Thursday, 27 April 2023 — Melbourne

By Ryan Clarkson-Ledward Editor, The Daily Reckoning Australia

[7 min read]

Dear Reader,

It’s been an eye-opening week for earnings over in the US.

The general result, and consensus, seems to be surprising. A lot of big stocks are faring better than many expected.

Obviously, that doesn’t mean the threat of a downturn is behind us...

The choppy markets of late aren’t going to go away until we have more certainty on inflation and interest rates. As for when that may happen, your guess is as good as anyone’s. The only thing more volatile than markets nowadays are central bankers.

But despite all this, the big winner has clearly been big tech.

After all the layoffs, all the cost cutting, and all the speculation, big tech continues to thrive. You can see this in the huge earnings beats for Microsoft, Alphabet (Google), and Meta (Facebook).

All three of these tech titans are proving why they dominate US markets.

And when it comes to these three stocks, all of them pinpointed artificial intelligence (AI) as the main driver of their growth to come...

Talk of the town

In both Microsoft’s and Google’s conference calls, it was clear that AI was the focus. As Reuters reports, AI was mentioned an astounding number of times by both companies:

‘Google used the term 52 times on its first-quarter call on Tuesday, up from 45 in the fourth quarter. Microsoft said it 36 times, versus 20 — not including references to its partner OpenAI.’ 

It was a similar story for Meta too. Here’s what Zuckerberg had to say on Meta’s AI development:

‘At this point, we are no longer behind in building out our AI infrastructure,

‘And to the contrary, we now have the capacity to do leading work in this space at scale.’ 

Let’s be real though, none of this is really that surprising. If we were to put our cynical hat on for a moment, we could argue that AI is just the latest buzzword fad for tech to latch onto.

After all, it was around this time last year that ‘Metaverse’ was doing something similar. Today, almost all interest in that technology has dried up, despite some exciting developments in the sector.

My point is the market has a short attention span. And big tech companies are notorious for trying to dazzle with short-lived excitement each and every year.

Personally, I’m taking the cynical hat off for good when it comes to AI.

I don’t believe it will be short-lived, and I think that is being made clear by the discussions beyond tech. For example, it wasn’t just the FAANG stocks discussing their AI capabilities and ambitions this week...

Smarter cola

The biggest AI surprise this week came from both Coca-Cola and PepsiCo.

Yes, two of the biggest names in beverages and snacks spent a good amount of time discussing AI. Here is what Coke’s head of Global Creative Strategy had to say on the topic:

‘I was the one who launched our first NFT for Friendship Day in 2021 and it worked very well, and after that we launched multiple different digital collectibles,

‘But I think AI is a more approachable technology. I can collect NFTs if I’m a big fan, but then I don’t use it every day. [AI] is available to you — you use it you can turn that into your profession, your marketing efficiency machine, you can create and it’s happening now.

‘So I feel the utility value of this technology is much higher.

‘I’m telling everyone…please learn to prompt, it’s going to be useful and it’s fun,’ 

You can clearly see how much Coke’s main marketer believes in AI’s potential. Not just for the brand he represents, I might add, but as a tool for all of us.

In contrast, PepsiCo was a little coyer about its AI plans. CFO Hugh Johnston did note the company is experimenting with AI’s potential, but with a caveat:

‘I think we also need to be responsible with how we use AI. We have actually filed with NIST [National Institute of Standards and Technology] a responsible AI framework, and we need to make sure that we protect employee data, we need to make sure we protect consumer data.

‘So we are using it, but we’re using it in a controlled environment so we learn about all of this,

‘The potential is huge, which is why w e are certainly fully involved in it, but we are trying to do this in a very, very responsible way.’

As a side note, Johnston is also on the board of Microsoft. For that reason, he is certainly no stranger to the tech sector and its developments.

What you should really care about, though, is what all these executives are saying. It’s one thing for a handful of ‘tech bros’ to talk up their latest and greatest development. It’s another matter entirely when a new technology begins to spread to other sectors.

That’s why, as investors, it’s time to take AI seriously...

The AI advantage

As I discussed last week, now is the best time to start learning to work with AI.

In terms of using a tool like ChatGPT, you might be mistaken in thinking it can’t offer investors much use. After all, the chatbot itself is limited in terms of the available data it has. It isn’t using real-time information, and therefore can’t provide up to date financial figures, for example.

But what you can use ChatGPT for is learning about an industry, a business, or even a product. After all, understanding what a listed company sells is just as important as understanding how much it sells. That’s why a balance sheet, as important as it is, can’t provide the full picture.

Having a full understanding of a stock requires a level of knowledge that few investors are willing to commit to. A tool like ChatGPT can help you bridge that gap.

Like I also said last week, AI is more than just ChatGPT...

My colleague, Callum Newman, has developed his own AI trading solution.

This sophisticated algorithm, built by software developers and tested via Cal’s vast trading knowledge, is offering a glimpse of the future of investing. It’s something I expect will become just as integral to every trader’s toolbox as charts, balance sheets, and technical or fundamental analysis are today.

As Cal himself puts it:

‘They [AI] are not going to “replace” human work or judgement.

‘They are going to compliment them and take care of repetitive, low-value work and free us to focus on creative ideas and higher-level tasks.

‘AI is a massive positive for productivity growth…and trading stocks!

‘That’s why I’m so excited about the share market right now.’

It’s also how Cal is able to offer his readers high-potential trades in tougher market conditions. Because as he explains here, his machine-assisted trading strategy is designed for times like these.

