Alhambra Investments

The AI trade hit some turbulence last week as concerns emerged about the growth rate of the industry. The technology sector ETF (XLK) lost 7.7% last week and is down nearly 10% since peaking on 10/6. The semiconductor industry ETF (XSD) fell 12.5% and is nearing bear market territory (-17.3%) since peaking the same day. What’s more interesting, from a psychological standpoint, is that the technology sector, despite making a nominal new high in October, is no higher today than it was in late May. Semiconductors are even worse, down 29% since peaking on June 3rd. Despite losing money since June, these stocks have been the constant topic of conversation the entire time. The hype force is strong with this one. https://lnkd.in/e6iU4kKJ

Technology’s promise has always been efficiency, and anyone who uses Google knows it can deliver. But one of the first things I learned studying economics is that there is no such thing as a free lunch. You can access a lot of information without paying a dollar, but that doesn’t mean there is no cost. You pay with your privacy. I expect secure ways to accomplish what Muse promises without requiring us to give up our privacy. Why? Because the market is already demanding it. Technology has jumped the shark; today, it often makes life more complicated rather than less. Endless two-factor authentication codes, dynamic pricing, a constant flood of spam and phishing attempts (which have now invaded our calendars), app-only discounts, subscriptions for everything, embedded vehicle tracking, endless customer service bot loops (OMG, how do I get a human on the phone?), QR code menus, self-check-ins, and grocery self-checkouts. Technology has enabled companies to become more efficient but at their customers’ expense. https://lnkd.in/e2NW9YmF

Rising rates this year have not been all about inflation. A lot of the rise in rates is about rising real growth expectations which neatly explains why stocks have been so resilient. Stock prices follow earnings and with rising NGDP, earning estimates keep going up. As long as that is the case, any correction in stock prices is likely to be temporary. https://lnkd.in/gjP-WUVn

Say what you will about our new Fed chief but he does have a sense of humor. After a shift in the dot plot in June that was decidedly hawkish and 3 dissents for higher rates at the July meeting, all the folks who get excited about such things were hoping this speech would give some clue about Warsh’s thinking – despite the fact that the only notable thing he’s said since becoming chairman is that he won’t. Nevertheless, there has been a growing consensus that Warsh will to have to relent at some point and hike rates, even if his boss doesn’t like it. So, using the word “hike” three times in the first paragraph of his speech was, maybe, Warsh’s cheeky way of poking fun at those who hang on the Fed chairman’s every word. Or maybe he was just testing to see if the algorithms that run trading today would key off that word and start selling bonds. https://lnkd.in/eXuFHaRJ

Monitoring the economy is something investors should do but they shouldn’t expect much change over the short term. Status quo ante is, well, status quo. If I look at the economy today, with no political blinders, it is remarkably unremarkable. We’ve had 3 Republican and 2 Democratic administrations this century. Congress has been controlled by both parties at times over the last quarter century. We’ve had multiple military conflicts, a financial crisis, and a global pandemic. Through it all, US Real GDP has grown at an average of 2.18%. The change over the last year? 2.1%. https://lnkd.in/e4VQkii6

Warsh hasn’t been on the job long and I’m not ready to anoint him as the second coming of Walter Bagehot*, but I’ve spent the last week thinking I may have misunderstood and misjudged Mr. Warsh. I am not a fan of central banking, seeing it as the central planning nose under the flap of the free market tent. I am of the opinion that an appointment to the Fed ought to come with a gag order, a huge dose of humility, and a preternatural ability to do absolutely nothing until absolutely necessary. https://lnkd.in/ePGc73D3