Its Over, page-22420

...BUT I will add : Do you not think that when NVIDIA finally crashes, that it will not take the entire equity market down with it?

...so I actually opine that it is better to not be involved in equities at all, whether good or mediocre companies, it does not matter. All will be subject to some form of correction, when the end of NVIDIA marks the end of the bull market.

...To me, an NVIDIA fall taking the market down is like a Trump loss taking the GOP down.
...You lose the hero, you lose the inspiration, you lose the inspiration, there goes the hype and market means revert. ALWAYS. This time is NOT different.
I (Dan Ferris) bet you didn't know you can measure the market value of hopes and dreams...

I didn't either.

That is until I recently stumbled across a July 9, 2020 piece by Bloomberg macro strategist Cameron Crise, published on the Bloomberg terminal, titled "Why Worry About COVID When You Can Dream About 2030?"

In the piece, Crise defines the "hopes and dreams" metric...
[T]he "hopes and dreams" analysis disaggregates equity market valuation into book value, the net present value of expected earnings over the next three years, and everything else – the "hopes and dreams" of future earnings that are not yet forecast.
Crise is describing a valuation tool that quantifies how much investors are looking past a business's fundamentals and instead betting on the over-optimistic nonsense people believe about the future.
Crise adds immediately after his definition that, "the more hopes and dreams dominate equity valuation, the more speculative the market pricing is." So it's a great tool for measuring how hyped the market is at any given time.

Hopes and dreams were 70% of the S&P 500's market valuation at the dot-com-era peak in March 2000. They're about 65% of it today, and a dot-com-bubble comparison suggests there's plenty of room for hopes to dwindle and dreams to fade...

Today's measure is roughly in line with November 2000, after the S&P 500 had lost about 14% of its peak value. The S&P went on to lose another 35%, finally bottoming out in October 2002.
Hopes and dreams took over the market, then the market fell apart.
Hopes and dreams during the dot-com bubble were about the Internet...

"Everybody" knew the Internet was the most amazing technological advancement since the printing press. Everybody knew it would make lots of folks rich. Everybody knew you couldn't go wrong buying Internet stocks...

Today, "everybody" is focused on a single buzzword that has become nauseatingly ubiquitous: artificial intelligence, or more commonly, "AI." Everybody knows AI is the biggest thing since the Internet, that it'll make lots of folks rich, and that you can't go wrong buying AI stocks.
Today, everybody, everywhere, is talking about AI...

I can't get away from it, not even 8,000 feet up in the Rocky Mountains – a two-hour drive from any major city – at the annual VALUEx Vail conference run by my friend, investor and author Vitaliy Katsenelson.

It's an invitation-only meeting of 40 investors who pitch their favorite stock ideas to each other.
At breakfast each morning, Vitaliy presents the group with a discussion topic. You'd think a group of value investors would be able to talk about something besides AI, but sure enough, on the first morning, Vitaliy proposed the question, "How do you use AI?"
The funny thing is, we talked about that same question at one of last year's breakfasts. (Don't tell Vitaliy, but when he stops talking about AI at VALUEx breakfasts, I'm going to start talking about it all the time.)
AI has captured the world's imagination...

Alphabet, Google's parent company, boasted on social media recently about "the magic of Google AI."

The people who run Google are smarter than I'll ever be, so it feels odd for a group of geniuses to make a comment that seems to sum up what the average fool thinks of AI.

It wouldn't surprise me if the technology became embedded into many tasks that are currently run by software. I assume most software might be improved by more intelligence.

That might sound suspiciously or even worthlessly vague as AI assessments go, but anybody who talks about the future in less-than-vague terms should be a lot more suspicious to you.

Any technology pundit touting AI miracles... any financial analyst looking for pure "AI stocks"... and certainly any government person saying anything at all about AI... is all highly suspicious to me and has a particular aroma any good analyst must learn to identify...

I think 90% of what is touted about AI right now will be revealed in the next several years as pure bovine excrement. And the market is already starting to figure that out...

A recent Financial Times article reported on the performance of Citigroup's "AI Winners Basket," a group of stocks said to benefit from AI...
About 60 per cent of stocks in the S&P 500 have risen this year, but more than half the stocks included in Citi's "AI Winners Basket" – an index based on the names that were garnering the most excitement among the bank's clients last year – have declined. More than three-quarters of companies in the AI basket had climbed in 2023.
Sounds like it's becoming an AI Losers Basket. Before it's all over, I bet that whole basket will decline.
It's hilarious to me that so many people are talking about AI and putting good money into stocks because of it. It's hilarious because, if stock market manias weren't known to send valuations flying into the stratosphere, nobody would care about AI, since 99% of everybody talking about it doesn't even know what it is.
They only believe that they can make money from it, because they've heard every talking head on their TVs and computers telling them so. They have no idea what they own. This is what I am warning you against getting caught up in...

A recent CNN article pointed out that folks buying Nvidia (NVDA) don't really know what it does and suggested it'll one day be replaced by another company whose name they can't pronounce.
Nvidia's $3 trillion-plus market cap is now larger than the entire market cap of each of the French, German, and U.K. stock markets. I suppose the company could be worth more than every public company in each of those countries... but would you bet on it?

It would have been a better idea to buy Nvidia back in 2016. That's when my colleague and editor of Stansberry Venture Technology, Dave Lashmet, recommended shares in the chipmaker. The company was valued at around $24 billion at the time.

The company's growth back then came from the video-gaming sector, but Dave saw potential ahead for more growth from AI and wrote, "nobody on Wall Street is betting on artificial brains as a business segment."

