Why the economy (the stock market) does not feel right

Question

It's one thing to hear about an AI bubble, but another one is seeing it broken down. I'm a data guy and this thing speaks to me.

I think it's more a question if than when the AI bubble will - let's call it shrink, because it may not burst. But when it does, we are looking at different economic KPI's, specifically GDP and emplyment. And those will have real consequences for real estate.

V.G Jason · Answer

The economy is not the stock market.

However, the stock market is the hyper representation of the general economy; extreme K shape. Top 7 do all the pulling(top .5%), the rest are lagging(lower 99.5%). And small caps(young generations) are struggling to disrupt to due to many headwinds.

If you adjust this all against the dollar, almost nothing has been impressive beyond gold, mag7 & btc. For that, the risk is extreme concentration.  You'll see the spreads trade unwind as rates lower(mega cap sell, small cap buy).  Japan buy their own debt, reduce US debt.  The true issue we'll face is inflation=FFR and unemployment gets to 4.5% or higher. The lower FFR is the solution to an unemployment rate, but that may not be the case if it's not debt it's AI that's causing it. Big companies will continue to reduce headcount, and use more debt for AI build out. And how the 10 year reacts, nobody expects a 1:1 move but if it's any tighter than a 1: .33 move then we're stuck, you get longer hard assets, and you buy deep.  Dollar devalues, prices are deflationary, big boys buy, and it creates an inflationary wave.

The tail risk which we cannot qualify right now is something we cannot predict; that's why it's black swan risk. It's already on my radar the risks of Altman, Saylor, and China's AI progress. If it's on my radar, there's others watching this too obviously.

Your biggest risk in RE is opex & capex.

Henry Clark · Answer

I agree with everything you stated except the last sentence.  Yes, normal world, opex and capex are the major REI concerns.   However in terms of questioning the economy, I would say your job, investment diversification and which side of REI your on, Owner/buyer.

BP posters I would divide into investors in REI and ones who want to be.  Key items I would look at:

1.  W2 job security.

2.  Investment diversification.

3.  Personal housing

4.  Debt load and terms.

5.  Life situations and stage of life

I’ll narrow the discussion down to investors with 10 housing units or less or say 5 commercial non housing properties.

If you’re extreme on any of the 5 items above as a current investor I would be moving to a defensive position. Refinancing for longer terms, increasing cash equivalents, trimming poor performing properties, holding off on non cash generating asset purchases, etc

If your a new or expanding investor  I see a Buyers market now.  But it’s on a deal by deal basis not across the board.  Make sure your stable on the 5 items above.  You’re looking for a current investor who is stressed on one of the 5 points above.  Since you don’t know the sellers situation, make offers that are good for you.   Forget list price.

Chris Seveney · Answer

Big gamble being made on AI. These companies are a lot smarter than me, so it will be interesting to see if this investment is worth it or if it causes the economy to take a big hit.

Henry Clark · Answer

OP the chart shows return on equity versus earnings.  Most of the Return on Equity is based on Exuberance and not earnings increase.

P/E or price to earnings ratio. Show the mag 7 as low return. W/O mag 7 S&P 500 is about 20. It would take 20 years to cover the cost of the stock from earnings. Tesla is 183 years and Nvidia is 40.

Hopefully the market has adjusted Tesla value as it relates to EV cars. China and other countries have advanced the EV market to a Commodity market, which does not support a PE of 183. Tesla is starting to focus away from EV vehicles.

The above story is a good example why the Mag 7 will never realize their market valuations. Product life cycles have gotten faster and faster. Hunter gatherer, farmer, horse age, industrial age, steam power, oil, computers, internet, AI. They go from Advanced tech to Commodity status, to fast to realize a “Longterm” payback. Millions of people have made millions of dollars on the Mag 7, but it is a “short term” investment.

The above is a stock investment view.

