[This blog post is an excerpt from a commentary published at www.speculative-investor.com within the past fortnight]

It has become clear to many analysts that the amount of money being poured into AI-related investment doesn’t make sense. The numbers just don’t add up, meaning that there appears to be little chance that many of the individual investments will achieve reasonable returns and no chance that the investment, in the aggregate, will achieve a reasonable return. This is true, but the rapid rate of spending probably will continue. Fortunately, there is a way to profit that doesn’t involve trying to pick winners in the technology race and doesn’t rely on the AI-related spending being profitable for the companies making the investments.

The rapid rate of spending on AI probably will continue, for two main reasons. The first is that although concerns regarding the magnitude of capital spending by formerly capital-light companies such as Oracle (ORCL) are beginning to appear in both the stock market and the bond market, it’s likely that the senior managers of the mega-cap tech companies view falling behind in the AI race as an existential threat. In other words, the current rate of spending creates a big risk, but failing to spend enough and thus falling behind one’s competitors could be an even bigger risk.

The second is that political leaders in both the US and China clearly believe that for both military and economic purposes, AI-related development in their country must at least keep up with the AI-related development in the country perceived to be their main adversary. Therefore, it’s reasonable to expect that there will be government pressure and incentives to ensure that the private sector continues to invest massive sums in AI and the associated infrastructure.

We think that the safest way to participate in this on-going investment boom is to own the shares of the companies that produce the raw materials that are needed to 1) build datacentres and the equipment that goes into them, and 2) build and fuel the systems that supply power to datacentres. Examples include the producers of natural gas, uranium, copper, tin, REEs and lithium.

The strategy of owning the stocks of companies that produce the raw materials required for the AI boom has worked well for us over the past 12 months and probably will work well for at least another 1-2 years, with — naturally — the occasional gut-wrenching correction along the way. Moreover, this strategy not only obviates any need to pick the AI winners, but also meshes with the fact that we have entered the phase of the economic cycle in which industrial commodities would likely perform well even without the additional impetus provided by the AI spending binge.

A final related point is that while the commodities mentioned above probably have all commenced cyclical bull markets, they tend to rally and correct at different times within these overarching cyclical upward trends. For example, the stocks of REE- and uranium-focussed companies were star performers during the second and third quarters of this year, but during September-November the focus shifted to lithium stocks and over the past few weeks the focus shifted again — to natural gas stocks. This means that it is not uncommon for a short-term selling opportunity in the stocks of companies focussed on one commodity to coincide with a short-term buying opportunity in the stocks of companies focussed on a different commodity.

[This blog post is an excerpt from a recent commentary at www.speculative-investor.com]

Aggregates such as Gross Domestic Product (GDP) and Consumer Price Index (CPI) always have been fatally flawed. For example, the GDP calculation treats a dollar of wasteful spending as if it were the same as a dollar of productive spending, and the concept that a single number (the CPI) could represent the economy-wide price of money has never made sense. However, over the past several years some of the highest-profile economic aggregates have become more misleading than ever, prompting economists and politicians to wonder: “Why is the average person so concerned about his/her financial situation when the economy is doing so well?”

In the US, the Bureau of Economic Analysis probably will report that real GDP grew at the annualised rate of 3%-4% during the third quarter of this year, which is suggestive of a strong economy. At the same time, however, President Trump’s approval rating on the economy is very low and measures of consumer confidence are in the dumps. For example, the following chart shows that US Consumer Sentiment as measured by the University of Michigan is near a 10-year low.

The discrepancy between the economic aggregates and the perception of the average person was explained in a recent FT article. Here’s an excerpt:

“The American economy is deeply split, with those at the top enjoying unparalleled prosperity and the rest of the country struggling to make ends meet. The top 10 per cent of earners now account for almost half of all spending, up from about a third in the 1990s. Many are feeling particularly flush as they enjoy the fruits of a strong stock market — the S&P is up more than 15 per cent this year, despite a few wobbles. For everyone else, the picture is gloomy. Lay-offs are surging, consumer sentiment has fallen by 30 per cent year on year to near-record lows, and three out of four Americans tell pollsters that the economy is in fair or poor shape.”

And:

“The share of Americans who describe themselves as middle class has dropped from 85 per cent a decade ago to 54 per cent. Over 40 per cent of Americans consider themselves lower or working class, suggesting that many of the finer things feel completely out of reach.”

