Moneybeat: AI investing

MARY REICHARD, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat.

NICK EICHER, HOST: Time now to talk business, markets and the economy with financial analyst and advisor David Bahnsen. David is head of the wealth management firm the Bahnsen Group. He is here now and David, good morning!

DAVID BAHNSEN: Good morning, Nick. Good to be with you.

EICHER: David, in a moment I want to ask you about your most recent Dividend Cafe where you get into the economics of Artificial Intelligence, and we’re seeing there’s gold in them there hills. But as far as concrete happenings in the markets or data in the economic world over the last week, I want to begin by asking whether you saw anything rise to the top?

BAHNSEN: You know, it's sort of a lull in the cycle right now, in the sense that the Fed got done having their meeting where everyone knew they weren't going to touch rates, either hiking or reducing them. There's no real companies releasing earnings result right now, because we're near the end of the second quarter, so we'll wait until the middle of July for the quarterly earnings season to begin. That gives us a good understanding of where corporate America is in terms of profitability and their own outlook and guidance going forward.

And in the economic cycle, there wasn't a ton of releases this week. I think across the news cycle, a lot of people are focused on the presidential debate that's coming up, and you're starting to see some things from each respective candidate around their policy vision. I don't think any real big surprises there.

But, Nick, last week, I guess if there was something I would say was most interesting, it is still in the data around manufacturing, industrial production. It's so fascinating to me that there's a kind of mixed bag of data on the economy, mixed bag of data on labor and jobs, and now we're really seeing the same thing in the manufacturing sector. While construction and housing remains dormant—and frankly, the whole housing outlook looks incredibly underwhelming—there are signs of life that pulling out of this manufacturing slowdown may be coming. And the industrial production number was better than expected, and yet it just seems to have a hard time getting multiple months in a row of reflecting the same thing, to kind of validate the data.

So, I think that from a macroeconomic standpoint, where we stand, that's probably where I would highlight the biggest information of the week is just mixed data around manufacturing, which mirrors the mixed data we see in so many other economic categories.

EICHER: Alright. We know investors and financial journalists have this one thing in common: and that is attraction to shiny objects. Nothing is shinier right now than AI, artificial intelligence. There are the infrastructure builders, there are the consumer-products companies. Apple, for example, had its Worldwide Developers Conference and touted the fall release of a new operating system that would feature AI, that is, “Apple Intelligence.” But now that you’ve devoted an entire Dividend Cafe column to AI this past week, David, you’ve clearly been thinking about this for quite awhile. So give us a couple big-picture takeaways.

BAHNSEN: Well, first of all, I want to thank you for teeing it up by saying that I've been doing a lot of thinking, because you are right. It's been me thinking, not a computer thinking for me. And I guess that joke will parlay into a more important point, which is that I don't believe there is ever going to come a time in which artificial intelligence is actually disintermediating the really human things.

Now, part of what I just said is a tautology. It's by definition true: artificial intelligence is not human. And the really human things are human, and therefore AI cannot disintermediate virtue. And I would argue, to a certain degree, the truly ontological elements of a human being cannot be replaced by a computer. So that's one of the first takeaways that I've become increasingly convinced of, is a lot of the hand wringing over AI sort of dystopian nightmares as to what it could do to our society, I sort of categorically reject. And in fact, feel a great deal of confidence that those of us who have a Biblical vision of the human person need not be afraid.

Now, when you talk about it from an investor standpoint, the AI investor angle, so far, has not been about the use of AI, not even remotely. It has been about the backbone of AI. The analogy I use is that if AI is like food, the investors are making money in the ovens, but they're not making money in the restaurants. They're not making money in the actual delivery of the plates of food. It's the back end. And it's impossible, Nick, to look at this without making it analogous to the late 90s that we, all of a sudden, realized this internet revolution was coming—I don't think anyone realized exactly what it would mean—but we knew that it meant something different for the cable companies, for the telephone companies, for fiber optics, and ultimately the devices that would be a part of it.

I see a big parallel there between some of these backbone AI companies that have gone up hundreds of percentage points in a very short period of time, that some will be total failures, some will succeed and be the major player in the backbone of AI, and yet are just simply caught in a valuation bubble right now.

EICHER: And, so I want to pick up on that: the valuation bubble and ask you to define it. But setting the context, you talk about the historic comparison to the 90s and the tech bubble and dot-com crash that followed the rise of the tech billionaire. And so now we have this dominant player NVIDIA today attracting all kinds of investment. But in the 90s we had Cisco, which also was one of the tech-bubble companies. For defining terms, let’s talk about stock bubbles. What do you mean when you say that?

BAHNSEN: Sure. And so part of the problem with the word "bubble" is it doesn't actually have a clear, unambiguous definition. A lot of times the bubbles, I think that they become more definable in hindsight than when you're actually going through it. Look, you mentioned Cisco a moment ago. That's the company we're talking about that I put a chart up of its incredible correlation with NVIDIA's rise up and rise down. But the very important thing is that Cisco is not a failure.

Microsoft is now up a ton in the last seven years. But where it was in 2016 is the exact same place it was in 1999. How does a company like Microsoft and Cisco, that did nothing for that period of time but make money, but grow earnings, but grow revenues? They outperformed the expectations that everybody had, and yet the stock was way, way down. The only reason that happened is because it was way, way up to start with, and up to a point where, right now, you have to believe that NVIDIA is going to grow earnings 2,000% again to kind of catch up to its valuation. If its massive, huge amount of earnings is generating now, were to stay the same, it would take 60 or 70 years to recover their investment.

Now, the earnings will keep growing, but they will not grow at a rate necessary to justify that valuation. That was the lesson of Microsoft and Cisco coming out of 1999. And I want to be clear, those were the winners. Those were the companies that succeeded out of the internet. The companies that failed we now make jokes about. They're gone in the ash heap of market history.

EICHER: All right. David Bahnsen, Founder, Managing Partner and Chief Investment Officer of the Bahnsen Group. You can check out David's latest book. It's titled, Full-Time: Work and The Meaning of Life, and you can check it out at fulltimebook.com. I hope you have a great week ahead.

BAHNSEN: Thanks so much, Nick.

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