“When I see a bubble forming I rush in to buy, adding fuel to the fire. That is not irrational.”
– George Soros, 2009
I’ve spent 25 years watching, trading and investing in the stock market. The repetition of patterns is amazing. In every generation we see new bubbles, which form when a new innovation comes along and everyone gets excited about the future. The crowd gets swept away on a wave of madness, fueled by the recent gains they’ve seen for themselves (or for others) and all other considerations go out the window. Get me in, I don’t care how, I can’t miss out on this.
In December, ChatGPT began to spread like wildfire on social media. A handful of art-related AI programs like DALL-E 2 also began to proliferate on Instagram and some of the more image-oriented sites, but ChatGPT captured the imaginations (and nightmares) of the chattering class like nothing else we’ve ever seen.
Wall Street has begun to take notice of the AI theme for the stock market. It should be noted that trading programs based on earlier versions of AI have been around for decades, so the concept is a very comfortable one among analysts, traders and bankers at traditional firms. But now that there is retail investor interest in riding the wave, you’re going to see the assembly line lurch into action very rapidly. The switch has already been thrown. They’re pulling up their overalls and rolling up their sleeves. Funds, products, IPOs and strategies are being formulated in the dozens as we speak. This will hit the hundreds before we’re through. It’s merely stage one.
This is Barron’s, waving the checkered flag a few days ago:
In a research note Wednesday, UBS analyst Lloyd Walmsley points out that the suddenly wildly popular natural language chatbot ChatGPT, created by the start-up OpenAI, backed by Microsoft was on pace to surpass 100 million monthly active users in January, up from 57 million in December.
Walmsley notes that it took TikTok about nine months from launch to reach 100 million users, while for Meta Platforms’ Instagram, it took about 2.5 years. “We cannot remember an app scaling at this pace,” the analyst adds. He says ChatGPT is averaging more than 13 million visitors a day, more than double the level in December.
Walmsley adds that he’s heard venture-capital investors speculate that the market for generative AI applications could be as large as $1 trillion. He notes that the world has over one billion knowledge workers; OpenAI charges $42 a month for the professional version of ChatGPT. If you assume every one of those people gets two accounts—one general, and one specialized—you get close $1 trillion.
I want to lay out a few of the things you’re about to see, so that when they happen, you understand that this is nothing new and all part of the ancient rhythm of the markets. An ebb and flow that’s been with us from the first sales of the South Seas company stock in London, or the Dutch East India Company’s share offerings, or the bubbles in canal stocks during the earl7 1800’s or the railroad stocks in the late 1800’s or the oil and steel ventures of the early 1900’s. We repeat this over and over again, always with the temporary amnesia that allows us to forget how this cycle usually ends – small handful of winners, lots of ruin, rancor and recrimination for everyone else.
Let’s get into these items:
1. Bubbles do not occur out of thin air or for no reason. There’s always a kernel of truth around which the mania coalesces. This is what makes them so irresistible and frustrating to fight again. The crowd does have the facts on its side, at least in the early going. Everything they said the internet would be able to do 25 years ago came true. And then some. It’s actually been more world-changing than even the biggest bulls would have thought possible. And yet, almost none of the companies from the late 90’s are still around. The Nasdaq had fallen by 90% from its peak despite the fact that, if anything, we had been underestimating the internet’s impact. Throw in wireless communications and throw in broadband technology – they all appeared at the same time. The bulls were right on the concept but wrong on the horses they’d bet on and way too early. So for starters, I want you to feel comfortable with the following: It is possible to simultaneously believe in the massive potential of AI while believing that the publicly traded stocks engaged in AI are unworthy of investment. You can believe both things and say both things to people in response to their exhortations. You are not backwards or old or clueless or a dinosaur for holding this view.
2. Twitter will be filled with charlatans, promoters and people who do not have your best interests in mind. There’s a thing about investing in the twenty-twenties decade where it’s not enough to make money in something, they also need to belittle everyone else who wasn’t as smart as they were to get in. There’s also a need to promote the things they were early too because without others coming in later, they have no one to sell to. So there is a built-in urge to evangelize and the place this is usually done by professionals and pseudo-professionals is on Twitter (retail folks use Reddit for this in the modern era, having used street corners, saloons, radio shows, pamphlets and the Yahoo Finance message boards in previous eras). You will see a new class of AI experts build large followings on the internet, starting YouTube shows and podcasts to cash in on the phenomenon. Their opinions on the daily happenings in “the AI space” will become gospel for the mainstream media, newspapers and TV networks while they use this “establishment” clout to promote various AI products and platforms in which they’ve made (or received) a financial investment. This is America, there’s nothing inherently wrong with this. But it’s coming. And you will see it everywhere you look this summer.
3. The people who make money in AI stocks will go after the conservative investors who have missed out or stayed on the sideline. If you’re a value investor or a bank CEO or some other paragon of the established order on Wall Street, you’re going to want to avoid walking in front of an open microphone and blurting out an opinion on this stuff. It’s going to come back to haunt you. The lottery winners who got in early on the AI stocks before the doubling, tripling and quadrupling will be out for blood. Remember, it’s not enough to have made money in the twenty-twenties – now it’s about utterly destroying the people who may have been skeptical or wrong while you were right. There is a sickness when investing is combined with social media, which is why every startup that engages in it eventually flops and fades. No good can come of this.
