AI and the 1995 Explosion Repeat

Wednesday, 13 March 2024

[5 min read]

Dear Reader,

1995.

I just keep hearing about it now.

Not because it was when Michael Jordan was king of the NBA and Carlton couldn’t lose an AFL game.

1995 was the pivotal year when stock market investors realised the internet was more than a fancy fax machine.

A mass realisation dawned on the investment community that the internet was a communications revolution unparalleled in history.

This dynamic sent multiple sectors into huge uplifts.

For example, look what happened to semiconductors by the end of the decade…

Extraordinary.

The parallels between 1995 and 2024 are eerie

You see…

In 1994 the Federal Reserve unexpectedly lifted interest rates.

It sent stocks and bonds into a tizz and bankrupted several organisations, including Orange County in California.

Nobody expected 1995 to be a great year for the share market.

But it turned out to be one of the best of the 20th century. The late ’90s boom is still infamous for the heights it scaled…for those who missed out.

And it was all thanks to the internet.

Now consider today…

What a difference a year makes!

Do you remember March 2023? That’s when the US banking issues roiled the markets.

There were shades of 2008 as Silicon Valley Bank teetered and the Fed was forced to extend emergency credit to the sector.

You know what…

In hindsight, March 2023 was a buying opportunity just like 1994.

There’s nothing easy about markets.

Last year, the debate was whether 2023 would look like 1995 or 2001.

Stocks boomed in 1995. They sank in 2001.
Which way to go?

Here’s what I told my subscribers in March 2023…

‘Which case is more relevant? 1995 or 2001?

‘I lean toward 1995. One reason is that in the 2001–2 period, the US economy struggled to generate jobs. That’s not the case today.

‘There’s another reason I lean to think the next few years could look like the boom years of the late 90s.

‘Back then, the internet was the hot new thing that sent US productivity soaring.

‘It seems to me we could be up for the same thing as artificial intelligence finds more and more commercial application.’

The NASDAQ barnstormed its way up 40% last year.

US stocks are still around their record highs. Now Aussie shares are up at record highs too.

I’m pointing out the above because comparisons to 1995 still keep crossing my desk.

Even in today’s Australian Financial Review, one of the investment banks say…

‘AI is accelerating cloud demand and this remains at the epicentre of our AI Revolution ‘1995 Moment’ thesis.’

People always want to know what can send shares up.

Over time, there is ONE factor above all else.

It’s earnings. The more money businesses can make, the more valuable the shares.

Here’s a chart showing the US stock market and earnings growth over the last few decades.

You can see the correlation is very tight…

Anything that can drive earnings higher is good for share prices! This is the “secret sauce” of share market returns.

The AFR quotes another investment bank today…

‘Bank of America said it lifted its 2024 S&P 500 earnings per share to $US250 (+12 per cent year-over-year) from $US235 previously (+6 per cent). “We also launch our 2025 EPS at $US275 (+10 per cent YoY).”

‘“We also see a virtuous cycle forming from AI investments,” BofA also said.’

Now back to that link to 1995. A colleague over in the USA says,

‘To spot future earnings acceleration, you need to look at

profit margins.

‘Do you know what happened in 1995 that tipped the Wall

Street Analyst community on its head?

‘The growth and integration of the internet sent productivity to new levels, sending S&P 500 profit margins soaring…

‘Now think about AI.

‘AI is all about automating repetitive and time-consuming

tasks, allowing organizations to optimize workloads.

Simply put, we’re about to enter another era of heightened

productivity. And that means accelerated profit growth.’

I couldn’t agree more!

This is what’s so exciting about this technology. It can lift profits wherever it finds commercial application.

And there’s no limit to how AI can benefit a range of industries and companies.

Already we’re seeing this “AI” effect lift some related stocks on the ASX.

Here’s NextDC…

Here’s Macquarie Technology Group…

Of course, not all AI stocks have seen results like this. And stocks that sit in this end of the market are high risk and carry lots of volatility.

However, it was only the other week that CBA came out and said AI was making its software engineers 30% more efficient.

It also helps make loan applications get processed faster. CBA is trading around record highs.

Hello!

AI is creating an incredibly exciting
time for the markets

Nobody can know how high the rollout of AI can drive profits and markets (or if the trend becomes a busted flush).

But surely you don’t want to miss this opportunity?

I’ve been around the markets for a long time.

A technology that can lift multiple industries and the general return on capital are rare indeed. They are not to be ignored.

The question remains: WHICH companies can incorporate AI into their operations and lift their profit margins?

That’s why I’m so keen to share my latest report with you. It’s called Collide. Lock. Build. Explode.

We’re launching it tomorrow exclusively to Fat Tail Investment Research readers.

Go back to that 1995 idea.

What would you give now to have seen the potential of the internet and taken a stake in the companies building it out?

What would your net worth look like now?

We can’t know.

We do know, however, that you and I both are getting a second look at another massive technology revolution.

I want you to have a front row seat. The best bit? This tech doesn’t stop at the Californian border.

