- “There’s a day of reckoning coming”…
- AI: A developing Ponzi scheme…
- Psst — Here’s the #1 stock to buy before the huge SpaceX IPO. Get the free ticker here.
Dear reader,
Yesterday I noted that the stock market was up and away to record heights… even as the global economy confronts severe energy disruption.
I cited one energy expert who argued that:
There’s a day of reckoning coming. It will be painful because I can tell you that the stock market’s ignoring this.
Of course, the question is why? Why is the stock market ignoring this?
Answer shortly. First, a few short observations on the Federal Reserve.
Our overlords at the central bank held rates steady on Wednesday. Chairman Powell addressed the press corps after the announcement.
The Usual Mummery
As is wont, the fellow spoke much… and said little.
Thus he babbled that:
- Our monetary policy actions are guided by our dual mandate to promote maximum employment and stable prices for the American people. At today’s meeting, the committee decided to maintain the target range for the federal-funds rate at 3 ½ to 3 ¾ percent.
- The economic outlook remains highly uncertain and the conflict in the Middle East has added to this uncertainty. In the near term, higher energy prices will push up overall inflation. Beyond that, the scope and duration of potential effects on the economy remain unclear, as does the future course of the conflict itself. We will continue to monitor the risks to both sides of our dual mandate.
- We are well-positioned to determine the extent and timing of additional adjustments to our policy rate based on the incoming data, the evolving outlook, and the balance of risks. Monetary policy is not on a preset course, and we will make our decisions on a meeting-by-meeting basis.
Jerome Powell’s Underrated Talent
As a student of the psychological arts and sciences, I confess to a certain admiration for Mr. Powell’s stratagem.
His tedious mummeries dullen and sedate all of the attending press… which slips into a sort of torporous trance.
Thus mesmerized into witless stupefaction, they are unable to manufacture sharp questions to ask him.
And he slips off without saying one thing.
It is a high, yet underrated talent. And it is in this Powell fellow. I shall miss his craftwork once his term expires in two weeks.
Yet let us return to today’s central question.
Why is the stock market running to record heights, even as the global economy confronts such vast uncertainty and disruption?
It’s All About AI
Here The Kobeissi Letter hazards an answer — the likely answer:
- Our most frequently asked question right now:
- “If oil prices are above $100/barrel and the Iran War isn’t over, why are stocks at record highs?”
- The answer to this question is simple.
- The AI Revolution has simply become so large, that investors are viewing everything else as “noise.”
- Over the last few months, as large cap technology stocks traded flat then sharply lower amid the Iran War, the AI narrative only grew.
- The Magnificent 7 companies are set to invest over $600 BILLION in AI this year alone…
- The reality is that many large cap technology stocks are merely getting cheaper as they go up. And when they go down, they become remarkably cheap.
- We are in the biggest technological revolution in modern history, and even $100 oil, a 4.40% 10Y Yield, and rate cuts priced out until 2027 are unable to derail the train.
AI: The Solution to the World’s Sorrows
I believe The Kobeissi Letter lowers its ax directly upon the root. Artificial intelligence has simply placed all other considerations in its shade.
The Iran conflict may send oil prices spiraling, potentially eventuating in severe economic recession?
“Stow it,” says the artificial intelligence zealot. “AI is changing everything,” he claims.
Fertilizer shortages may result in “food insecurity” for millions — that is, hunger for millions?
“Let them eat cake,” says the same artificial intelligence zealot. “AI is unstoppable,” he insists.
What is the solution to the sorrows of this world — and perhaps of the world to come?
Artificial intelligence is of course the answer.
Yet is it? Prominent artificial intelligence stocks are presently “priced for perfection.” And perfection is a condition rarely attained in this tearful and sorrowful vale.
Yet investors are gobbling artificial stocks as if the perfections are within sight. They believe future cash flows will justify today’s extreme prices — a very, very, questionable assumption.
A Developing Ponzi Scheme
Thus the sector begins to assume the calamitous dynamics of a Ponzi scheme.
Money man Jon Hussman… whose crystal ball revealed to him the 2008 housing catastrophe in advance… and which is presently projecting images of an artificial intelligence collapse.:
- The defining feature of a Ponzi scheme is that it persuades investors to pay for future cash flows that, at least in part, don’t actually exist, while creating the impression that those cash flows imply an attractive return on the price investors pay… [expectations for profit growth driven by AI are] wildly over-optimistic…
My opinion remains that this bubble will go down in a ball of flames.
Meantime, Mr. Nussman acknowledges that corporate profits are up and away. Yet he believes they are the product of Himalayan debts in government and elsewhere in the economy.
The grand delusion endures so long as the arrangement endures. And when the arrangement no longer endures?
Then the delusion no longer endures. At which time investors must confront grim reality:
- If we allow for the possibility that the US will eventually move back to fiscal stability, it follows that corporate profit margins will also retreat from their current extremes. That’s the magic of a Ponzi scheme — everything works fine as long as nobody questions that the future cash flows are a-comin’.
Too Big to Save
All the while, Mr. Michael Burry — he of cinematic fame through “The Big Short” — argues that the disparity between the “promised revolution and delivered reality” has never been greater.
He adds that:
The government will pull out all the stops to save the AI bubble to save the market, to save the economy. [But] the problem is too big to save…
Thus I hazard that many a fool, presently rushing in — and his money — will part. When? As always, I do not know the answer.
Yet the fools must absorb a punishing but necessary lesson. As old Ben Franklin argued:
“Experience keeps a dear school, but fools will learn in no other.”
Brian Maher
for Freedom Financial News
