Of Course, A.I. Will Be a Bubble.

A freind asks about this New York Times article about Jim Covello's A.I. bubble predictions.  Do I agree, Of Course.  But so what?  

All bubbles are rooted in an actual advance with financial benefits.  Then that goes too far and there is over-investment, lots of people make money, more people lose money, then the technology continues benefiting people.  Bubble Examples that created overinvestment:  Railroads, Radio, Bowling, Conglomerates, Computers, Home Mortgages, Internet, crypto-currency.  We are currently in a fast moving A.I. bubble and a slow moving index fund bubble. 

More on the index fund bubble later.

People Skimp on Baby Formula but Not Pet Food

I was in my Bloomberg doing some research on Conagra and other food companies. Yes, they are mostly cheap and yes, I'm worried about the effects on GLP-1 on the products these companies sell. Btu this chart about price elasticity hit me in the face like a brick. Basically, price elasticity is the tendency to switch to a cheaper product or go without all together. The highest price elasticity baby formula, the lowest, pet food.

Click to read more ...

Fear Of Missing Out is the Nemesis of Diversification

STAY DIVERSIFIED.  RESIST FOMO. 

Came across this quote from Jordan Brooks of AQR while reading an article at Bloomberg via FA Mag.

“Diversification’s nemesis is FOMO—by definition you’re always going to have some regret,” said Jordan Brooks of AQR Capital Management.

Diversification has lots of enemies but diversification continues to be the only free lunch on Wall Street and risk taker's best friend.

When do I Fade the Strong Dollar?

The dollar is quite strong right now for a few reasons.

1:  Highest interest rates in the developed world. 

2:  Flight to reserve currency (uncertainty from war)

3:  Poor moments in the alternatives (Euro looking at stagflation economy, Japan still keeping interest rates low – even in the face of an improving business environment)

All this said, the U.S. has some problems of its own but is the cleanest dirty shirt in the cabinet.   And there is the possibility that some of the political issues in the US could start to hurt the currency. No signs of this yet.

Another strike against the dollar is purchasing power parity basis (how much comparable but non exportable products cost).  The U.S. is nearly as expensive relative to the rest of the world as it has been in memory.

What am I doing?

I’m taking this opportunity to cover any non-USD currency shorts I have in my portfolios just in case a catalyst hits.  And, because I actually live purchasing power parity.  I am buying Euros to cover my European spending through the end of next year.  But I’m not yet ready to short the USD.  The key to that opinion changing will require a change in the global differentials in real rates (rates in excess of inflation.) 

Currencies I’m watching to buy vs. short USD but waiting for a catalyst:
Australia Catalyst – hard core inflation fighting.  Catalyst: Global peace with China breaks out.
Swiss:  Catalyst:  Rates go above inflation.
Euro:  Sudden economic turnaround or interest rates above USD rates.  (I seriously don’t expect this anytime soon).
Yen:  10-year JGB (government bonds) go to yield of 2+%

COUNTRY                            INFLATION%      2-YR BOND%      Real Rate%

Australia                              6.0                          3.9                          -2.1
Swiss                                     1.7                          1.1                          -0.6
Eurozone                             4.3                          3.1 (Ger)              -1.2
Japan                                    3.2                          0.1                          -3.1
US Dollar                             3.7                          5.0                          +1.3

Source: Bloomberg/Bureau of Labor Statistics as of 9 Oct 2023.

Disclaimer:
Important Risk Discussion Investing involves risk including the risk of loss of principal. The whole or any part of this work may not be reproduced, copied, or transmitted or any of its contents. This material is for informational purposes only, not to be construed as investment advice, or a recommendation or offer to buy or sell any security and should not be construed as such. The views expressed in this material are the views of David Neubert and not the views of Eagle Bay Family Office or Hurricane Capital and are subject to change without notice based on market and other conditions. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Past performance is not a guarantee of future results.   Hurricane Capital or Eagle Bay Family office may have or may seek investment management or other business relationships with companies discussed in this material or affiliates of those companies, such as their officers, directors and pension plans. 

