Aussie households have woken up to more bad news this morning…
Despite all the pain inflicted by the RBA’s rate rises it appears to still not be enough. Inflation spiked 0.5% higher in April, showing that price pressures aren’t going away as easily as everyone hoped.
As a result, it seems likely we can expect yet another rate rise from Dr Lowe next week. News that is almost certainly going to place more stress on everyone’s budget.
For investors, it also raises questions as to whether an impending recession is on the way.
That’s not exactly a new fear after all, it is growing in prominence the longer this cycle of rate rises continues — a factor that may push more people into more defensive assets. At least, that’s what seems logical…
The trouble is, as we’re seeing in the US market right now, logic isn’t the be-all and end-all.
Because while the US is facing just as many economic risks as we are, there are some incredible market outliers. The most prominent of which, in recent days, has to be NVIDIA Corp [NASDAQ:NVDA].
AI boom or bubble?
Over the course of May, NVIDIA’s share price climbed from around US$289 per share up to an incredible US$412 per share earlier this week. That’s about a 42% spike in market cap for a stock that is one of the biggest across the entire Nasdaq.
In fact, NVIDIA briefly reached a US$1 trillion valuation this week. And while it hasn’t been able to hold onto that share price, it is an incredible achievement given market conditions.
However, what is even more fascinating than the ‘how’ is the ‘why’ behind NVIDIA’s share price boom. Because as a designer of computer microchips, it’s their plans for artificial intelligence (AI) that lit a fire under their stock…
As the Australian Financial Review comments:
‘No other company embodies Wall Street’s current obsession with AI more than Nvidia. It has become the world’s biggest maker of the specialised chips needed to power a new generation of AI products, surpassing Advanced Micro Devices and Intel in capability just as the viral success of ChatGPT has virtually every company around the world baking AI into its operations.’
In other words, NVIDIA is basically the poster child for the AI sideshow in markets right now.
While everyone else is fretting about inflation, rising costs, and a potential recession, NVIDIA is booming with optimism. A turn of events that, depending on your investing disposition, could be a sign of extreme hope or hopelessness…
After all, it is easy to look at this AI trend and see a bubble.
I mean, it’s not like NVIDIA has even delivered an incredible result yet. Their share price is simply rising on forecasts and hype from management.
That certainly doesn’t paint a picture of sustainable investment. And for that reason, I certainly wouldn’t be following the masses on this NVIDIA hype, personally.
But this is also a case of not wanting to throw the baby out with the bath water. Because as crazy as the NVIDIA story is, it really shouldn’t deter investor excitement over AI.
A real solution for real problems
For example, circling back to the matter of inflation at home and the RBA, Dr Lowe has pointed the finger at productivity as the problem. More specifically, our lack of productivity growth.
Collectively, our productive capacity just isn’t moving the needle enough to justify the wage growth that we’ve seen and that the government is pushing for. In Lowe’s own words:
‘In the normal course of things, 4 per cent wages growth is not problematic,
‘But it is problematic if we had no productivity growth.’
At the end of the day, without productivity, our economy simply can’t go forward. It is the driver of growth and better living standards for us all.
And that is where AI could come into the picture…
You see, despite the bearish market examples, what AI really represents is productive potential. It is a technology that could unleash incredible productivity gains as it matures. Because just like previous technological tools such as the personal computer or the internet, AI could revolutionise the world economy.
Here is how the Brookings Institution discussed this incredible potential of AI:
‘On a recent Friday morning, one of us sat down in his favorite coffee shop to work on a new research paper regarding how AI will affect the labor market.
‘To begin, he pulled up ChatGPT, a generative AI tool. After entering a few plain-English prompts, the system was able to provide a suitable economic model, draft code to run the model, and produce potential titles for the work.
‘By the end of the morning, he had achieved a week’s worth of progress on his research.
‘We expect millions of knowledge workers, ranging from doctors and lawyers to managers and salespeople to experience similar ground-breaking shifts in their productivity within a few years, if not sooner.’
Investors should be looking at this in terms of AI rather than the anecdotes surrounding companies like NVIDIA. Because as important as individual stocks will be to this trend, it doesn’t represent the much bigger development at hand.
There won’t be an individual or small group of ‘winners’ regarding AI investment, and it is going to fundamentally flip entire industries on their heads. And while no one knows what sort of carnage and euphoria that could deliver across markets just yet, it is certainly coming.
That’s why whether you’re a bull or a bear on AI, it doesn’t really matter.
Change is coming, and all you need to do is prepare for it.
Regards,
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Ryan Clarkson-Ledward,
Editor, Money Morning