In short, the aggregates reflect a large increase in spending on the part of the wealthy, while most people are struggling financially. This has political consequences and probably is the main reason for Trump’s success in November-2024 despite the strong — according to high-profile statistics — economy of the time. Moreover, the economic trends of 2022-2024 and their effects on the political realm have continued this year, with the recent election of Zohran Mamdani, a so-called “democratic socialist”, as the New York City Mayor being one of the consequences.

All economic trends affect the financial markets in some way and economic trends that bring about political upheaval tend to have big effects on the financial markets. Although the “inflation” resulting from simultaneously creating a supply shock and showering the populace with money during 2020-2021 is the main cause of the current malaise, it’s a good bet that additional inflationary policies will be part of the official solution to the problem. For example, Trump is talking about sending a $2,000 “tariff dividend check” to almost everyone next year and cutting income tax*, while the Federal Reserve almost certainly will be taking actions to ease monetary conditions. We expect that these policies will extend the gold bull market and fuel even bigger price gains within the ranks of industrial commodities.

*Trump is saying that the income tax cut will be funded by tariff revenue, but you only need rudimentary understanding of the size of the federal budget relative to projected tariff revenue to know that this is nonsense. Any significant cut in US income taxes will be funded by an increase in government indebtedness.

We have never come across a satisfactory way of quantifying overall financial market liquidity, but major trend changes in liquidity can be observed in the price action. In this regard, the price action in several markets points to a major downward reversal in the liquidity trend having occurred during the first half of October.

To further explain, too many markets reversed course during the first half of October for it to be a random coincidence. Therefore, during this period there must have been an underlying shift in something with the ability to pressure prices in diverse markets upward or downward. A shift in the liquidity trend is the most logical explanation.

A shift in the liquidity trend could explain why all the following happened within a 2-week period:

1) There were spectacular downward reversals in the prices of stocks focussed on Rare Earth Elements (REEs), indicating that the REE bubble — a bubble that was extremely profitable for us — has burst.

2) The prices of gold and silver rocketed upward and then reversed downward.

3) The gold mining indices/ETFs peaked in mid-October, two days after breaking above their 2011 highs, and then plunged.

4) The prices of platinum and palladium rocketed upward and then plunged.

5) After peaking during the second week of October, US Antimony Corp. (UAMY), a proxy for the antimony speculation, quickly lost about two-thirds of its value.

6) Bitcoin made a new all-time high and then reversed downward.

7) The German stock market, as represented on the following chart by the DAX, made a marginal new all-time high and then reversed course. The chart indicates that the DAX may be about to complete an intermediate-term topping pattern.

The most important market that is yet to show evidence of declining liquidity is the one that is being supported to the greatest extent by passive money flows: the US stock market as represented by the SPX. However, if a major liquidity trend reversal is underway then its effects should start to become apparent in the senior US equity indices by early next year at the latest. More generally, if a major liquidity trend reversal is underway then no market will be spared and the next several months will be a period in which to ‘play defence’.

[This blog post is a brief excerpt from a commentary published at www.speculative-investor.com on 9th November]

In the 15th October Interim Update, under the heading “The REE Bubble”, we wrote that all the REE-related stocks that we track except for Neo Performance Materials (NEO.TO) were now in bubble territory. This was not only because equity prices had gone parabolic, but also because the price gains in the stock market were not supported by price gains in the underlying commodities. We went on to write that the bull market possibly had years to run, but the risk of an intervening crash had become high. Therefore, we recommended that anyone with significant exposure to REE-related stocks who had not yet harvested meaningful profits, should do so right away. Our warning was well timed, because a crash began almost immediately.

The first of the following daily charts shows that MP Materials (MP), the largest (in terms of market capitalisation) stock in the REE sector and a stock that we use as a sector proxy, fell by 50% from its October high to last week’s low. The second chart shows the performance of USA Rare Earth (USAR), a stock that looked very expensive in early-September — BEFORE it tripled in price on the way to a blow-off top in October. USAR lost two-thirds of its value from its October high to last week’s low.

On average, the prices of the REE stocks on our radar screen fell by around 50% from last month’s high to last week’s low. The stock price of Neo Performance Materials (NEO.TO) held up relatively well and suffered a peak-to-trough decline of ‘only’ 32%, because it didn’t rise by as much in the lead-up to the top and because its current valuation is underpinned by current revenue and earnings.

The way these things usually go, the initial phase of the crash will be followed by a rebound to a lower high, a decline that tests or breaches the initial low, and then several months of base-building. After that, the next leg of the bull market possibly will begin. Note that last Friday’s price action suggests that the initial phase of the crash is complete, so over the weeks ahead there probably will be a rebound.

With commodity-related stocks, we like to do most of our buying during base-building periods and to scale-out during the parabolic rallies.