4. In the beginning, there are not enough stocks to go around. Have a look at the chart below. These are the three pure-plays in AI that currently trade publicly. BigBear ai has government contracts for artificial intelligence (legitimacy!). C3.ai has the right ticker symbol (AI, nailed it!) and SoundHound has the term “ai” in its name plus a backlog of about $300 million worth of projects for corporate customers in the space (customer service phone calls, conversational AI that replaces human interaction, etc). Their market caps are small and their business models unproven but there are no alternatives. Retail investors can’t call up Silicon Valley and order themselves up some shares of the next wave of AI startups. They must content themselves with what is on the menu today.
5. The ETFs are not going to suffice here. They are loaded up with traditional tech stocks like semiconductor companies and software companies and robotics and automated driving and all sorts of stuff that is AI-related or AI-adjacent or AI-scented, but is not quite in the eye of the hurricane. You can find a full list of ETFs here at VettaFi that have something to do with AI. Most of them are loaded with large cap Nasdaq names where AI is just a small (but growing) part of their business. By this logic, IBM is an AI stock. Okay. You’ll also find a lot of AI bundled with autonomous or robotics stocks in these products. There’s no reason they can’t work as investments, but it’s not quite the same thing as owning a pureplay on AI that goes up because more people are getting excited about AI. Rockwell Automation is a robotics play. It’s all the robotics ETFs. They may use AI but they are not inventing AI. It’s robots for factories. Different secular trend. I own Nvidia, which I fully expect to be a major player in AI through the rest of the decade. Most of the tools available to developers in the AI field involve Nvidia’s software and hardware platform. It’s already an expensive stock so I don’t expect a re-rating. I just know that I am glad to have been in the name for a long time and following their progress in AI will be one of the ways I keep myself sane and away from the carnival of hype.
6. A lot of desperate companies are going to get caught up in the AI hype and start issuing press releases. Below is a chart of Buzzfeed. Try and see if you can pinpoint the day they announced an AI initiative:
Yes, that’s a 95 cent stock tripling overnight. Buzzfeed is going to start replacing their their regular worthless content with software-generated worthless content. I’m not sure why that’s worthy of a pop other than the fact that the term “ai” was part of the announcement. Just as we saw companies adding the suffix “dot com” to their names in the 90’s and announcing “blockchain” initiatives in 2017, so too will we now see an endless parade of AI announcements in 2023. Large companies, small companies, microcaps, penny stocks. It’s coming like a tidal wave. It will work at first, especially in controversial, heavily-shorted names where the float is small and the bears get blindsided. Eventually, there will be too many announcements and they will lose their power to inject excitement. But not yet. We’ve only just begun.
7. Some washed-up hedge fund manager or former tech founder is going to use this as a springboard back to prominence. We saw this with Bitcoin. There were guys (mostly bearish on stocks and the economy) who had been wrong for a decade about everything they were saying. Many of them “pivoted to crypto” in 2021. It rejuvenated their content and their audience development with a fresh new purpose. All the macro doom and gloom could now be repurposed into “and so, consistent with the last ten years of my money-losing, Fed-bashing, fear-mongering, non-constructive rhetoric, I am now pivoting to crypto because decentralization is the only answer!” It’s funny that they had the cartoon piano dropped on their heads twice – first, they’re telling people to short stocks or avoid the market during the second best decade for returns of all time, causing their followers to miss all the gains and even lose money from the excess trading and hedging. Then, at the very peak of another, even more egregious and embarrassing bubble, they go all-in and start changing their avatars to laser eyes and dressing in costumes and whatnot. They lost in both directions! Only subscription guys can get away with this. If they were actually running money, their AUM would be zero by now, LOL. But you’ll see – the new AI opportunists are going to come from the ashes of some other movement that’s already been burned to the ground. No one will remember or care, it’s fine.
8. The machinery is cranking up. I mentioned the assembly line above. Here’s how Wall Street works: Sell the people what they want to buy, when they want to buy it, and if a little of a good thing is good, then a lot of a good thing is great. When the ducks are quacking, you feed them. That’s how we ended up with one thousand SPACs and two thousand IPOs and 10,000 crypto currencies. Because Old Man Thirst is one of nature’s most reliable, renewable resources. The old men are thirsty to capitalize on what the young men are capitalizing on, so they will be stuffed with AI IPOs and AI ETFs until their livers are turned into foie gras. “Here comes the gravy pipe, open wide you sonofabitch.” The bankers are on the phone with the west coast right now, “Show me something in AI, Chad…” Mark my words, they will drown you in supply. Three publicly traded pureplays will become five, then ten, then fifty. It’ll happen overnight. One or two of these companies will become something bigger. The rest will fade away when the mania subsides. Are you good enough to identify the AI winners from the losers at this early stage? Go for it!
I can do more but eight of these ideas is enough for now. I promise to revisit as things get even more intense (and they will).
To close, I’ll leave you in the hands of George Soros, legendary hedge fund manager, giving the below speech in 2009 during the aftermath of one of the biggest booms and busts in history…
I have developed a theory about boom-bust processes, or bubbles, along these lines. Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend. A boom-bust process is set in motion when a trend and a misconception positively reinforce each other. The process is liable to be tested by negative feedback along the way. If the trend is strong enough to survive the test, both the trend and the misconception will be further reinforced. Eventually, market expectations become so far removed from reality that people are forced to recognize that a misconception is involved. A twilight period ensues during which doubts grow, and more people loose faith, but the prevailing trend is sustained by inertia. As Chuck Prince, former head of Citigroup said: we must continue dancing until the music stops. Eventually a point is reached when the trend is reversed; it then becomes self reinforcing in the opposite direction.