That's far from the case today.
Crise also noted that less than half the S&P 500 stocks and 43% of the Russell 3000 are trading above their 50-day moving averages and that the S&P rallied twice last week with less than 200 of its components rising on the day. Crise says this constellation of circumstances has aligned as often over the past month as it has only once in the past 30 years: March 22, 2000, two days before the S&P 500's dot-com-era peak.
The desperation and speculative fervor around AI remind me of a bumper sticker allegedly seen in Silicon Valley after the dot-com bubble blew up, which read...
'Please, God, just one more bubble'...

THAT is what the hopes-and-dreams metric measures: investors' belief that, even though they failed to get rich from the past three epic bubbles, the presence of yet another awesome new technology means they'll be able to get rich fast in this one, and with a lot less effort than it takes to generate real wealth in a universe in which there is no free lunch.

It's the same reason people bought meme stocks and NFTs (non-fungible tokens) over the past few years... and every other pathetic gamble investors have bought in the financial markets over the past few centuries.

A few smart folks get an idea and make some money from it.

When it seems to every fool with a few extra bucks in his pocket like the market has validated a few early birds' theses, a greed-addled throng of followers pours into those markets, trying to ride others' coattails to an easy fortune.

But life – and investing – doesn't work that way. The coattail riders always get wiped out.
More than one successful investor has pointed out that the wise do in the beginning what the fool does in the end. And it's looking a lot more like the foolish end of the inflated expectations portion of the AI hype cycle than its wise beginning.

Consultants at Gartner have made a technology hype cycle graphic you should see...

​

The language on the graph is reminiscent of my Digest last Friday.
I evoked the phrase "One Ring to rule them all," from Lord of the Rings, which refers to the "One Ring" of power at the center of J.R.R. Tolkien's epic of hobbits, elves, wizards, and other creatures in the mythical land of Middle-Earth.

Looking at Gartner's hype cycle chart, you can almost hear Gandalf, the wizard from Lord of the Rings, warning, "Should you survive that hopeless dark chasm, the Trough of Disillusionment, you will have to call upon all your remaining strength to climb the steep Slope of Enlightenment and finally stand atop the glorious Plateau of Productivity..."

Right now, my vain efforts to stop hearing and talking about AI have left me thinking we're somewhere around the Peak of Inflated Expectations. Next stop: the Trough of Disillusionment.
Make sure you're not on board the hype train when it leaves for that station.

As for me, I'm not betting on AI at all because I think it's a bunch of hype and nonsense at this point. I'd like to think I'll become interested as an investor when somebody can convince me we're on the Slope of Enlightenment, but only time will tell.
For now, here's an idea so 'terrible,' it's good...

When buying hopes and dreams is widely seen as a good idea, shorting the market is widely seen as a terrible one...

JPMorgan Chase recently published data showing that "short interest tied to SPY and QQQ is hovering at the lowest levels since at least 2018," as Wall Street Journal reporter Gunjan Banerji put it in a recent post on social platform X.

In other words, everybody knows AI will send the market soaring to a permanently high plateau and that it's just dumb to be short the market.

But as regular Digest readers all know, whatever everybody knows is wrong, whether it's the unassailability of the Nifty Fifty "blue chip" stocks before they were decimated in the 1973 to 1974 bear market...

The no-brainer bets on gold that folks took on in 1979 and 1980, before the yellow metal descended into an epic 19-year, 70% decline...

The dot-com miracle before it was obliterated in the 2000 to 2002 bear...

Or the belief "U.S. home prices never fall" before the housing bubble nearly caused the global financial system to collapse in 2008.
Each time, what everybody knew was dead wrong. Big losses followed.
I have no reason to believe this time is different...
All the ingredients are in place for an epic meltdown. And though it might not be imminent, the risk of a meltdown is certainly higher than any time since the dot-com peak, by the measures we cited today.
I have to conclude that putting on some short exposure beyond November 2024 is not a terrible idea right now, especially considering the current low short interest in SPY (the SPDR S&P 500 Fund) and QQQ (the Invesco Nasdaq-100 Fund).
Maybe short exposure seems like a mistake to you. After all, markets hate uncertainty... For instance, when the next U.S. president is elected, that'll remove a great source of uncertainty, which could unleash a new bull market rally.
That sounds suspiciously like something everybody knows.
What they don't know, or at least don't care about, is that stocks are egregiously overvalued and starting to behave the way they did around the dot-com peak.
You could argue that whatever optimism anybody might have about who the next president will be is already firmly priced into the current valuations – along with "everything else," as Crise described investors' hopes and dreams.
Uncertainty in the stock market has apparently gone out of style.
But, please, don't misunderstand me...

I can't overemphasize that I'm not telling you to sell everything, but only to prepare for what may lie ahead...
Matt Franz and Dan Shuart from asset-management firm Eagle Point Capital are here in Vail this week. I've found their writing very thoughtful and occasionally brilliant.
In a piece they published last March, they point out that there's always a reason to sell stocks and run for the hills... and how that has consistently been a mistake for the past several decades.
Buying great businesses for the long haul and riding out the rough times is still the best thing most folks can do with their capital, with the notable exception of starting a highly successful business.
There are dozens of great businesses in the stock market. Many aren't valued as richly on "hopes and dreams" as Nvidia or other popular AI stocks today.
Learning something about as many of them as possible and buying shares when they're priced right has been an excellent way to build long-term wealth throughout my six-plus decades of life.
I suspect this time is no different.
I doubt that'll change much over the next several years, even if I'm right about a huge bear market followed by a decade-plus sideways market, and even if I'm right about today's AI hype having the hallmarks of previous bubbles.
As it has in the past, investing in great companies throughout such periods would lay the groundwork for decades of excellent compounding at very high rates.
So I'm not trying to scare you away from stocks. I'm just trying to help you avoid the big, catastrophic mistakes equity investors tend to make. Getting caught up in AI hype right now definitely qualifies.