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I detect a significant trend emerging in global equity markets. Enough participants are now doubting the ludicrous pricing of AI related stocks and the technology sector of the US equity market, as seen in the NASDAQ 100, had become highly volatile and I think is showing signs of becoming bearish.

‘To infinity, and beyond!’

Reportedly a comment from the Pixar Animation Studios equivalent of Warren Buffet, Buzz Lightyear, speculating yesterday on the Nasdaq composite index!

Well, no actually, although he has been known to utter those words, I don’t think a Toy Story animated spaceman will ever be seen as offering an alternative to the Wall Street Journal. Even though the film script writers are probably just as capable as the financial journalists when it comes to guessing next week’s stockmarket valuation.

The quotation is certainly appropriate to the staggering and in my opinion completely irrational performance of the US stock markets over the last few weeks, more or less starting one month after the invasion of Iran. Readers will know that this is mainly driven by all sorts of stocks loosely connected to the booming investment in AI infrastructure. That is not the same as saying it relates to booming profits or even actual profits growth for AI companies.

I have already set out some evidence as to why the underlying fundamentals suggest that this growth in equity valuation cannot be sustained (May’s Deep Dive), and some of those facts have even got worse since I wrote about them. So why is this all happening?

Blinded by the Light

When the climax of the firework display is filling the sky with colours and explosions that are impossible to absorb as anything more than a momentary impression, a burglar walking into the house across the road, torch focused in a narrow beam, has an excellent chance of not being noticed.

The tendency of humans to focus on ‘big’ events or things that our instincts react to as threatening or in other ways stimulating to our bio-chemistry is well understood by those whose job is to manipulate the flow of public information. 

Many a press officer will have timed a data release that must be made but which is unhelpful to their principal at exactly the time when some other major news event is grabbing the headlines.  I am sure such specialists scour the weather forecasts waiting for a pending typhoon or flood so as to know when to issue that necessary but unfortunate press release saying that the department has spent several hundred million on a project that yielded no tangible economic or social benefit!

I want to look at this general tendency from the point of view of an investor who, being well educated and responsible, likes to keep up to date with world events with a view to anticipating risks and minimizing unexpected losses of portfolio value. 

Now is a good time to think about the possibility that important news relevant to investors may be going ‘under the radar’, simply because the Trump/Netanyahu war of choice in the Middle East is so scarily, albeit quite logically, taking over the vast majority of news coverage and analysis.

Preface (written March 13th)

Most of what follows was written a few days ago.  In the interim, a whole range of news filtered into the mainstream, often covering elements that I had until then thought were being ignored by the main UK media. Perhaps the issue is delay, maybe because of a responsible desire for verification.  It is certainly noticeable that The Sun will run a story that is sensational must earlier than say the Daily Telegraph or the Guardian and Sky News will run a more likely propaganda report before the BBC.

The part of the text below over which I dithered the most was the first speech by the Iranian leader.  I had heard this from a questionable (based on its likely geo-political angle) source but it seemed credible.  In fact, while holding the article for final edit, I was only pondering whether to cut it, ot add a stronger caveat.  Yesterday the speech was officially published, probably not made by the man himself, who is almost certainly in hospital, but I would assess as having his approval. It was nearly exactly the same as the version I had heard, which multiple AI checks had vehemently denied existed!

The fact that with only an internet connection and an aging brain, I can research and to a degree forecast what is happening in the world is not a surprise to me, because that is how I have earned a living over recent years and sustained my own modest finances, with the odd ‘cock-up’of course!.  What is as surprise is that the people charged with making decisions that impact millions of lives, terminating thousands in fact, either cannot see the consequences of their decisions, or more likely suffer such psychological impairments that they ignore the appropriate advice of those both paid and well able to know what is going to happen.

I offer what follows under the general aegis of pointing out that the USA’s decision (in compliance with Israel) to start a war with Iran is the stupidest political act I have observed in my life and the potential consequences are being severely underestimated by stock markets. 

It MAY not be so bad, but my methodology has for years been about assessing probabilities, and at this time not only is the degree of risk very high, but the likely damage might be at a level we have not seen since the dot.com crash – which had an impact lasting 3 years. If I am wrong, nobody will be upset, I think.

Given the rate at which things are changing and the known flip-flopping of POTUS, I will add update my publsihed opinions more often than usual if necessary in my judgement. In the meantime, I think that what I wrote a few days back still stands up. Here is the article:

Below are charts for the share prices of 3 truly global companies – one is actually the largest company in the world by capitalisation – note the 4.4T valuation! The others are not small at around 200 billion. The first 2 charts are over one year and the last is over 5 years for reasons that will become clear.

What these charts show is that the short term share price momentum is driven by what the markets thinks is going to drive profits in the future. It is also possible to note that a good business can still make solid returns on average even after a momentum ‘climb’ fizzles out, but that depends on its operations being widely based.