From an AI impact on jobs. It will have an impact on jobs. 30 years ago one of the companies I worked for. The forklifts in the warehouse did not use drivers. Another had automated welding which is commonplace now. Another had a parts vending machine, massive. Farming already has used AI for years.
I used to stop by my mom’s restaurant on Fridays and help cook hamburgers, fries, drinks, etc. AI could do that. The cash register could be AI. Even semis between cities can be driverless today.

But, But, But, this will create more jobs?????  Go thru all of the product life cycles I noted above.   They all created more jobs.

Plus the US has gone too far shipping out manufacturing jobs over seas starting in the 70’s. These either will be brought back to a degree or we will go onto Societal bankruptcy. We need a strong middle class, which manufacturing supports. There will always be poor, middle and rich people. The mix is skewed to much since the 70’s.

Actually the greatest Disruptive technology will be 3D manufacturing.  Especially tied with AI.

The next largest impact will be Carbon Sequestration technology, which is actually thousands of years old.  I don’t believe in Global ??????.  But the impact of Human Climate change can be offset within 1 year.  People and governments need to stop talking and do it.

Henry Clark · Answer

OP AI is one of the least issues I would be worried about RE or your tenants being able to rent.

1.  AI stocks fall to whatever degree.  This will only impact investors over 50 nearing retirement.  Or young investors who invested heavily only into the Mag 7.

2.  If AI automates semi driving, eye surgery, flipping hamburgers, next Beatles song, next Louis L’Amor Sackett book, that will be the same as automating picking cotton, cutting hay for horses, splitting firewood for locomotives, or filling street lamps with whale oil every night, etc.  There will be new jobs.

3.  The US will inflate the U.S. dollar by 1,000%.  Wages of your renters and potential unit buyers won’t keep up.  They will get poorer real fast.  Your rent rate will go down and thus their value to potential buyers. 3 year window.

4.  China will dissipate as the world’s cheap manufacturer in the next 5 years.  This switch in sourcing over the next period will cost a lot of capital investment and cause inflation. Causing inflation making your renters poorer.  5 year window.

5.  Islam- our economy will revert to 3rd world.  I approach this as Accountant by trade and thought process.  Read the Quran and understand Sharia law, approach it from a financial viewpoint.  Your renters wages and your unit values will decrease significantly.    30 year window.

6.  Business cycles- nothing is ever flat.  Back in the early 80s the fed rate was taken up to about 20% to curtail inflation.  Believe our national debt was about 20% of GDP.  Today our national debt is about 120% of debt at $36T not counting $133T of unfunded debt for social programs.  The Fed Rate can’t go up even to say 8% for very long or we go bankrupt.  Our only two options is to increase GDP by say triple or print more money.  Either way we hit a point of no return   Then we cycle back down into recession.  The good thing about being poor there are solutions for being poor.  Both rents will go down and unit value.

7.  Global warming-  I’m actually not worried about this whether you think it or not.  It can be solved in one year world wide easily.  If you believe in it.  Then fewer people in the world then rents and values go down.  Or houses get wiped out, and rent and prices go up.

Crystal ball analysis is always based on What?, When? Magnitude?  You can disagree with any of the above, but there are still the others.  AI really is small potatoes.

Marcus Auerbach · Answer

Some people say the bubble won't burst, because everyone is waiting for it to pop. A valid argument is also that most of the mag7 are profitable (unlike most of the dot-coms) But they can't earn their way out of these PE ratios. That is what leads me to believe that we will see just a deflation of the bubble, not a pop, but that's not going to be great either.

Frankly, my biggest concern is that once AI goes physical in the shape of humanoid robots, the manual labor market will collapse. To what degree we can reorganize remains to be seen. But I believe it will mean a lot of my tenants will be unemployed permanently. This will be a while, the current generation robots are more a publicity stunt than actually useful. But that will change. And that may become Tesla's new revenue model. I don't see them working on any new models - I think their cars start looking old.

I am sceptical that this industrial revolution will bring more jobs, as the previous ones did. When I see that happening, I'll have to rethink my positioning in real estate.

Why the economy (the stock market) does not feel right

Most Popular Reply