Blain’s Morning Porridge Feb 8th 2024: ARM at the top of the AI Bubble – why do we keep repeating these things?

“Those who rule data will rule the entire world.”

The AI everything bubble has all the makings of a classic market pop – belief in a theme, everyone on the bandwagon, hype, enthusiasm and not much real content. And sitting in the middle will be those who really claim to understand it.. Plus some thoughts on Tucker Carlson.

Couple of things to be thinking about this morning. I am genuinely interested to see how Tucker Carlson’s pre-recorded interview with President Putin comes out – it may just be terribly embarrassing, or it might be something much, much more.. But, let’s start with some caution around the AI bubble.

AI – How many pops in a bubble?

The spectacular overnight gains in ARM on the back of its “improving outlook” for license and royalty payments from its chip designs, are being hailed as yet another confirmation of the everything AI rally. The CEO says AI will power the next stage in its growth – of course it will. Yesterday, when I wrote about the Magnificent Seven, basically it was all about which of them stand to gain most from AI.

And there it is… deja-vu all over again… Been here before…

The similarities of the AI bubble to 2000, and the collapse of the Dot.Com boom – are just too obvious to old market dogs like myself. The Dot.com pop was nearly a quarter century ago – then it was the euphoric belief e-tailing, the internet and mobile phones were the greatest consumption revolution of all time. Anyone under 45 today – and that’s most of today’s tech analysts, bankers, P/E investors and certainly anyone calling themselves an AI investment expert… won’t much remember just how fervid and downright silly the market became 24 years ago.

Two things to say:

• Pets.Com. The IPO of the millennium before it filed for bankruptcy a few months later.

• The people who made money out of dot.com were the bankers. Fees, fees, and more fees and warnings from the boss to not spend our bonuses on the stocks.

I guess what interests me is why tech bubbles keep repeating. What are the behaviours that cause markets to repeat the same cycles time and time again?

Today, the biggest winner from AI and how ARM has followed it up, is Masayoshi Son, Softbank boss, who can point to the suddenly improved NAV on his Vision Funds and declare .. “what a clever boy I am.”

Vison funds hold 90% of the Chip designer – and frankly Son pulled off a masterclass hyping last year’s IPO with the assistance of the investment banks boiler-housing the deal, including to buyers with vested interests in AI upside. The timing was exquisite. I could be cynical and suggest Son bet the shop on that one ARM IPO roll of the dice. He had to persuade markets everything is good at Softbank – covering up the multiple disappointments including Alibaba and WeWork – with the ARM play. If it had underperformed post IPO… Son would be in serious trouble today.

I could, of course, point out lots of concerns about ARM’s valuation – like it’s not chip designs that are scarce, but the production of them… or the issues I’ve previously raised in the Porridge (See: Will ARM break the Tech Market), such as its biggest customers include itself in China, where it seems to have lost control (and the Chinese are rapidly innovating their own designs), or how crashing demand for chips from the flat-lining Electric Vehicle sector will impact it.

But, let us not be churlish.

Give Son his moment in the sun (see what I did there!). The reality is the rest of the Vison Fund book of IT detritus looks just like that box of old chargers and cables everyone has sitting in the corner of their home office. Junk we can’t bear to part with just in case there might be a use for it – which we know will never, ever happen.

On the upside, ARM’s chip mastery is an important part of the AI ecosystem – simple as. If AI is as important, and if the evolutionary paradigm shift the market is being told it is – is, (I give myself a bonus every time I get away with using “paradigm shift”), then ARM will be a winner. Right up to the moment someone new finds a new way to do what it does.. better.

I don’t have an Ericson, Motorola or Nokia phone anymore… cell phones evolved and became Smart, but the chargers are still under my desk!

The thing is… equity markets tend to accentuate the immediate positives and eliminate the negatives. As someone pointed out recently, the only negativity you will find on market AI darlings like Nvidia come from credit analysts wondering how AI firms will pay back long-term debt when a mature AI market no longer justifies 60x stock multiples. Where will the profits to repay debt come from?

A number of market watchers have noted that back in 2000 the dot,com bubble was around 40% of market cap. Today the AI market is, well… since every tech company in existence has now declared itself an AI based investment bet… at least 40% of the market.

I guess this is normal behaviour in Tech markets. Through history we’ve seen multiple bubbles emerge around the dominant tech themes of the period. For instance, the railway booms and busts of the 19^th Century, speculation in fertilisers, oil and coal, booms in aviation and autos, before the internet, digitisation and now AI. All these things become established. (Well maybe not all. Three times I’ve invested in Airships… to little avail except a lighter wallet. Show me a powered weather balloon deal and I’m your mark!)

I was not particularly surprised to read how Morningstar (no, not the Dark Lord, but the US financial analytics firm) declared Cathie Woods and her battery of ARK Tech ETFs as about the most efficient destroyers of investment value in recorded history, losing investors some $14 bln. She is another serial collector of improbable tech businesses and a believer in market size over profits. “These funds managed to lose value for shareholders even during a generally bullish market,” said Morningstar.

