The ONE secret to investing in AI

I have a fool proof way to invest in AI and it is sure to make money. This post is a little long, but this strategy is so good, and so powerful, it’s worth it - promise.

Ready for this super secret strategy - okay, here it is:

Buy low cost, tax aware, index funds.

Buy them in all the flavors (sectors) you’d like: Technology, Energy, Financials, whatever you want. Then wait 15 years. There, I just made you the greatest investor of all time. You’re welcome.

The irrational flurry of investment into this ‘new’ technology has created insane charts like this one:

That’s silly because that’s a stock image for the google search “massive growth” but then there’s this actual chart of NVDIA that looks…well….also fictional:

I don’t plan on owning Nvdia. I’m staying away because I remember what happened to Cisco in the the years leading to the dot-com crash. Back then Cisco was being compared to the hardware stores that sold picks and shovels to gold minders during the 1849 gold rush.

Sound familiar? NVDIA is producing the chips and providing service to ensure that LLMs work the way they should. Looking at chart similar to the ones above, down below we can see Cisco had a nearly 100% gain as we entered the 21st century by selling those picks and shovels during the heady days of the “information superhighway.” And boy, does that late 90’s early 2000’s climb to the top on this chart look a lot like the current exuberance in the Nvdia chart above, or am I taking crazy pills?

Now, Cisco did get crushed when the dot-com bubble burst, but ultimately stabilized because the entire world started using web 1.0 and then 2.0, which is all made possible by routers and other hardware from Cisco. Similarly, I would argue that Nvdia has so much risk to the downside right now and we don’t even know what we can make with their products that consumers and businesses will buy at scale. Nvdia sells tools, and that’s interesting - Home Depot is a great business too - but at the end of the day, we consumers buy the finished house, not an erector set that turns into a house. It’s NVDIA’s customers that will make the magic happen. So why not invest in them?

Just ask the early investors in Jin Yang’s hot dog app about how it feels to invest in something before truly understanding what, exactly, the thing does.

That’s why i’m suggesting that if we want to play this AI craze, but you’re not sure where to start, one place to begin could be by investing in companies that are doing well and can afford the exorbitant capex hit it takes develop interesting and cool products that leverage AI. Companies don’t spend money to just spend - one day CFOs will wake up and make everyone actually do some work with these chips before they go out and buy a bunch more!

In the end, I guess the more things change, the more things stay the same. Speaking of change, let’s get into the week ahead:

In this economy? At these prices? We get a CPI print on Wednesday and with the massive upside surprise on the payroll data on Friday, after a week full of cooling inflation data, the Wednesday CPI print is going to be the event of the week.

The Consumer Price Index (CPI) measures the average change over time in the prices paid by urban consumers for a basket of goods and services. Where “Headline CPI” includes all kinds of things like food, housing, apparel, transportation, “Core CPI” excludes food and energy prices, which allegedly gives a clearer picture of underlying inflation trends.

So does this chart, which plots core CPI against Headline CPI. Analysts expect headline inflation to rise by 3.4% year-over-year. Core inflation is projected to increase 3.6% annually​. While the trend line below is encouraging, given the mixed data that came out last week, I would suspect that any CPI print that does not strongly confirm this downtrend in inflation will be met with sell off in the market - it’s sensitive time!

“I do not think it means what you think it means.” On Thursday morning I thought I heard possibly the dumbest thing ever said on cable news. The guest on one of the myriad financial news programs I consume said something like “rising interest rates my very well be the cause of inflation.”

In the world of economic theory, this is blasphemy. So I did what anyone else with an opinion does, I took to my keyboard. And in doing my research to help me absolutely destroy the alleged expert telling us rising interest rates are adding to inflation, I came across this analysis, with the chart below, and I am betwixt and befuddled!

In the article (that is very long, you’re probably not going to read it - but, to be fair, if you’ve made it this far, maybe you will?) the author makes some really good points, to wit: 1) Rising interest rates increase borrowing costs, which businesses then pass on to consumers in the form of higher prices, adding to inflation; 2) the last time we hiked rates aggressively, during the Volker era, it actually didn’t work really well - the reduction in inflation can be explained by a precipitous drop in energy costs and the uneven nature in which inflation ebbed across the globe during the 1980’s, and a constellation of other data points; and 3) other factors like cost-push dynamics (like what we’re seeing in fast food prices today) explain the current inflationary environment. In considering other factors, I started thinking about the elderly.

In the US, it’s a well worn saw now that boomers have the wealth. They represent about a quarter of the population and control more than half of the wealth. They also aren’t spending. This article examines data from around the world and notes that saving money amongst seniors is increasing. That’s upside down. In retirement, when you aren’t working, you’re to be spending more than you make - it’s the only time in life where this will not cause your financial advisor agita.

Seniors appear to be loth to spend because they feel that they may need that money to pay for long-term care. As we get healthier, and live longer, it seems more of us are saving for long term care at the end our lives, than to enjoy ourselves in retirement. This only compounds our inflation problem because those with all those dollars are not consuming AND they’re getting 5% on their cash, increasing the supply of money frustrating the Fed’s efforts to bring it down. Paradoxical indeed.

It might be time for Gen X and Millenials to shore up their health, and think about their own end of life care - because, at this rate, we may live to 150 with many of those years coming long after we lose our employer sponsored health care. Yikes.

Bonus: Okay, that was depressing, so a bonus - this week I’m watching for news out of the FTC. They may be jumping the shark on policing the consolidation in the tech industry. Yes, I know last week I was very anti-consolidation; but not in all cases. I’m not changing my mind…It’s called diversity of thought, look it up! 😎