#177 - Generational Investment Opportunity, AI Impacts on Big 5 Tech and How Nike Makes Money
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New Paradigms in Tech
2023 Global Risks
Ai and their impacts on the big 5 tech companies
How Nike makes money
Recommendations and Predictions
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👉 For specific investment questions or advice contact Joel @ Gold Investment Management.
Short week but important week as America will be celebrating Martin Luther King day today.
Over the last year, I feel like I’ve heard every possible comparison of the current economic and market cycle:
“It’s the 1970s all over again!"
“It’s 2000 to 2003 with the Dotcom bubble!”
“It’s the 1920s”
“It’s the 1930s”
“It’s the 1940s, you moron!”
“It’s the Fourth Turning”
But last year most certainly was the beginning of a new regime. What worked in the past is unlikely to work the same into the future…
So please. don’t look now, but $ARKK is up 15% YTD.
Sure, it’s still down 77% from all-time highs and shaved off 70% last year, but it’s back baby!
ARKK has been the punching bag of old-school value investors as it took a beating buying profitless tech companies that push cash flows out to further dates in order to invest R&D on innovation.
Time will tell whether this year-start rally will sustain or not, but my bet is that it will not and ARKK is likely going to revert back to its poor relative performance. This ETF will not be what leads as we transition into a new bull market in the coming years.
Optimism reigned supreme last week, with risk assets continuing their upward climb.
Inflation came in-line with expectations. Inflation is truly declining as monthly headline/core inflation readings are back to pre-pandemic levels.
Fed futures are now only pricing in 2 more 25bp rate increases in February and March but are now giving high odds that the FOMC cut on the back side of the year.
The World Economic Forum’s 2023 Annual Meeting kicks off on Monday evening. Many of the panel discussions focus on disruptive innovation, and global geopolitical risks:
While the Davos meetings are likely to win a number or media headlines this week, it’s very likely that the “debt ceiling” chatter will pick up.
I want people reading this to understand that the debt ceiling is nothing to worry about. Never has been and isn’t going to start today. Cullen Roche says it best:
The rest of the pod, we talking about AI and paradigm shifts… read below to see what we’re paying attention to in 2023.
💸Reformed Millennials - Post of The Week
Recent positive data points on wage and general price inflation as well as better price action in global capital markets strongly suggest that 2022’s “Only the Fed Matters” paradigm will not be as useful in 2023.
HERE ARE 4 IDEAS FOR POTENTIAL INVESTMENT NARRATIVE/PARADIGM SHIFTS IN 2023:
The stability of US economic growth and corporate earnings. We are coming off an economic era with no precedent in the modern world. Pandemic-related fiscal and monetary policy created a fast, powerful snapback in consumer spending. Businesses struggled to find and retain workers to satisfy that demand but had the balance sheets and profits to pay up for talent.
The coming year carries much less momentum than the last two. Perhaps the Fed’s belated efforts to contain inflation gave the US economy enough of a shove to allow it to coast over the crest of higher interest rates and into the next phase of growth. That’s a tough bet to make, however, given the paradigm of high current rates versus the neutral rate of interest creating elevated recession risk. (Exemplified by the current difference between 2- and 10-year Treasury yields.)
China’s post-pandemic reopening also has little precedence, making it another potential paradigm shift this year. The last time China broke away from the global economy was just after the 2008 Financial Crisis, when it enacted a broad set of economic policies to insulate it from a global slowdown. The country’s economy is more than three times the size now ($18 trillion) as it was then ($5.1 tn), so any acceleration in economic growth will be felt around the world.
We will be watching oil prices to measure the vitality of China’s reopening-related economic growth this year. From the start of 2010 to April 2011, WTI crude went from $73/barrel to $113/barrel as China’s economy surged even while the developed world struggled. Oil prices are $78/barrel today. If crude reacts the same way in 2023 as it did post-Financial Crisis, it could both dampen global growth and reignite inflation concerns.
Positive real interest rates. Ten-year Treasuries currently offer a 1.4 percent real (after expected inflation) yield. The last time you could get a similar real return before the last 120 days was in back in February 2011. Investors no longer must hold risk assets to have a shot at positive returns in real terms. Risk-free Treasuries offer that right now.
