Is the AI Trade Over? | Animal Spirits 439

Episode Overview

• The episode features a debate on the current market sentiment, questioning whether 2023 is a "joyless bull market" despite strong returns, and analyzing the recent mini-bubble and pullback in AI-related stocks.
• It delves into the psychology of famous investors, drawing a sharp distinction between making a single "legendary trade" like Michael Burry and being a "legendary investor" with long-term consistency.
• The discussion explores the natural lifecycle of successful companies, using the innovator's dilemma to explain why dominant businesses often falter and why high returns inevitably attract competition.
• The hosts cover several modern economic trends, including the institutionalization of niche markets, Bitcoin's correlation to tech stocks, and the growing challenge of housing affordability.
• The conversation also touches on generational wealth transfer, humorously coining the term "The Great Stuff Transfer" to describe the logistical challenge of inheriting physical possessions from the Boomer generation.

Key Concepts

• "Joyless" Bull Market vs. AI Euphoria: A central debate on whether the current market lacks true euphoria due to widespread skepticism, or if speculative frenzies in sectors like AI prove that pockets of euphoric behavior are still present.
• The AI Hype Cycle: The market experienced a mini-bubble in speculative AI stocks over the summer, followed by a healthy 20-40% pullback. The underlying AI narrative is considered to be far from over.
• Skepticism as a Market Safety Valve: Pervasive public and media skepticism towards big tech and AI may be acting as a natural brake, preventing the formation of a larger, 1999-style systemic bubble.
• Legendary Trade vs. Legendary Investor: A critical distinction is made between a one-time, successful market call (a legendary trade) and the sustained, long-term performance that defines a legendary investor. Fame from one big call doesn't guarantee future success.
• The Innovator's Dilemma: Even highly successful incumbent companies can be disrupted because their profitable existing business models prevent them from embracing paradigm-shifting innovations, as illustrated by Hoover's failure to adapt to Dyson's bagless vacuum.
• Mean Reversion in Great Companies: High returns and market dominance are not permanent. The success of "compounder" stocks inevitably attracts fierce competition, leading to mean reversion over the long term.
• Institutionalization of Niche Markets: Sophisticated institutional capital is increasingly entering niche areas like sports betting and private markets, which may legitimize them but also arbitrage away the excess returns previously available to smaller investors.
• The "Great Stuff Transfer": A humorous term for the massive logistical challenge younger generations face when inheriting a lifetime's worth of physical possessions from their Boomer parents and grandparents.

Quotes

• At 1:27 - "It feels this year like a joyless bull market." - Ben Carlson describes the sentiment of the current market, suggesting a lack of widespread euphoria despite strong performance.
• At 1:50 - "Over the summer and into the fall... and Oracle, for example, whose stock jumped 25% on the day, there was absolutely euphoria." - Michael Batnick counters the "joyless bull market" thesis by pointing to specific examples of speculative fever in AI-related stocks.
• At 2:51 - "No way. It can't be." - Michael Batnick's immediate reaction to the idea that the AI bubble has already popped, suggesting more is to come.
• At 14:32 - "The tech industry is going to be the next financial industry... they're going to be the most hated industry likely after this is all said and done." - Ben Carlson predicts a public backlash against the tech industry similar to what the financial industry experienced after 2008.
• At 20:06 - "They want, you know the scene in Jurassic Park where Samuel L. Jackson says 'hold on to your butts'? And they reboot the system. Many people are rooting for that." - Using a movie analogy to describe the widespread desire for a systemic economic "reboot."
• At 20:40 - "There is a difference between making a legendary trade and being a legendary investor." - Establishing the core theme of the discussion, differentiating between a one-time great call and sustained investment success.
• At 22:01 - "How could you have that experience where you're the star of this best-selling book and then Christian Bale plays you in a movie? How could that not mess with your head?" - Speculating on the psychological pressure faced by figures like Michael Burry to live up to their fame by constantly predicting the next market crash.
• At 24:25 - "So I think what you have to invest in in the coming years is dumpster rentals. How do you invest in dumpster rentals? Because think about all the stuff you're going to be throwing away." - A humorous investment thesis based on the idea that younger generations will need to dispose of massive amounts of inherited items from their Boomer parents.
• At 45:29 - "The actual answer is that this is the rule, not the exception. Great returns attract competition. That's the beauty of capitalism." - Michael Batnick reads a tweet explaining why great "compounder" stocks eventually falter, a point both hosts agree with.
• At 46:46 - "Their entire business was the bags inside of the vacuum cleaner... They were never, ever, ever going to do what Dyson did. And then guess what? Dyson killed them." - Michael Batnick uses the Hoover vs. Dyson story to illustrate the innovator's dilemma and how incumbent companies fail to adapt.
• At 49:09 - "Bitcoin is still... acts like a tech stock." - Ben Carlson comments on a chart showing the drawdown profile of Bitcoin is nearly identical to that of Meta, suggesting it has not decoupled from risk assets.
• At 54:22 - "I'm sorry, we can't feel sorry for everyone... The person who didn't get to buy and didn't get the 50% price appreciation and didn't get the 3% mortgage, they have my sympathy, not you." - Ben Carlson pushes back against a news story about homeowners who feel "trapped" by their low mortgage rates, arguing they are in an enviable financial position.

Takeaways

• Be skeptical of public market predictions from famous traders; their actual portfolio management is often more flexible and dynamic than their rigid public statements suggest.
• Don't assume that past market-beating performance from a "compounder" stock will continue indefinitely; all great companies eventually face the powerful force of mean reversion due to competition.
• When analyzing an industry leader, identify its core profit center and consider how that might prevent it from adapting to disruptive threats—its strength can become its biggest vulnerability.
• Resist the temptation to root for a market crash, as the real-world consequences are often far more severe and widespread than anticipated, and timing such an event is nearly impossible.
• Re-evaluate traditional homeownership timelines, as buying a first home later in life is becoming a more common and potentially smarter financial path in the face of affordability challenges.
• Modern market cycles may be faster and shorter than historical ones, meaning investors should be prepared for more frequent but less prolonged downturns and recoveries.
• As sophisticated institutional investors enter niche markets, expect potential returns to compress as the "easy money" is arbitraged away.