It’s going to wash over the ASX like a tidal wave…and potentially set to lift some stocks to epic heights. It’s already done it to some stocks in the USA. You know about Nvidia and the Magnificent Seven.

You can get my Top 5 ASX plays as soon as tomorrow.

Best,

Callum Newman,
Editor, Small-Cap Systems and Australian Small-Cap Investigator

Callum Newman is a real student of the markets. He’s been studying, writing about, and investing for more than 15 years. Between 2014 and 2016, he was mentored by the preeminent economist and author Phillip J Anderson. In 2015, he created The Newman Show Podcast, tapping into his network of contacts, including investing legend Jim Rogers, plus best-selling authors Jim Rickards, George Friedman, and Richard Maybury. He also launched Money Morning Trader, the popular service profiling the hottest stocks on the ASX each trading day.

Today, he helms the ultra-fast-paced stock trading service Small-Cap Systems and small-cap advisory Australian Small-Cap Investigator.

[3 min read]

Dear Reader,

‘The natural progress of things is for liberty to yield and government to gain ground. One of the most profound preferences in human nature is for satisfying one’s needs and desires with the least possible exertion; for appropriating wealth produced by the labor of others, rather than producing it by one’s own labor…the stronger and more centralized the government, the safer would be the guarantee of such monopolies; in other words, the stronger the government, the weaker the producer, the less consideration need be given him and the more might be taken away from him.’

Thomas Jefferson

Our question today: why is that the ‘natural progress of things?’

As government takes more and more out of the productive economy, less and less is left for everything else. Then, as the feds spend more, more people become beholden to them; they become more powerful…and harder to stop. Why let that happen?

And yet, it is happening all the time. Last week, the SEC made an announcement:

‘The Securities and Exchange Commission today adopted rules to enhance and standardize climate-related disclosures by public companies and in public offerings. The final rules reflect the Commission’s efforts to respond to investors’ demand for more consistent, comparable, and reliable information about the financial effects of climate-related risks on a registrant’s operations and how it manages those risks while balancing concerns about mitigating the associated costs of the rules.’

Whatever else it was, it was 800 pages of cheer for securities lawyers, green lobbyists, and class action activists…a gift to meddlers sure to be worth hundreds of millions of dollars.

Butterfly Effects

Companies are already required to divulge all ‘material’ risks. Now they have to figure out how their emissions affect the environment…how they’re going to deal with the risk…how the Green Energy Transition will affect their business – all in excruciating detail and agonizing uncertainty.

Already, ‘everything is securities fraud’, as Matt Levine puts it. Now, corporations can count on an attack from a new angle as their SEC reports fail to mention the butterfly-like effects of their sales of donuts in New Orleans on the sleep patterns of the native peoples of Greenland…or the use of galoshes in New York.

Regulation on top of regulation…rule on top of rule…and exception on top of exception. Eventually, you get a fully-planned, fully controlled economy – say, North Korea or the Soviet Union – in which so much effort is devoted to fulfilling the planners’ fixes and fantasies that no progress can be made. Real GDP goes into reverse.

Why then allow the government to grow? It would be so easy to stop it.

Here’s Fortune magazine:

‘Barry Sternlicht, the outspoken billionaire co-founder and CEO of real-estate giant Starwood Capital, has a solution to Powell’s biggest problem.

‘“What he really needs to do is walk across the street and tell Congress to stop spending money like drunken sailors,” Sternlicht said in a new interview on the globally-syndicated TV show In Depth With Graham Bensinger.

‘“You have one part of the government with a foot on the brake—The Federal Reserve and Powell—and then you have the other part of the government—the legislature—spending as much money as they can,” he said.’

A Useful Stroll

Why doesn’t Joe Biden just ‘walk across the street’ and tell Congress, ‘enough is enough’? He could even add a little come-to-Jesus brimstone to its message. ‘You can spend all you want. But we’re not printing any more money to cover your deficits.’

Joe Biden’s approval scores are at record lows. People doubt he can govern. They doubt that he can win the November election…even against a former president facing 91 criminal indictments, who has already proven himself clownishly incompetent.

Biden no longer represents the special interests – big credit card companies and big companies who have their corporate headquarters in Delaware. Their interests are ‘special’ because they benefit from special rules and regulations – designed to help them and cripple their competitors. But now, Biden is supposed to represent the entire nation, the general interest. Taken all together, we are better off with fewer taxes, less inflation, less government spending, fewer rules, and fewer hoops we have to jump through. As a nation, collectively, we are much better off with a balanced federal budget, for example.

So, why hasn’t the budget been balanced in half a century (excepting 3 years of the Clinton administration when, counting Social Security contributions as ‘income,’ the figures came out in the black)? And why didn’t Biden use his glorious opportunity – the State of the Union speech last week – to announce a new program, one suited to the general interest of Americans, rather than the special interests of special groups? One that would have sent the special interests into paroxysms of outrage…but would have rallied ‘The People’ behind him? What if he had just told the truth?

Tune in tomorrow…

Regards,

Bill Bonner,
For Fat Tail Daily