AI: The Apex of Implosion

This week, a parade of Fed speakers set about tamping down expectations of imminent rate cuts, culminating with Neel Kashkari Thursday who questioned whether any rate cuts were appropriate in 2024. Nevertheless, similar to last month, the market rallied straight into the jobs report. That was the peak for the AI rally one month ago. This is the second lower high for semiconductors which are the top performing AI stocks. Once again, the jobs report ran far hotter than expected, however this time the market rollover began the day before the jobs report, so what we're seeing now is an unwinding of weekly options.

This AI rally is eerily similar to the semiconductor/WFH/Cloud bubble that took place during the pandemic. Back then, consumer panic buying and supply chain bottlenecks conspired to cause a very large one time increase in semiconductor orders. However, as demand cooled down and bottlenecks eased, there was no follow through, so the sector entered a major recession of sales declines. The same thing is happening now. There is no actual use case for all of this AI hardware. This is the peak of the hype cycle.

This week, the market's leading clown Jim Cramer attempted to assure investors that AI is NOT another pump and dump similar to the pandemic. Recall that it was Cramer who coined the CNBC "COVID 19" index of pandemic stocks. No surprise, there's a lot of crossover between AI and the COVID-19 index. Below we see via the equal weight semiconductor index that the pandemic bubble imploded in 2022, something Jim Cramer has long since forgotten. Here is what he said this week in defense of the AI Tech echo bubble:

“It’s clear that lots of investors have no idea what AI is,” Cramer said on “Mad Money.” “In fairness, the reason they have no idea is because we really haven’t even seen anything transformative from the AI camp just yet.”

FR: And you won't see anything transformative until long after this latest pump and dump has ended.

Since the AI stocks peaked last month, there has been a strong rotation back into cyclical stocks. Which means that "investors" are now positioning for both higher inflation AND a lower Fed rate.

In the chart below we see that the Tech / Industrials ratio has rolled over again. At the first rollover which came during the pandemic re-opening, the market did not take a hit - the rotation was fairly seamless for the overall market. The second rollover came in late 2021 when the Fed started raising rates. During that rotation, the entire stock market entered bear market. Without Tech there was only relative outperformance by other sectors compared to Tech. They were not spared the rout. This time, there will be an even bigger pullback in Tech - the mega caps. And this time the entire market will be down a much larger amount.

The main point is that as we saw during the pandemic, the "inflation" mentality is one of panic buying and hoarding because the expectation is that prices can only go higher. However, the deflation mentality is one of selling and raising cash because the expectation is that prices are going lower. Since the pandemic, investors have been entirely in a buying mode. There has never been any panic selling. Why? Because the current crop of investors has been convinced that as long as they "HODL" aka. buy and hold and never sell, they will never take a loss.

Deflation will fix that theory.