have a better life. And the country was vast and underpopulated and industrializing so lots of opportunities. Now the only industry making any money is technology and they are laying off staff left right and centre and trying to replace with their own AI technologies. And most of the new jobs being created are in government as they've embraced deficit spending and are very motivated to keep unemployment low to get Biden re-elected. And most jobs these days are part-time. You can understand the motivation to create a welfare state with a huge population of people dependent on government benefits who will vote for governments who keep the benefits flowing to them. But hardly good for the long run future of America.

History repeats itself. She's just a reincarnation of the go-go investors of the 1960s. The lesson investors never learn that if a fund massively outperforms over a short period of time it is usually a combination of: a) Taking on a lot of risk (i.e. speculating) b) Being in the right place at the right time (i.e. the flavour of the month happens to be the stocks you are concentrated in) Of course there is some salesmanship involved. If you can talk your book convincingly that will attract more investors into the stocks you are investing in. And you need to be intelligent enough to at least sound convincing. But she is a product of a speculative investing environment where the current generation of investors are used to getting rich quick and are easily seduced by anything futuristic.

Must be some good companies that have been thrown out with the bathwater. Mandarin Oriental comes to mind. At similar levels to depths of the pandemic. Jardine Matheson is a solid storied conglomerate Marty Whitman used to love Henderson Land, CK Hutchinson Holdings, Wheelock etc.

If models need a lot of customisation or in-house programming to be useful wouldn't that limit the revenue opportunity for Big Tech? Presumably the idea is to provide for a subscription fee either the infrastructure or an off-the-shelf model that can easily be customized or programmed. And for the most basic applications/models there will probably be open source versions that allow companies to bypass Big Tech and allow niche smaller providers to make models for limited uses. OpenAI is a bit of a sham as they've already got into bed with Microsoft and clearly have little interest in making the underlying technology freely available for the benefit of mankind. But other Big Tech companies have come up with their own models and presumably lots of start ups can as well. Competition would drive down prices and returns and ultimately benefit consumers the most. But the way Big Tech companies have melted up since the release of Chat GPT there seems to be the implicit assumption that Big Tech will enjoy a lot of additional revenue with the same high margins and returns on investment they have made on their existing products/services. And maybe the internet is an example. It wasn't the companies providing access to the internet who made hay. But rather the companies who found a way to make money through the internet and even then there was a time delay and they weren't spared from the shakeout and even very big companies who were frontrunners didn't end up being the big winners. Only Microsoft is still on top. This time round Big Tech have a competitive edge as they have the huge customer base, the customers trust their products/services, they can invest far more than anyone else in AI and fund promising start ups and VC firms and reap the benefits of their work (and exclude others from doing so) but if the products they provide only provide a limited value add they won't be able to charge exorbitant fees and it may be that other smaller companies come up with more innovative uses and applications.

A little more colour coming out of the latest round of tech earnings calls on the AI breakthroughs will play out. First area seems to be AI model as a service giving clients access to a variety of AI models they can customize while not having to worry about maintaining the infrastructure. Second area seems to be AI agents which can improve productivity by assisting with simple tasks. Already have a customer list that is hooked on their existing products/services and the seductive qualities of AI are such that they'd probably happily pay over an extra chunk of money to get AI add-ons or upgrades and the same powerful network effects and ability to spread investment in AI over hundreds of millions of users. Potential issues might be: -It will require a lot of investment. All the CEOs touting further cost cuts and efficiency gains but those won't be alone to fund it and the risk is that research will eventually hit a dead end and it will become a black hole in a quest for artificial general intelligence when the history of the development of AI shows that progress eventually stalls and you then get an AI winter and only many many years later is the next breakthrough made -Even if the revenue opportunity is tens of billions that doesn't really move the needle when these are trillion dollar companies already generating over $100b revenue a year and market caps already anticipate double digit earnings growth