So, if you’re looking for the best way to get in on the AI boom, this is likely it.

Make sure you’re one step ahead of the masses by tuning in to Cal’s presentation, ‘The MAT Advantage’, this evening. Secure your spot here before 7:00pm AEST tonight.

Regards,

Ryan Clarkson-Ledward,
Editor, The Daily Reckoning Australia

PS: As of tomorrow, The Daily Reckoning Australia will have a reduced publishing schedule, coinciding with the launch of our brand new free e-letter, Fat Tail Commodities. You're next article from The Daily Reckoning Australia will be on Saturday 27 April.

By Bill Bonner Editor, The Daily Reckoning Australia

Dear Reader,

‘Yesterday, all my troubles seemed so far away
‘Now I need a place to hide away
‘Oh I believe in yesterday’

The Beatles

We pause to draw breath…tidy up…and say farewell to yesterday.

Last week, we looked at an approaching recession. We saw how the pain needed to escape from inflation is likely to fall mainly on people who can’t stand it. To make a long story short, they’ll use politics to try to stop the clock.

Another way to look at it: after a blow-out bubble, the next chapter is normally a blow-up correction…a recession. Life seeks ‘normal’, so the bigger the bubble, the bigger the correction that follows. Then, in keeping with the cyclical nature of financial trends, the ‘correction’ will overshoot…leaving assets underpriced and setting the stage for a new boom.

But when things have been good for a long time, nobody wants to turn the page. People have reputations to protect. Careers. They’ve written books about ‘stocks for the long run’. Some have gotten Nobel prizes. Others have cushy, high-profile jobs at the Treasury and the Fed. 

Corrupting maths

We’ve seen how the poor have been trained to live on federal handouts. At any sign of a cutback, those pips are going squeak.  

The rich have gotten used to rising asset prices — from the Fed’s ultra-low interest rates. And remember, they’re the deciders. Ultimately, they choose what is good for them, not what is good for our grandchildren.    

As for the middle classes, their housing ‘equity’ is already shrinking…and their real incomes have been going down (thanks to inflation) for the last two years. A recession will only make things worse.

And it’s not just the money. The last 100 years have been kind to the US. We were the richest, most powerful, most admired people on Earth. Who wants to give that up?

Here, in stark focus, is the corrupting maths of democracy, generally, and the US’s late, degenerate empire in particular. We need higher interest rates to combat inflation. But financially, we can’t afford them (too much debt to refinance). Economically, we can’t support them (too many businesses depend on low rates). And politically, we can’t tolerate them (too many voters — rich, poor, and the middle classes — with a keen interest in not allowing a correction to do its work.) 

They, the deciders

For more detail…curbing inflation means a Fed Funds rate at least a couple hundred basis points above the CPI. But the Fed’s low interest rates brought US$91 trillion in debt…US$50 trillion in ‘excess’ asset valuations…and an average mortgage of US$313,000.

A reasonable Fed Funds rate today should be about 7% — about 19 times higher than it was three years ago. Already, the average new monthly mortgage payment is at US$2,538. And if the whole Everest of debt were refinanced at 7%, it would mean annual debt service costs of more than US$6 trillion — or a quarter of GDP. Not going to happen. Not without an avalanche of defaults, bankruptcies, and crashing asset prices.

And then, who do ‘The People’ vote for? The candidate who promises to balance the budget? Or the one who promises more free stuff? The young one, who moves boldly into the future, by bringing the US empire to a graceful end? Or the old one who promises to hold onto the glories of the past with bigger military budgets?

In any government, over time, more and more people get a piece of the action — handouts, subsidies, protective tariffs, ‘excess’ asset values, tax breaks, jobs, contracts. Then, fewer and fewer can accept change. It’s why democracy degenerates into something else…something more disagreeable. The natural feedback loops that capitalist economies need (corrections, bear markets, budget cutbacks, reputational loss…) are unpleasant. People use politics to stop them. Rivals are blocked by threats and sanctions. Money is printed to keep the show on the road. The news media, joining forces with the political elite, shuts out alternative views. The future still happens…but without the purgative or pedagogical benefits. Toxins aren’t eliminated, they are multiplied; the zombies shuffle along, indefinitely. Debts grow bigger. The danger of war grows more acute.

Smarter, nicer, stronger…

Unwilling to accept harsh reality, people hide away in fantasies and delusions.  

Americans are damned sure they know where the border between Russia and the Ukraine should be; and they’re willing to spend billions to keep it there. As for China, they’re sure she’s up to something even if they don’t know what it is.

They also think they know what the surface temperature of the Earth should be half a century from now…and they’re willing to pay the costs of setting the thermostat, provided the money can be printed, not earned.

They believe in ‘equality’ even though nothing like it has ever existed…and practically every American aims to be smarter, nicer, stronger, and cooler than his neighbours.  

And they are entrusting their futures to the most geriatric team in US history. Dianne Feinstein is 89 years old; she might recall one of Franklin Roosevelt’s ‘fireside chats’. Charles Schumer is 72; does he remember when Kennedy was shot or when the Beatles released their Sgt Pepper album? Joe Biden is 80; maybe he remembers hearing Adolf Hitler’s voice on the wireless? Clarence Thomas is 74. Lindsey Graham is 67. Richard Durbin is 78. Nancy Pelosi is 83. Barbara Boxer is 82.  

We have nothing against old people. We’re among them. But whatever tomorrow brings these people, it is not likely to be as appealing as yesterday.

Regards,

Bill Bonner,
For The Daily Reckoning Australia