Inflation, Social Buying, AI Level-Set
The trend is your friend. Thankfully yesterday’s CPI came in just a bit lower than last month’s at 4.9%. From a peak of 9.1% in June ‘22, each of the last 10 reports has ticked progressively lower. The Fed’s rate hikes aim to lower inflation to 2%, which is still far away despite considerable progress.
The rate hikes are over, with the final level at 5.25%. That’s my strong opinion, at least. The futures market has priced in rate cuts in the coming months, but that’s unreliable at this stage. For the last decade, the worry has been that the Fed/Government can’t cut rates in an emergency because they were already at zero. It’s reasonable to expect that the Fed will hold onto higher rates as long as they possibly can. Waiting preserves the Fed’s option to use rate cuts in response to future events.
In the meantime, the regional banking index ETF (KRE) is down -36% since the first failure (Silicon Valley Bank). Failing banks have become the new meme stock. Even Wall St Bets has turned their attention towards buying puts of various regional banks. There are 13 million subscribers on WSB. Organized social investing is likely amplifying regional banks’ valuation collapse. Generally speaking, it’s helpful to be aware of the buying power sloshing around in the various community-organized investment groups.
A penny saved is a penny earned. While banking stocks collapse, technology and software companies have had a few quarters to take cost-cutting seriously. That cost-cutting has a material impact on their bottom line. The pack leader is Meta which added $350B back to its market cap since committing to cutting headcount and R&D spend.
Level-Setting AI Tools – Hype and Reality
There is talk now of an AI bubble. I wanted to take a second to explain what that means for individual investors. For the general public equity market, as of today, only a handful of companies have successfully used AI narratives to pump their valuation. They represent a small portion of the S&P, Nasdaq, or international indexes. New and recent venture capital investments are most at risk, and the average investor has no allocation to that asset class. While the hype cycle is obvious, so are the benefits and usefulness of the tools that continue to emerge on a monthly basis.
ChatGPT is a general-purpose tool. Doctors, students, salespeople, researchers, and even Wendy’s can use it for all types of work at an extremely low cost. Chegg (college education materials) was down -40% last week after earnings, partially due to worries about competition from ChatGPT. I’m in the pro-ChatGPT camp in this case because it leads to cheaper education costs for students. I don’t think limited student budgets should pay for 101-level information that can be generally accessed online.
It’s disappointing that Google, Meta and Microsoft have not released anything as interesting or immediately useful as ChatGPT (AI Text), MidJourney (AI images), or Runway (AI Video). I’m sure they will eventually. Runway was used to add visual effects to Everything Everywhere All At Once, which won Best Picture for 2022. These tools are amazing and still at the early stages of their impact. Even with the hype cycle running at full force, the current generation of AI tools provides enormous value and I wouldn’t consider it to be in a bubble. The biggest offenders in the next year or so will be the companies claiming to use AI when actually have no real AI or machine learning tools involved in their product or services.
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