This is due to the piece of current Fed policy no one really talks about: quantitative tightening (selling bonds from the central bank’s balance sheet), which by design increases real rates. Positive real rates should pull marginal capital out of risk assets and also encourage saving over consumption. We have not yet seen any effect on stock valuations – the S&P 500 trades for 18x current earnings – but as positive real yields persist they should have some impact.
Lower correlations will reduce market volatility. If we are correct that there’s more to 2023’s “paradigm” than just Fed monetary policy, then individual stocks and industry sectors should trade more independently of the overall market than last year. This will result in lower overall market volatility. More stocks/sectors will “zig” while others “zag” as they respond to multi-variate fundamental forces instead of just macro concerns like rates and possible recession. This should leave theTSX, S&P, Russell and NASDAQ indices more stable on a day to day/week to week basis than in 2022.
Thursday’s VIX of 18.8, below its long run average of 19.7, tells us a multi-paradigm 2023 is already starting to play out. This does not assure smooth sailing ahead, however.
It just says that there will be many different challenges this year rather than just one overarching concern.
Final thought… it is tempting to think that the US/global equity rally we’ve had since the start of the year augurs well for the next +11 months, but we think it is just a sign of the paradigm shift away from 2022’s one-factor market to multi-factor one. Rather than focusing on 8 FOMC meetings and 12 CPI reports, investors now must consider a much wider set of issues. They will ebb and flow through markets on their own timetable rather than based on the economic calendar. In the end, this makes us marginally more positive on stocks than we were through most of last year. We’re hardly raging bulls, but a fundamentally driven market is much more “normal” to us that what we’ve all had to deal with over the last year.
Best Tweets From Last Week:
Google DeepMind vs. Open AI
Cable vs. Streaming: from the hustle
🎙Podcast & YouTube Recommendations🎙
Business Breakdown - Hermes
The price range of the Birkin and Kelly bags. (Cheapest Birkin is 8,500 USD and the cheapest Kelly is $6,800 USD)
Why they’re so iconic. How they maintain their 70% gross margins and how they intend on growing the business into the future.
The Best 20 Min Dive Into How Chat GPT disrupts The World and Big 5 Tech - Ben Thompson
🔮Best Links of The Week🔮
AI and the Big 5 - Stratechery The story of 2022 was the emergence of AI, first with image generation models, including DALL-E, MidJourney, and the open source Stable Diffusion, and then ChatGPT, the first text-generation model to break through in a major way. It seems clear to me that this is a new epoch in technology.
"U.S. inflation eased in December for the sixth straight month following a mid-2022 peak as the Federal Reserve aggressively raised interest rates and the economy showed signs of cooling. The consumer-price index, a measurement of what consumers pay for goods and services, rose 6.5% last month from a year earlier, down from 7.1% in November and well below a 9.1% peak in June." Source: WSJ
"Sweden’s state-owned mining company LKAB has said it has discovered Europe’s largest deposit of rare earth metals. The discovery bolsters the continent’s ambition to rely less on imported raw materials needed for the green transition. The deposit, dubbed Per Geijer, is located north of the Arctic Circle in Sweden’s province of Lapland and contains more than 1mn tonnes of rare earth oxides — the largest known deposit of its kind in Europe, the company said." Source: FT
2023 Oil research from Anas Anaiji - Substack His main bullets from his post:
- 23’ is expected to be a tale of two opposite halves: bearish to neutral in the first half and bullish in the second.
- Global oil demand is expected to reach a record high in 2023, defying all earlier forecasts of peak demand in 2019.
- Almost all average price forecasts for 2023 are between $80/b and $100/b. Our estimate is toward the lower end of these forecasts.
Any OPEC+ production cuts will create a price floor but may not raise prices significantly.
- Refilling the US SPR will have a limited impact on the oil market.
Russia’s oil exports are not expected to decline significantly in 2023, but the Russian government may be forced to reduce taxes on oil companies.
- The impact of China’s reopening on energy markets will be felt in the second half of 2023. Beijing, however, will likely release oil from its SPR as oil demand and prices rise.
The return to fossil fuels in Europe and some US regions last year to address energy needs was unprecedented. A repeat in 2023 should call for a new way of thinking with a focus on relative prices of energy sources.