Uncertain Confounding Rally: Options Markets Disagree

Confounding Markets are heading higher:   

Rising to much confusion in the face of so many potential bad news items out there:    Global interest rates are rising, turmoil in the U.S. Congress, a looming recession, a nascent but not fully birthed credit crisis, bubble behavior in A.I. related stocks.  This can be explained by one thing I always say, “Equity Markets are driven by supply and demand (aka flows of money) in the short term far more than by fundamentals.”  We are in one of those situations, stimulus money is still burning a hold in the virtual pockets of so many individuals.  Oddly, the banking problems exacerbated this as people pulled zero yielding funds out of banks and put it in brokerage accounts.  Those brokerage accounts now full of cash showed a new underweighting to equities.   Individuals and their financial advisors opened month-end reports and realized they were now underweight equities after all that new cash.  And wham rally, advisors were buying the whole market, individuals were likely buying the A.I. bubble. 

How does this rally end? 
It ends when money is fully allocated to risky assets and people start to need cash to pay for rent or their next vacation (the sector experiencing the highest inflation by the way).   

When does the stimulus money finally run out? 

Most strategists (including me)  thought that should have already happened.  At this point, I’m just watching the numbers.    And which numbers to watch are harder to find, previously, I was watching checking balances, now since cash left banks and went to money market funds, I’m watching some money market measures and M2 money supply to see when the latest increase starts to turn.  Right now M2 is declining and money funds are rising. 

OPTIONS MARETS SEE LITTLE UNCERTAINTY

In the face of this confusing the markets are handing out a very cheap way hedge U.S. stock markets.   Normally, hedging is expensive and not worth the cost.  Now is not one of those times.  We are presented with an opportunity to stay long but hedge.  The most interesting place is a potential breakout forming in U.S. small caps still at cheap levels relative to large caps. (Russell 2000 up 8% in the last five days).   So the idea, as equity markets rise and bond markets fall instead of selling stocks, let them run and use options to hedge the rest of the summer.   

Goldman Sachs produced some great research this week on low options prices in indices as of June 7^th.

Why Is Market Going Up When Earnings Are Declining

All that money removed from zero yield bank accounts last month is sitting in brokerage accounts at Investment Advisors.  The pull of creating a balanced portfolio is putting that money into the markets.   Most assets allocation models don't care about equity valuation. 

downtownrecovery.com

The Euro Reaches Parity with US Dollar

Posted an answer to questions I've been getting about the recent move through a nice round number for the Euro/USD exchange rate. https://www.linkedin.com/feed/update/urn:li:activity:6968549702870953984

Perspective on the Shanghai Slide

My buddy, and market cognitive psychology expert, Stephen Duneier of Bija Advisors puts some perspective on recent market movements.  His two points: first,   the correlation between US and Chinise stock markets (.215 monthly) is low, very low.    He notes that the two markets moved in the same direction in only 57% of months - that's pretty close to random.   Secondly, when you look at recent US market movements in the attached rolling monthly chart going back to 2009 they don't look so special.

Goldman Misses The Point: Equities Aren't Cheap Bonds Are Insanely Expensive

Goldman portfolio strategists Peter Oppenheimer and Matthieu Walterspiler are out with a report getting big of attention.  The report presents the generationally important bullish case for stocks relative to bonds. 

I'm worried this report will be the case for everyone to go 100% into equities and then get clobbered when the bond bubble bursts.  I agree that equities are stupidly undervalued relative to government bonds but it's only because EVERYTHING is at an historic low valuation relative to government bonds.

Click to read more ...

Lighting Round on Seattle Fox News Q13

Bill and Lilly didn't let me take a breath today.   In five minutes we discuss: Greek debt default and politics, European bank contagion, Occupy Wall Street and the Tea Party, saving money on your cable bill, my U.S. economic forecast and Bank of America's debit card fees fiasco.

 See today's Finances with Neubert.