Hartnett is Correct-- A.I. is a Baby Bubble
Right now AI is doing nothing for bottom lines of anyone except CEOs and some stock holders.
"The Fed facilitates bubble growth with easy money. The Fed then hikes to deflate the bubble. The Fed breaks something. The Fed eases starting the whole process over. "
2024: Why A.I. is Likely a Stock Bubble
Intro
The Bull Case
What A.I. is Supposed to Do for Companies
What Companies are Actually Doing With A.I.
Companies are AI-Signalling To Pump Stocks
Hartnett on Fed Bubble Blowing
The Dot Com Bubble Example
The 1980's ATM Invasion
Artificial Intelligence is a bubble.
Trading Comment
1- Intro
In an EOY report entitled Flying Blind, (at bottom) BOA feels if AI turns out to be a bubble, correlations between the Mag7 and broader market could return with a vengeance. If A.I sputters, then Mag7 would also certainly fall. Finally, if Mag7 falls under those circumstances, then all stocks fall.
Given how high dispersion is currently in the S&P, a cracking of the Mag 7 could drive stock correlations significantly higher resulting in fragility risks to the S&P.
Why?
BOA argues there would be no place to hide as those top seven tech stocks have *been* the safe-haven (Tech Gold) for stocks the better part of 2 years.This, in combination with observations of how corporate America is currently implementing leads us to believe this is now an actual bubble.
2- The Bull Case
The Magnificent Seven will be able to capitalize immediately on AI not just at the top line sales, but also at the bottom line by greatly reducing operating costs by firing people.
Here’s what GSTrader Tony P. said on that in May of 2023
The fever around AI has been very detectable in the past month. - there’s a lot of rough work being done on the perceived winners. - the market is showing its hand ... it believes the biggest beneficiaries are the names at the very top of S&P index who notably carry the most market cap ... think MSFT, GOOG, NVDA
He was right. Those stocks and other companies benefited more than they should have. But, did those companies reduce costs, or create innovative tools with AI? No. Hence it is a bubble. And *if* bad news comes before these firms actually innovate or terminate employees, it's going to pop. Right now they are doing neither to justify the valuations given them on AI's behalf.
To be fair why should they? Even better, if Powell starts easing they can continue promising the innovate and cut costs but will never have to. Incumbents do not innovate until they have to. But if Powell does not cut..... look out.
Before we get a little more into the mechanics of bubble behavior, lets first describe how AI and every new technology changes business practices in the long run.
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3- What A.I. is Supposed to Do for Companies
There are two ultimate benefits from this and every new technology once they figure out how to use it best.
COSTS DROP: Cost of production drops from efficiency improvements and concomittant labor costs dropping (aka- people getting fired)
PRODUCTS CREATED: Innovative applications are devised to add value customers want
That's what all new tech is used for when used properly.
(Flying Blind at bottom)