What could possibly go wrong?
Wall Street seems to be channeling the late, great Prince.
The signs are all around that Wall Street is back in that dangerous atmosphere of giddy euphoria that those with long memories will remember from the infamous dot-com bubble of the late 1990s.
Whether we're now in 1998 (booyah - the only way is up!), 1999 (OMG, it is so easy to make money!) or 2000 (wait - what??), only time will tell.
The latest sign came Monday, when AI computer chip giant Nvidia (NVDA) announced it was teaming up with a bunch of big Wall Street institutions - Blackstone (BX), BlackRock $(BLK)$, Goldman Sachs $(GS)$ and so on - to arrange an extra $500 billion in loans for its customers, so that they can afford to carry on buying Nvidia's computer chips.
What could possibly go wrong?
This looks awfully similar to the notorious "vendor financing" used by tech giants during the last amazing magic-mushroom phase of the technology bubble all those years ago, when big tech companies helped their customers borrow lots of money so they could keep buying.
Nvidia will apparently backstop a quarter of the borrowing itself, up to $125 billion. (Is that all?)
To give you an idea of where we are now, Nvidia CEO Jensen Huang said his company's computer chips are now an "investible asset" that customers could effectively mortgage, presumably the way that, say, airlines borrow against their planes.
If these chips can delay obsolescence long enough for that to be true, the rate of innovation in AI computing must be a lot lower than I had thought.
Financial engineering
BlackRock CEO Larry Fink, apparently with a straight face, hailed the new arrangement as "the beginning of the next future for financial engineering." He compared it to Wall Street's genius creation, all those years ago, of those mortgage-backed securities that allowed them to leverage endless empty condos in the Las Vegas desert.
Yes, the same securities that blew up the global economy in 2008.
Nothing to see here, folks. Move along.
When a tycoon on Wall Street tells you about an exciting new invention in "financial engineering," reach for your wallet. To check that it's still there.
As the late, great economist Hyman Minsky pointed out, booms pretty much always lead to bubbles, which in turn lead to crashes, because of human nature. Economic stability breeds instability. The final phase he called "Ponzi financing." It's generally marked by a massive expansion of debt, broadly understood - including, say, companies saying, "Here, take $100 billion of my computer chips. Pay me whenever. They won't lose their value, because I'm the only guy developing new AI computer chips, so these will keep their value for years and years."
If only this was an isolated incident. But the giant technology companies are now greedily raising as much money as they can from suckers - excuse me, investors - to keep spending on the AI arms race.
Chip company Intel $(INTC)$ is raising $20 billion in new money at $95 a share - more than twice the price the stock boasted at the start of the year.
And megacap tech stocks led by Alphabet $(GOOGL)$, nee Google, have raised nearly $500 billion through stock sales and borrowing so far this year, as MarketWatch's Christine Ji recently reported.
Recent academic research and Wall Street analysis raise major questions about what sort of positive return AI investments will make.
If any.
Repeating cycles
I spent most of the great technology bubble laughing, but maybe I was left with post-traumatic stress disorder anyway. I keep thinking I've seen this movie before. Am I wrong?
This isn't the only thing going on this summer that gives me that ominous fin de siècle feeling.
Terrific new research from analysts Savita Subramanian, Nicholas Samoyedny and Alex Makedon at BofA Securities says we are now starting to see the kind of distortions in the S&P 500 SPY that we saw back then.
In particular, we're seeing massive elements of concentration, as a narrow group of giant "winners" carry the market. Meanwhile, stock-picking fund managers are apparently throwing in the towel, because using your brains to pick good stocks at reasonable prices can't compete with simple momentum - in other words, with just following the crowd.
"Current mutual fund holdings indicate record low levels of active share (less deviation from the benchmark than ever), suggesting more benchmark-hugging than at any point in our data history since June 2000," they write. For much of the last three years it has paid to simply follow the capitalization-weighted S&P 500 - like during the mid- to late '90s, they add.
Isn't just following the S&P 500 always the best strategy? Absolutely not. For most of the past 100 years, research has found that an equally weighted portfolio of stocks has generally outperformed the traditional index, which weights the different stocks according to their market value.
In the 10 years following June 2000, the S&P 500 produced total returns of minus 8% - in other words, if you started with a $10,000 investment, you ended up with about $9,200. That's before fees and taxes, and before factoring in the declining value of each dollar due to inflation.
But according to financial-data firm MSCI, over the same period the MSCI Equal Weighted U.S. stock index produced total returns of plus 38% - in other words, $10,000 at the start gave you $13,800 at the end (ignoring taxes, fees and the declining spending power of each dollar, of course).
For ordinary investors, the simplest way to follow that strategy is to invest in the iShares MSCI Equal Weighted ETF EUSA, which for a very cheap 0.09% annual fee invests your money equally across about 500 major U.S. companies and rebalances quarterly.
As iShares is owned by BlackRock, the same Wall Street fund giant that is in Jensen Huang's AI loan syndicate, it raises an obvious question. Which do you think will prove a better investment over the next 10 years - Blackrock's equal-weighted U.S. stock exchange-traded funds, or its loans to companies so they can buy more Nvidia chips?
Ask me again in August 2036 - although I already have my suspicions.
-Brett Arends
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