Rates Are “Likely to Be Higher”

How ChatGPT’s debut compares to that of the iPhone … this is huge is for tech advancements … how do you invest in AI today? … Luke Lango and Eric Fry’s take on what’s coming

Speaking on Capitol Hill this morning, Federal Reserve Chairman Jerome Powell disappointed bulls by saying:

The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.

This casts doubt on the bullish narrative from recent months that we’re on the verge of stopping all interest rate hikes, and only months away from actually cutting rates.From CNBC:

Those remarks carry two implications: One, that the peak, or terminal, level of the federal funds rate is likely to be higher than the previous indication from the Fed officials, and, two, that the switch last month to a smaller quarter-percentage point increase could be short-lived if inflation data continue to run hot.

Immediately after the comments this morning, Wall Street sold off substantially. But bulls have pared the losses as I write early afternoon. Wall Street is increasingly coming to terms with the reality that the Fed is committed to “higher for longer.”Powell speaks again on Capitol Hill tomorrow. We’ll bring you any market-impacting highlights from his testimony.

How to invest regardless of the Fed

Although Powell’s comments could move the markets this week, one way to downplay their impact is by zeroing in on investment trends with longer legs. In other words, those massive trends that can drive investor portfolios in spite of a “higher for longer” interest rate environment.To set the stage for profiling one such trend, let’s turn back the clock momentarily…

“We’ll never have to write a book report ever again.”

It was the early 1990s, and my junior-high-school friend, Chip, was telling me about this new “thing” on a computer that would usher in a whole new level of academic laziness…The “internet,” whatever that was.Given my skepticism, Chip demonstrated, turning on his family’s comically large computer, then clicking some buttons that resulted in a strange electronic sound (if you’re a younger investor, please Google “dial up modem sound” and enjoy).We eventually navigated to some website where Chip typed in a few search terms, then after waiting 15 – 20 minutes for the data to download, my jaw dropped when there, right in front of me, was the equivalent of countless Saturday afternoons of research at the library.I was floored, realizing that technology’s crowning achievement had finally arrived, and it meant one thing for the world…No one would have to read The Great Gatsby ever again.Now, as wonderful as that was, and frankly, as great as the internet-related advancements of the late-90s were during the Dot Com bubble, they paled in relation to something that happened in 2007.The launch of the iPhone.The power of the internet can be divided into pre- and post-iPhone. This was the watershed product that accelerated our societal addiction to the internet, as it ushered in a new world of tech-based advancements, products, and conveniences.

From an investment perspective, the launch of the iPhone was also a starting gun for the astonishing growth of the FAANG stocks

Our hypergrowth expert Luke Lango highlighted this recently for subscribers:

Just look at how the revenue growth trajectories for internet titans like Amazon (AMZN), Alphabet (GOOGL), and Netflix (NFLX) dramatically changed after the iPhone’s launch.Before the iPhone, internet companies were growing. After, they started to spread like wildfire and take over the world.It was a critical inflection point – the “tipping point” for the internet revolution…The moment when everything changed.

Chart showing the revenues of the FAANGs climbing after the iPhone versus before
Source: Bloomberg

Now, the reality is that investing in the FAANGs in 2007 was actually a bad decision in the short-term. Luke points out how each of these stocks dropped between 50% and 60% in 2008.But for investors who understood the before-and-after significance of the iPhone and stayed the course, well, you know the ending. But here’s Luke with the numbers:

Every $10,000 invested in Alphabet stock in late 2008 would be worth nearly $140,000 today.A $10,000 investment in Amazon or Apple stock in late 2008 would be worth nearly $500,000 today.And a $10,000 investment in Netflix stock in late 2008 would be worth over $1 million today. 

We’re revisiting the iPhone and the growth of the FAANGs because another technology just had its own “iPhone moment”

We’re talking about Artificial Intelligence (AI).In the same way that the internet was around for years before the iPhone, AI has been around for years and it’s already highly-integrated into our lives…It speaks to us in our cars, telling us turn-by-turn how to get to a destination we’ve never visited, all while avoiding the worst real-time traffic snarls…It understands us when we speak to a Smart Speaker and instantly obeys hundreds of commands…It learns about our preferences at frightening speed, and serves up movies, TV shows, songs, an/or products that we (usually) enjoy…But while it is no longer “new,” AI’s astonishing potential became real in a brand-new way last fall.Here’s Luke to explain:

The burgeoning field of artificial intelligence (AI) just had its iPhone moment last year, when Microsoft-backed OpenAI launched ChatGPT.  This put the power of sophisticated AI in the hands of everyone with a computer. Like the internet in the 2010s, AI promises to change every facet of our global economy in the 2020s. It will represent a massive paradigm shift in the way society operates and the way money flows in our economy. It will change everything about everything. It will create a $15 trillion market by 2030. And that revolution just had its iPhone moment.

