Is The Market Bubble Finalizing Imploding? | Jim Bianco

Market Concentration and AI Bubble [0:00]

• The current market is more retail-driven than in decades.
• Silver is predicted to reach $50 for the first time, with potential to move to $75 or $100.
• Half of investments are in the AI space, and it's impossible to escape its influence.
• There's a concern about a bubble peak in AI investments that everyone will feel.
• Precious metals and AI stocks are seen as the best performers, for now.

The momentum is precious metals and AI stocks. So, they probably will continue to be the best performers. I hate to say it until they don't. And when they don't, you'll know it.

The AI Economy Thesis and Valuation Bubble [0:37]

• A thesis suggests the American economy runs on AI sectors, boosting capital expenditure and the S&P 500.
• Without AI, the economy would slow down significantly.
• The S&P 500 and NASDAQ 100 indices have the same eight larger stocks, indicating they are merging.
• There is a concentration bubble, with the top eight stocks representing 37% of the S&P 500 and nearly 70% of the NASDAQ 100.
• These stocks are argued to be extremely overvalued, with a potential valuation bubble.
• Similar to the dot-com era, not every AI company is going to win, despite some having "not ridiculously high" valuations.
• Comments from prominent figures suggest that "not everybody can win," and many are overvalued but believe they will be the exception.

Yes, we know there's a concentration bubble. Is there a valuations bubble? Yes. And yes, there is a concentration bubble that you know the top eight stocks in both indices are the same.

AI's Impact on GDP and Economic Growth [3:21]

• A Harvard economist calculated that excluding data centers and information processing technology, GDP growth would have been only 0.1% annualized.
• This explains the confusion of having S&P at all-time highs and Bitcoin at all-time highs, while the labor market shows cracks.
• Software and IT equipment have added 1% to GDP over the last three quarters, the highest level ever seen.
• This is comparable to internet adoption in the late '90s (slightly less than 1%) and PC adoption in the early '80s (about 0.9%).
• The current AI build is stronger and shorter than previous technological booms.
• Apple is noted as a company "losing" because it's not playing in the AI space.
• Companies feel pressure to "outspend everybody else and win the AI race" or risk being lost.
• Tremendous power needs for AI companies are causing electricity prices to move up.
• The impact on the economy is significant.

So, this is something we've seen in the past that we have this tremendous build. Now, what's different about the AI build is it's stronger and shorter than we've seen before.

Retail Investor Dominance and Market Rally [6:26]

• Data centers are driving capex, and tech is driving S&P valuations.
• There are 45 AI and AI-related stocks in the S&P 500.
• Since ChatGPT's launch, these 41 stocks accounted for 71% of the S&P 500's gain, while the other 459 stocks accounted for 29%.
• For broad index investors, these 41 stocks represent 45% of the S&P 500, meaning half of their investment is in the AI space.
• Everyone, including the economy and investments, is tied into this AI trend and cannot escape it.
• The market is priced for everyone to win, but not everyone can.

If you are an investor in the stock market and you own broad indices, those 41 stocks are 47% or now 45 to be exact, 45% of the S&P 500. You've got half your investment in this AI space. You are tied in it.

The Retail Investor Phenomenon and Market Drivers [8:16]

• The rally in stocks, Bitcoin, and gold is being driven by retail investors.
• In September, retail investors put $100 billion into the market, an all-time high.
• This market is more retail-driven than hedge fund or institutional investor-driven.
• Retail investors are pouring money into indices, AI, and even precious metals like gold and silver.
• The bond market has not rallied significantly, with the 10-year Treasury yield remaining stable.
• Retail investors are tangentially interested in bonds, but their main focus is on indices and AI.
• Even buying broad index funds like VO, IVV, or SPY means 45% of the portfolio is tied to AI due to concentration.

This market is now more retail driven than any market that we have seen in decades. It is not hedge fund driven. It is not institutional investor driven. it is the retail investors at the side.

Labor Market Trends and Population Growth [10:15]

• The US unemployment rate has risen to 4.3%, the highest since October 2021.
• This trend is concerning for the Fed, potentially leading to rate cuts.
• The unemployment rate has been hovering around 4.1-4.2% and recently rounded up to 4.3%.
• The biggest driver of the labor market is population growth, which is driven by net immigration.
• Net immigration is down, and deportations are up, leading to potentially the lowest population growth in 80 years.
• The Congressional Budget Office forecasts population growth at 0.1% to 1.5% this year, a level not seen since the 1940s-1950s.
• The break-even rate on payrolls could be as low as 0 to 25,000 jobs, or even zero.
• This means creating one job might be enough due to low population growth, reducing the need for many new jobs.
• Historically low job creation numbers (e.g., 22,000 in August, 29,000 over 3 months) are seen as recessionary signals but are offset by low population growth.
• Stimulating the economy to create 150,000 jobs a month could lead to wage and CPI inflation, negatively impacting the bond market and potentially raising interest rates.

JP Morgan himself said at his September press conference, there's an argument to be made that the break even rate on payrolls is now 0 to 25,000 job uh 50,000 jobs with the midpoint being 25,000 could be as low as zero.

Market Correction Potential and Valuation Expectations [13:39]

• Some express concern about a market correction, with a 30% chance cited.
• Valuations are high, and there's a concentration bubble.
• The rally might continue in the short term, but high valuations mean companies must exceed top-end earnings estimates to avoid disappointment.
• Failing to meet these expectations could lead to stock market underperformance.
• Monstrous earnings projections are not currently evident, and the argument that AI will increase margins might not materialize in the near term.
• High-risk momentum plays from retail investors continue, but holding stocks long enough may lead to disappointment if earnings don't justify valuations.

