Dear Reader,
Good morning,
Today I’d like to talk about where we are with the AI bubble:
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NVIDIA Turns to AI 2.0:
AI 2.0 is on the verge of revolutionizing a $1.4 TRILLION a year industry.
And the smart money is now backing one tiny small-cap selling for under $5 a share.
Nvidia bought 7 million shares.
Catherine Wood bought 30 million shares...
And Bayer signed a $1.5 billion deal with them.
Get the name of this stock before it takes off.
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We’ve seen the market sell off a bit lately and valuations, what things are worth, are a big deal for us.
I was talking to a buddy of mine last night who said, “where do you think we are in this market cycle?”
I was thinking back on a very important book in my life.
When I started working on Wall Street, I was very, very young.
All the old timers gave me their lists of favorite books.
They’re about accounting, statistical analysis, math, and psychology.
When you think of the great books on Wall Street, those are the categories.
In the category about mass psychology, a book that had a profound impact on me was Manias, Panics and Crashes, written in 1978 by a historian named Charles Kindleberger.
He takes us back through history, all the way to the Dutch tulip bulb mania of the 1600s.
He lays out historical stages of the bubble model.
Now, I remember when I first started working on Wall Street, before I moved to Manhattan - before I made it big…
I was really young and really broke.
I wasn’t from one of those connected families.
I used to have to take the bus.
One of my shoes had a hole in the sole, and I couldn’t afford other shoes.
I had two pairs of pants I had to alternate and clean every day. Just a few shirts.
I didn’t come from Harvard or Yale like so many around me.
My family wasn’t part of any secret societies.
But I was young, and I wanted success so bad.
What I did know how to do was work harder than anybody else.
Like I tell my kids, in my family, hard work is our superpower.
We expect nothing handed to us; we work hard for everything.
So, I would come to the office really early, when it was still dark outside. I’d leave really late.
Those years, I wanted to absorb everything I could.
And I remember when I started reading this Mania, Panics and Crashes book…
On the 9:00 bus home each night, the last bus that would leave Wall Street and take you back to Queens, which is where I’m from.
I’d turn on that little light in the half-empty bus and I remember being amazed at what this author was saying.
He clinically analyzed this and broke down market bubbles into a five-stage model.
I’m going to go over these stages with you so you can understand where we are in the AI bubble.
The first stage is “displacement.”
It’s a change in economic circumstances that creates new and profitable opportunities for certain companies.
We’ll call that the “ChatGPT” moment - when AI became “real” when ChatGPT rolled out.
The second phase is “euphoria and overtrading.”
A feedback process sets in whereby rising expected profits lead to rapid growth in share prices.
The third phase is “mania” or “bubble.”
The prospect of easy capital gains attracts first time investors and swindlers eager to defraud them.
The fourth phase is “distress.”
Insiders discern that expected profits cannot possibly justify the now exorbitant share prices and begin to take profits by selling.
The fifth and final phase is “revulsion” or “discredit.”
As share prices fall, the outsiders stampede for the exits, causing the bubble to burst altogether.
So, where are we now?
We’re not in the displacement phase.
We’re past the euphoria and overtrading - I would say that was 2024…
We had some difficulty - we didn’t know if Biden or Trump was going to win, so there was a lot of negative pressure on the market then.
Right now, we are definitely in the “mania” or “bubble” phase.
You see a lot of first-time investors coming in to join the AI trade.
We are in phase three.
We’re not in phase four, “distress,” yet.
We don’t yet see insiders discern that expected profits cannot possibly justify the now exorbitant share prices and selling.
Looking at the information that surrounds us, we are squarely in phase three: mania/bubble.
The interesting thing about stage three, which I learned through the dot-com boom, is that this phase can last for years.
Stage three of the dot-com boom lasted basically from halfway through 1996 to the end of 1999 - over three years.
To use the dot-com comparison, I’d put us now in 1998.
But we don’t know.
So what I am telling folks right now when they ask, “are we in a bubble?” - yes, 100%.
There’s no question about it.
It’s a time to be very careful.
That’s why we’ve been recommending fewer positions and closing out some positions.
The options are, take your money and invest in bonds for 3.5%, 4% returns on short-term paper…
Or you could buy Microsoft at $500 a share, and it’s likely going to gain more than 3% or 5% a year.
So, thinking about it that way makes this a “low interest rate environment.”
That there aren’t a ton of great alternatives to stocks also drives the bubble.
So there you have it - my call is we are at stage three of Kindleberger’s five-stage bubble model.
I don’t believe the recent market turbulence is the popping of the bubble. The way I see it, it’s just a churn.
Sectors rotate.
People have to validate again.
It’s the normal bubbling and churning of a bull market.
So that’s all I have today. Have a wonderful day, and I’ll see you tomorrow.
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