Luke points out that it might not feel that way coming out of 2022. Most investors’ portfolios are still reeling from last year, and there are plenty of reasons to feel anxious today.But this is similar to where investors found themselves 15 years ago after the iPhone launch and the subsequent stock market crash. And Luke sees history repeating itself:

Today, AI stocks are crashing just months after their own “iPhone moment” because the economy is enduring a crisis. Back then, “big-picture” investors who were able to zoom out and recognize the importance of the internet and the iPhone – and buy the dip in internet stocks – have since made fortunes. Today, “big-picture” investors who can recognize the importance of AI – and buy the dip in AI stocks – will give themselves the chance to make fortunes, too. 

Unfortunately, this “big picture” can be hard to grasp.Here’s Forbes to help us understand the enormity of what’s in front of us:

The human brain can easily predict the rate of arithmetic growth (whereby numbers increase at a constant rate: 1, 2, 3, 4). And it does reasonably well at comprehending geometric growth (a pattern that increases at a constant ratio: 1, 3, 9, 27), as well.But the implications of continuous, exponential growth prove harder for the human mind to grasp. When it comes to generative AI, that’s the rate of growth to focus on.Let’s assume that the power and speed of this new technology were to follow Moore’s Law, a posit that computational progress doubles roughly every two years.In that case, ChatGPT will be 32 times more powerful in a decade and over 1,000 times more powerful in two decades.That’s like trading in your bicycle for a car and then, shortly after, a rocket ship.

So, what are the best ways to invest in AI?

A few moments ago, we highlighted the investment “opportunity” part of AI – it’s finding the stocks that will turn into the AI-equivalents of the 2010-FAANGs.But hold on…If Microsoft bought ChatGPT, and Google is introducing “Bard,” and many of the rest of the FAANGs are pouring ungodly amounts of capital into their own AI offerings, are the FAANGs the best way to play AI?Will the 2020s be “FAANG the sequel?”Not according to Luke:

Big tech stocks are a way to play the AI Gold Rush. We believe companies like Microsoft and Apple will integrate sophisticated AI throughout their ecosystem of products.And chipmakers like Nvidia will see a huge uptick in demand for its GPUs to power next-gen AI systems. However, those are multi-hundred-billion-dollar, even trillion-dollar companies. Even if their AI applications create trillion-dollar empires – which is totally possible but also a best-case outcome – their stocks would only rise, say, 100%, versus 1000% for a smaller company. Why? Because of the “small firm effect.”

Luke explains that small-cap stocks have higher growth potential than their large-cap counterparts because they have a greater amount of growth opportunities. This is the “small firm effect.”

So, how do you find the right small-cap AI stocks that will create vast wealth this decade?

That’s what Luke and our macro expert Eric Fry discussed last week at InvestorPlace’s first ever AI Super Summit conference.Here’s how Luke described the event:

The first step in embracing something is understanding it.That’s why, at our AI Super Summit, Eric and I will discuss how AI will change the world, what specific industries it is going to have the biggest impact on over the next 12 months, and of course, which AI stocks are the best ones to buy right now.

You can watch a free replay of the event by clicking here.AI just had its iPhone moment. The economic and investment impact will only accelerate from here. Make sure your portfolio is ready.Here’s Luke with the final word:

The AI Revolution represents one of those once-in-a-lifetime investment opportunities where 1,000% and even 10,000% returns are entirely possible. Let the opportunity of a lifetime pass you by – or capitalize on it now. If you want to take advantage of this revolutionary moment, then I highly suggest you check out our first-ever AI Super Summit. It’s an event we held specifically to help investors capitalize on what may be the biggest technological paradigm shift of our lifetimes. We even disclosed a few of our top AI stocks to buy right now. Check out a replay of that event now.

Have a good evening,Jeff Remsburg

Article printed from InvestorPlace Media, https://investorplace.com/2023/03/rates-are-likely-to-be-higher/.

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