So if you're buying stocks at these valuations, and even if you take out the AI stocks, the market is still fully valued, if you want to use that term, maybe even slightly overvalued.

Alternative Assets: Precious Metals and Bitcoin [15:56]

• Retail investors are moving into alternative assets like precious metals and Bitcoin.
• Gold is near $4,000, and silver is near $50, both historic all-time highs.
• The narrative of dollar debasement is false; the dollar is not falling, and risk markets are not declining.
• Precious metals markets are small compared to financial markets.
• Investors, particularly retail, are seeking safe havens due to valuation concerns, AI hype, and potential politics.
• It takes less money to move precious metals markets higher compared to stocks and bonds.
• There's a perceived zero-sum game between crypto and precious metals, with one taking turns leading.
• Bitcoin is still considered to be following the NASDAQ.

The precious metals markets as an asset class are tiny compared to the financial markets. There's probably a cohort of investors and probably at the retail side that are worried about valuation, AI, a lot of other things as well too, maybe even some politics in there.

Realistic Investment Expectations and Risk Tolerance [19:00]

• Unrealistic expectations of 20-30% annual returns are common due to recent market performance.
• A more realistic expectation based on current valuations is 4% for cash, 5% for bonds, and 6% for stocks over the next 5-10 years.
• These "average" returns are considered excellent, but people have become accustomed to outsized gains.
• The bond market, offering 5% yields with investment-grade quality and lower volatility, looks compelling.
• Investing heavily in AI requires rolling the dice, hoping the trend continues, and picking the winning companies, which is not guaranteed.
• Trying to "buy them all" in AI won't work, as seen in the internet bubble where only a few winners emerged.

A more realistic expectation based on the current valuations in the market. I've referred to it as the 456 market. Cash should return you around 4% which is exactly what it's been doing this year and I think it will. Uh bonds have been returning you about 5%.

Navigating Investment Decisions and Risk Profiles [21:57]

• Taking profits and moving into lower-yielding assets like 4-5% bonds or CDs can be psychologically difficult when seeing high returns on gold, S&P 500, or Bitcoin.
• It's important to consider personal expectations and risk tolerance.
• Experiencing a 15% stock market correction can indicate too much risk in a portfolio.
• Stock market corrections are normal and will always happen.
• A realistic stock market return expectation over the next several years is around 5%.
• Investors have been in an outsized period of gains and should avoid giving back profits.
• There's no immediate reason for a stock market correction in the near term.
• The decision to transition from outsized gains to normalized gains with less risk is a personal one.

If you were bothered by that 15% correction in um the stock market after liberation day, you've got too much risk. You shouldn't be you shouldn't be bothered by that.

Small Caps, Midcaps, and Sector Valuations [24:29]

• Small caps and midcaps have more realistic valuations compared to mega-cap AI companies.
• The Russell 2000 has underperformed the S&P 500 due to the dominance of AI in mega-cap companies.
• Investing in small caps is a bet on the economy staying okay and interest rates remaining reasonable.
• Small-cap companies are more economically sensitive than larger-cap companies.
• If the economy is expected to be okay, small caps might be a reasonable place to invest, but returns are expected to be around 5-6%, not the 20% seen from mega caps.

They have a more realistic valuation, and one of the reasons you mentioned it. Why are they underperforming? Cuz they have no AI. AI is all meggaap companies right now.

The Future of Silver and Bitcoin [26:10]

• Silver's recent surge to near $50 is unprecedented historically.
• In past instances of massive spikes, silver quickly dropped back down.
• Precious metals are expected to continue moving higher, but are currently speculative.
• There's a risk of significant losses if the speculative bubble bursts.
• The speaker predicts silver will take out $50 and keep moving higher, potentially to $75 or $100, but notes the risk of parabolic downturns.
• Bitcoin's parabolic rise on a linear scale is questioned, with a suggestion it's following the NASDAQ.
• There's a shift in the crypto space towards Ethereum (ETH) due to stablecoins and DeFi, which Bitcoin lacks.
• Bitcoin is positioned as a store of value, while other blockchains like ETH, Tron, or Solana are expected to handle real-world assets and payment rails.
• Year-to-date, ETH has outperformed Bitcoin.

I think the near-term flow, yeah, I think we're going to take out $50 for the first time in silver's history, and we're probably going to keep moving higher. It's go to 75 or 100.

Blockchain Tokenization and Decentralization Debate [29:43]

• The SEC has more or less green-lit the tokenization of securities, leading to more stocks and real-world assets being put on the blockchain.
• Discussions are ongoing about which chains will be used for tokenization, with Solana and Ethereum being key contenders.
• The Bitcoin blockchain is not expected to be used for this due to pushback.
• A debate exists between Solana and Ethereum regarding permissionless decentralization versus centralization and censorship risks.
• The speaker favors Ethereum due to its greater degree of permissionless decentralization compared to Solana.
• If the goal is true decentralization and permissionlessness, then Ethereum is the preferred choice.
• If control by third parties like governments is acceptable, then running everything on a US Department of Treasury server is suggested.

So, the big question is really between Salana and between ETH. And it really comes down to a question of um uh you know permissionless decentralization. How important is that?

Best Performer Prediction and Market Momentum [32:24]

• Precious metals and AI stocks are expected to be the best performers in the near term (next 2-4 months) due to momentum.
• This is a high-risk momentum play.
• It's unlikely there will be a sudden rotation into an unloved sector.
• The speaker contradicts himself slightly by acknowledging the momentum play despite earlier concerns about speculative bubbles.

At this point I think you know I'll I'll contradict myself in that what's got the momentum and the momentum is precious metals and AI stocks.