Morningstar really don’t rate Ms Woods – previously citing her history of underwhelming returns, high vol and big downside. They rank her funds below average across the board – well, consistency is important. Despite promising market beating returns (and lots of other stuff) she has consistently underperformed the wider market. Yet, her ETFs attracted tremendous retail following on the back of energetic marketing and the promise her young team of “researchers” understood the opportunities better. Morningstar rate all her teams as “below average”.

Morningstar have previously called Cathie’s reliance on her instincts a liability. Stocks with sky-high valuations, limited earnings, and cross-correlated to what-ever the tech-theme of the week is. Its research function… hah! a pin and a child’s picture of a donkey’s bottom. Risk management still isn’t even a thing at ARK.

Yet, ARK defines the last decade of investment management – infectious enthusiasm, puff marketing, uncritical opinions presented as research, all fuelled by the excesses of cheap money fermenting speculation on the grand scale!

Meanwhile.. in Moscow..

The USA might be the most dynamic and vibrant economy on the planet, but as I wrote earlier this week… a lot of people are terribly unhappy. For the benefit of fellow Europeans who don’t bask in the glory that is Fox News and other bastions of who the Alt-right define truth, freedom and democracy, let me present a quick crash course in Tucker Carlson studies.

It matters for markets.. because Carlson is enormously popular in the US. He is definitionally an influencer, and might even be the people’s choice as Donald Trump’s running mate. To suggest Fox sacked him for thinking he was bigger than the channel – nonsense… He is a journalist – so he keeps telling us. Exposing the truth… as he sees it.

Tucker Carlson is an interesting fellow. What’s his objective? He tells us he is a journalist. He has opinions. He recently said interviews with President Zelensky of Ukraine are “not journalism. It is government propaganda.” Heard it on the Carlson show – must be the truth?

Therefore, Carlson is in Moscow to interview Vladmir Putin, because “the uncurious western media has resulted in a grossly uninformed public.” Carlson says the American public has a right to hear Putin’s voice and understand why Ukraine was invaded. Even smart, clever, erudite Republican’s are calling it “balance”, seeking to obscure and justify their recent treachery in defunding Ukraine.

The Kremlin is pleased to host the interview because it says Carlson’s approach will be fair and balanced, unlike the usual terribly one-sided western reporting. It definitely won’t be propaganda. Definitely not. Russian media have lauded Carlson as a journalist “who speaks the truth” – although they also admit they turned down other journalists who also requested to speak to Tzar Vlad.

The not-at-all propaganda interview Carlson, who, remember, is a journalist, has with Putin will definitely not be propaganda, but will be a proper forensic examination of the truth – as perceived by Carlson. The America media superstar will grant the Russian’s leader the opportunity to share his genuine perspectives of the special military action which the US, under Sleepy Joe Biden, has become implicated in. So no cheap political point scoring then.

It will not be propaganda because Carlson loves the United States. He wants it to remain prosperous and free…..

As Carlson, the journalist, will be aware; the most effective propaganda dwells mostly on facts, but succeeds by deleting key truths and inserting a few massively big lies right under viewers noses. No need to worry then.. because Carlson keeps reminding us he is a journalist, and therefore acutely aware he might look like a shill unless he is very alert.

The interview was recorded Tuesday. I am told it will surprise us.

I expect Carlson will ask about the horrendous casualty figures on both sides. He will be told how the hundreds of thousands of Ukrainian dead were unnecessary, how the country is being turned into wasteland by the West funding the fascist resistance to the Russian liberators, and that press-gangs are scourging the streets for deserters and conscripts. He will listen as Zelensky and his cabal are held to account by Putin. He will nod his head vigorously as Putin berates the west for allowing such suffering, and plotting to bring down Mother Russia through Ukrainian aggression, and the West ignoring Russia’s valid security concerns.

Carlson will keep nodding as Puttin rails against the sums Western Governments are paying Zelensky to fight the war against the peace-loving Russians who only want to save their Ukrainian brothers from the fascist usurpers who have captured the nation. Putin will ask Carlson why Western governments have seen fit to consign their peoples to penury by not using Russia’s cheap and plentiful energy.

Carslon, will be respectful and probably not ask such obvious questions such as the issues of a strong nation invading a weaker Democratic one, why Western journalists are in Russian jails, or the ineffectiveness of the initial Russian invasion. Putin will boast of global support for Russia’s action, the strength of the economy and the single-minded determination of the Russian people to save Ukraine. And Carlson, who claims to be the only journalist to have asked for an interview with Russia’s war-lord, will thank Putin for his time.

I will be watching the Twitter interview on an old laptop lest I lose my temper.

The fact is… the interview is very much part of this year’s US election.

Out of time..

Bill Blain

Strategist – Shard Capital
Alternatives – Wind Shift Capital – www.windshift.capital

Author – The Morning Porridge

 

billblain@morningporridge.com

billblain@windshift.capital