The Sunday Drive - 03/03/2024 Edition [#100]
Musings and Meanderings of a Financial Provocateur
👋🏼 Hello friends,
This week marks the 100th Sunday Drive 💯. Still haven’t missed a week, though I admit some weeks have been easier than others.
I’d like to thank you for all the support, feedback, and generosity of the time you have given me. What started as a way to stay in contact with friends, family, and former Eaton Vance colleagues after I retired from the corporate world at the end of 2021, has remained that and yet become so much more.
Now, let's enjoy a leisurely Sunday Drive around the internet.
🎶 Vibin'
Well… Most parts of the financial markets were up again this week, particularly the Nasdaq 100 and Russell 2000 (small cap) indices. The strength was mostly driven by reasonably benign inflation numbers and strong corporate earnings expectations for the balance of 2024.
So this week, I’m vibin’ to Jackie Wilson’s (Your Love Keeps Lifting Me) Higher and Higher. My hope is that I run out of “higher” songs to vibe to before this market runs out of energy. Enjoy.
💭 Quote of the Week
“I think we are going to drive the cost of intelligence down to so close to zero that it will be this Before and After transformation for society.”
– Sam Altman, CEO, OpenAI
BONUS QUOTE OF THE WEEK
”There are no new hammers on Wall Street, only new nails.”
– Liz Hoffman
📈 Charts of the Week
A couple of charts this week… They’re from the most recent newsletter by Ray Dalio, Founder of Bridgewater Associates, and I thought they were both worth including. See the link in the Drive-By section below if you’d like to read the whole thing.
Say what you will about the cult(ure) that Mr. Dalio built at Bridgewater, but I think it’s hard to argue with his investment success.
Most bull markets are built on the back of P/E expansion, where the price of stocks outpaces the growth of earnings. In the case of the Mag-7 led bull run over the last few years, that hasn’t been the case. The returns of the largest companies in the S&P 500 have largely matched the pace of their earnings.
The logical conclusion one might draw from this situation is that strong, yet concentrated market returns could very well continue if the earnings strength of the largest companies in the market holds up. If they don’t then we could argue that the market isn’t nearly as ahead of itself as some might say.
Many people make the “history repeating” argument of the current bull run, with Nvidia as its poster child, as compared to the late 1990’s bull market, led by the then poster child, Cisco Systems.
The left graph above lays the stock price of Nvidia and Cisco on top of one another. It’s “easy” to think that Nvidia would follow the same course. But…
The right graph shows that Nvidia hasn’t yet come remotely close to discounting the future growth that Cisco did at a similar point in the prior cycle.
I would contend that if (when?) Nvidia blows up as a result of an earnings disappointment, it may likely come after an even more substantial run in its stock price than we’ve seen thus far.
🚙 Interesting Drive-By's
This week we have articles on market sentiment, technology as an asset class, AI, marriage, and live music:
📈 Are We in a Stock Market Bubble? - from Ray Dalio
As you know, I like to convert my intuitive thinking into indicators that I write down as decision rules (principles) that can be back tested and automated to put together with other principles and bets created the same way to make up a portfolio of alpha bets. I have one of these for bubbles. Having been through many bubbles over my 50+ years of investing, about 10 years ago I described what in my mind makes a bubble, and I use that to identify them in markets—all markets, not just stocks.
I define a bubble market as one that has a combination of the following in high degrees:
High prices relative to traditional measures of value (e.g., by taking the present value of their cash flows for the duration of the asset and comparing it with their interest rates).
Unsustainable conditions (e.g., extrapolating past revenue and earnings growth rates late in the cycle when capacity limits mean that that growth can’t be sustained).
Many new and naïve buyers who were attracted in because the market has gone up a lot, so it’s perceived as a hot market.
Broad bullish sentiment.
A high percentage of purchases being financed by debt.
A lot of forward and speculative purchases made to bet on price gains (e.g., inventories that are more than needed, contracted forward purchases, etc.).
I apply these criteria to all markets to see if they’re in bubbles. When I look at the US stock market using these criteria (see the chart below), it—and even some of the parts that have rallied the most and gotten media attention—doesn’t look very bubbly. The market as a whole is in mid-range (52nd percentile). As shown in the charts, these levels are not consistent with past bubbles. [link]
🤔 The Age of Incumbents - from Kyle Harrison
Technology is a versatile little word. It can mean a whole host of things. Some people think technology began with computers, or software, or the internet. Other people think technology didn't really get going until ChatGPT came out.
But the reality is technology is simply "the application of scientific knowledge for practical purposes." So fire, or early stone tools, these are all technology.
However, even if technology as a concept has been a round for the entirety of recorded human history, technology as an asset class is relatively new. When you think about the stock market as one reflection of what "assets" exist you've had railroads, mining, construction, industrials, etc. to reflect exposure to a particular value chain. Technology has always played a part in all of these. But it wasn't until recently that asset managers had to start thinking about exposure to "tech" in a more pure form. [link]
💡 What the Media is Getting Wrong About AI - from Evan Armstrong
AI may be the most significant invention since electricity. It is a marvelous, spectacular evolution in our relationship with computers.
It is also terrifying.
Some people, maybe many people, will lose their jobs if AI continues to progress at its current rate. This disruption is scary. When you mix AI fears with the crash in public opinion about the tech sector, it is not surprising that misinformation is rampant. What is surprising is how much of this incorrect analysis comes from mainstream writers with large followings.
I strongly believe we should be rigorously examining AI. Technology should be critiqued, written about, and, most importantly, utilized. It can only make our world better when examined with truth, not hyperbole. AI is important enough that society should be considering the implications of its deployment. But progress can’t be made when everything you believe about a sector is incorrect. [link]
❤️ Can Marriage Be Saved? - from Arnold Kling
You win the game of life when you become a grandparent. We don’t give young people that message, and even if we did, it would not sink in.
Grandparenthood is most satisfying if you can share it with your spouse. So the winning procedure is to get married, then have children, and then stay married.
My wife and I got married in March of 1980. We are still together. It’s looking like our marriage will last. Based on my experience, here are my thoughts on what makes for a successful marriage.
As individuals, it helps if you can make and keep commitments. In personality psychology, this corresponds to the trait known as conscientiousness—call it C. But my understanding is that C is not purely innate. I think that if we wanted to raise someone’s C, we could do it. [link]
🎶 Live Music Moves Us More Than Streamed Music - from University of Zurich
Music can have a strong effect on our emotions. Studies have shown that listening to recorded music stimulates emotional and imaginative processes in our brain. But what happens when we listen to music in a live setting, for example at a music festival, at the opera or a folk concert? Do our brains respond differently depending on whether the music we’re listening to is live or streamed? [link]
👋🏼 Parting Thought
If you have any cool articles or ideas that might be interesting for future Sunday Drive-by's, please send them along or tweet 'em (X ‘em?) at me.
Please note that the content in The Sunday Drive is intended for informational purposes only, and is in no way intended to be financial, legal, tax, marital, or even cooking advice. Consult your own professionals as needed.
I hope you have a relaxing weekend and a great week ahead. See you next Sunday...
Your faithful financial provocateur,
-Mike
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