Stockchase InsightsA Comment -- General Comments From an ExpertA CommentaryCOMMENTMar 30, 2022

Equities are starting to see competition from other asset classes, given the yield you can get on "risk-free" assets. A lot of the focus is short-term -- oil, inflation, etc. But the US government has a lot of debt. At the same time, demand seems to be weakening structurally for bonds.

We've had a weaponization of the US dollar. Whether it be sanctions on Russia, China, etc. Then there are all the tariff issues we've had with (supposed) allies of the US.

Central banks are wondering if they want to have that much tied up in US treasuries. They're still buying, but not at previous levels. At the same time, supply is booming with all the hyperscalers raising money. Demand/supply doesn't look great.

It's something that's been grown, rather than crafted, so we don't know quite what it will look like in the end. In a conflict with two intelligent things, the one of far superior intelligence will win. 

At the beginning of the week, a number of prominent investors came out and said that we need to have guardrails to slow things down. If that leads to slightly lower growth and demand, it might end up not being a bubble that pops, but that growth gets normalized. And that could affect profitability across the whole sector.

They're long-term investors. Whenever we talk about metals, it always seems to focus on the demand. For copper, demand seems fairly robust. The supply side is what makes him positive. Some institutions are talking about a major undersupply by 2035. It takes about 20 years to get a mine going.

Likes it over the long term. You could buy FCX, the heavyweight player. Also LUN or HBM in Canada, which are smaller and faster-growing. You might also consider an iShares ETF -- diversified, you don't have to worry about jurisdiction risk or individual mine risk.

WTI pricing can be all over the place, with lots of trading. Whereas WCS is based on long-term contracts. The differential does seem excessive, but so many short-term factors (futures, location) are at play. It wouldn't surprise him if it settled back to a normal range in 6 months.

Some clients have asked him the very same question. He answers: Are you trying to avoid the US economy? Trying to avoid the US stock market? Or trying to avoid the US dollar? Even with a typical international portfolio, you're exposed to the USD and the US economy.

Looking back at history, the competence or incompetence of the administration doesn't matter to the stock market. It goes on through thick and thin. Yes, some issues might affect things in the short term. But, ultimately, it's hard to pinpoint any incompetence on a long-term chart of the S&P 500. The two aren't as closely linked as you might think.

He understands the thinking. If you have very strong views that the US economy will implode to some extent, and you have concerns over the debt levels, then you probably want to avoid all stocks and go to bonds. But he's not sure you want to do that either.

If you're looking to build wealth over the next 5-10-20 years, stocks are really the best place to be. US stocks have shown themselves to be better stewards of capital than most others. So many US stocks (think MSFT, AMZN) are not really domestic plays at all.

In the short term, there's opposition to data centres (NIMBY). They also need skilled labour; you can't just build one overnight. 

Longer term, he worries that "compute" is going to become a commodity. If things normalize (due to fears about AI, or cheaper/more efficient models), the whole jamboree we're seeing today ends up slowing.

The act is unlikely to pass, He has yet to see a realistic use to cryptos, which will remain purely a trading vehicle. Some will question why they support Trump through cryptos; Trump has made a lot off cryptos.

Big news came out over the weekend that's affecting stocks this week. Initial reaction was that people were scared that AI development is not going to continue, and companies won't continue investing and innovating into the frontier models.

Those concerns are misplaced. What's going to happen is that we're going to be a lot more careful when introducing these models in order for them to be secure and safe for the public. There will be a little more investment in cybersecurity, and a bit more review before models come to market. But, ultimately, it won't affect the pace of development.

The key will be to come up with a pre-agreed standard that companies apply and screen for. Not sure it needs to be regulatory oversight.

Doesn't see any sort of slowdown in development, especially in hardware investments. Over the past year, dollars have shifted from the big data centres and more toward distributive architecture. We've gone from a model-training era to an agentic era. The big dollars are being spent on inference and using these AI systems. That will continue.

Even if there are regulatory changes on the model side, the application and adoption sides are still in very early innings. That's where she's looking for opportunities.

Important for people to understand that the AI trade is not trading as one thing anymore. You really need to pick and choose the areas you want to be invested in. The fundamentals remain very strong and we're still in the very early innings of adoption.

Doesn't own any at the moment. Reason is because her firm tries to generate alpha, and they usually find it in companies that are between $10-100B in market cap. But her team follows them closely because they set the tone for the rest of the infrastructure spend.

If you look at the 3 biggest hyperscalers today, the best position is probably in GOOG. Doing lots of internal development and investment in its AI models. Gemini is lagging Anthropic and OpenAI, but it's a close third. GOOG is really at the forefront of innovation, especially compared to the other 2 hyperscalers.

AMZN is well-positioned because of its partnership with Anthropic. In third place is MSFT, which really hasn't come up with a differentiated strategy.

Returns for hyperscalers over next cycle will not be as good as prior cycle. Returns to date have been exceptional.

Her firm holds only a few very select companies. While they closely follow about 100 companies, only a few make the cut to be included in the portfolio. These are disclosed on their website.

She does invest from time to time, but not now. Level of improvement seen to date is not meeting the expectations that people had 2 years ago. The downside surprise was that the working quantum computer of today doesn't outperform accelerated computing. Commercial adoption is not there yet. Need to have a really long-term horizon, about 10 years out for broad deployment.

As soon as we have some sort of indication that a computer performs on par, or better than, accelerated computing, that's when you want to invest. You don't necessarily have to wait 10 years.

Lots of risk, as many of the publicly traded stocks may not be the ones that end up winning. One to put on your radar.

He's not bullish yet. Since early summer, he has moved from neutral to high risk, when there's more market volatility. The S&P is below 7,600; if it stays here, it becomes technical support, and likely fall to 7,300. The crowd is getting very bearish because they've seen the market fall for the past month. He predicts a little more downside before we reach capitulation, which is the time he will buy. We're getting there. He still holds 20% cash, and is ready to deploy it.