Question everything. Learn something. Answer nothing.

Euripides 

Investors live in a world of noise. Every day the financial media pumps out content designed to capture your attention. An economic report will generate multiple analyses, some bullish, some bearish, looking at identical data and arriving at opposite conclusions. Social media amplifies it all, creating a cacophony of competing memes, all designed to get and keep your attention. If you’re bullish, you can find a ton of content that will comfort you. If you’re bearish, you have an order of magnitude more content than the bulls to choose from; doom really sells. And all of it sounds plausible in some way. The dollar could collapse or it could soar. AI could change the world or be the biggest bust of all time. The Iran War could really be over or, well, not. The economy could be on the cusp of another great depression or it could be on the verge of the biggest boom of all time. Whatever your fear or hope, you can find comfort and like minded people on the internet.

Most of what you read about the economy and markets is barely more than propaganda or what was once called yellow journalism and today is called “clickbait” or “rage bait” or “fake news”. Politicians and their surrogates – which very much includes economists – have a vested interest in making you believe that their view is the “right” one. It does not matter what economic news has been released, bad or good, we all know that today Republicans will always find something good to say about it while Democrats will find any negative to amplify. They do this because shaping public opinion is profitable for them, at least in the currency of Washington, D.C. This at least is not new; politicians have been lying to us since the serpent slithered, politician-like through the Garden of Eden.

Remember the late 90s when the dot com companies were said to be competing for “eyeballs”? We all laughed at it back in the day but it turns out they were exactly right because eyeballs today are just another form of digital currency. Competition for your eyeballs is fierce, which is why the headlines today all sound like the world is headed for Utopia or Hell on Earth, with the emphasis on Hell because Utopia sounds boring. Mainstream media outlets – if you can even define mainstream anymore – are supposed to be the sober ones, the companies that protect journalism’s impartiality, on which it’s reputation rests. Boy has that ship sailed. Almost all media companies today are posting material from dubious and often anonymous sources, with agendas known and unknown, all in an attempt to get you to read something, anything. 

This din of iniquity makes our jobs as investors more difficult; it is hard to ignore the daily “news” even if you know that most of it isn’t news. In the 1960s, Timothy Leary told us to “think for yourself and question authority”. Today, most people seem only able to get the second part of that right; they don’t trust any of the “lamestream media” or “fake news” or “corporate media”. As for “think for yourself”, there seems to be dearth of that across the political spectrum. Investors, though, need to think outside their political opinions; they need unbiased sources. The only one I really know of is the market. The political opinions of the millions of people and trillions of dollars trading in the bond, equity, commodities, and foreign exchange markets cancel each other, leaving nothing but price as truth. Or as close as we’re ever going to get.

How do you calm yourself and ignore the noise? Skeptical optimism. Be optimistic about the future but be skeptical, question everything. Especially yourself. 

Questions

Are index funds distorting the market?  

Vanguard’s S&P 500 index fund recently passed $1 trillion in assets and passive funds now hold a majority of the assets in the fund complex. You’ve probably seen multiple articles about why this is bad and how it distorts the stock market; passive flows determine the course of the market, nobody buys or sells based on fundamentals, the buy-the-dip mentality is a passive fund creation. Is this true? Index funds may be a majority of fund assets but they only hold roughly 18% of the total stock market. Add pension funds, institutions and wealthy individuals doing some form of direct indexing. Subtract some for money sitting in indexes that are nothing more than active management in disguise; what do you think factor investing is? The fraction of the total market owned in the major indexes via mutual funds and ETFs is way less than 50%. My guess would be somewhere between 25 and 35%.

So, yes index funds are a big part of the market but that doesn’t mean they are the tail wagging the dog. There is this emerging belief that the largest stocks in the index are invulnerable, that the constant flow of money into the indexes ensures they will continue to outperform. After all, nearly 40% of every dollar invested in the index goes to those top 10 stocks. But regardless of the size of the top 10 cohort, it has always been true that the largest companies in the index get the largest allocation of new money. That would in turn, imply that as index funds became more influential that there would be less and less turnover in those top 10 names. Has that happened? Not even close. 8 of the top 10 in 2010 are no longer in that cohort. 5 of the top 10 from 2015 have been replaced.

We haven’t owned the S&P 500 or most of the other big, cap-weighted indexes for some time but it has nothing to do with the construction of the index per se. We don’t invest in the index because we don’t think it is properly diversified, with 10 stocks representing nearly 40% of the index. The problem is compounded by the fact that most of those top 10 stocks are in one sector – technology. We’re optimistic but not foolish. We also know that the index has been concentrated in the past and that it didn’t stay that way. Why aren’t these big stocks protected? Because the indexes are price takers, not price makers. Roughly 90% of trading on any given day has nothing to do with the index funds; it is the active investors, the hedge funds, institutions and algorithms that set the price on a daily basis. A company in the top 10 that has problems won’t stay there just because it is already there.

Are AI stocks dominating the market? 

There is no doubt that the AI stocks – or tech stocks to be a bit more general – have been a big influence on the market, but it isn’t a one-industry show out there. This perception that the market is dominated by AI has increased recently and there is some evidence to support that. If you look at performance over the last 6 months, we find Emerging Markets at the top of the performance list (+27%) and with nearly half that ETF in Taiwan and South Korea, that is a direct impact of the AI boom. The NASDAQ clocks in at second with a gain of nearly 18% and with nearly 3/4 of that index in either technology or communication services, that is obviously an AI effect too. But as we move down the list it gets more complicated. The next five spots in my not so random list, all with double digit returns are: Small cap stocks (R2000, +16%), Japan (EWJ, 14.6%), Real Estate (VNQ, 12.3%), MSCI All Country World Index (ACWI, 11.3%), and the Eurozone (EZU, 10.35%) all before you get to the technology dominated S&P 500 (SPXTR, 9.5%)*. Maybe I missed it but I don’t remember real estate being mentioned as an AI play. I also seem to remember a lot of talk about how Europe didn’t have a clue about technology in general, much less AI. The market is certainly being affected by AI because the economy is being affected through the capital spending. But it isn’t the only game in town.

Is SpaceX worth $1.8 trillion?

Only in the sense that anything is only worth what the next person is willing to pay for it. It doesn’t matter why that person is buying as long as they are willing to pay the market price. But can the price be justified by SpaceX’s fundamentals? At 100 times sales? Probably not.

Should I buy SpaceX stock in the open market?

You probably need to total up your exposure first because you may already own some. If you own Alphabet (nee Google), you already own SpaceX; they own about 6% of the company. What about Echostar? They own a stake worth about $30 billion now, which is basically the entire value of the company. Do you own Tesla? Elon Musk’s other company owns about 19 million shares. Do you have any investments in Baron Partners or Fidelity Contrafund? Both were early investors. As for buying in the aftermarket, there is a widely held belief that since the NASDAQ, Russell, and CRSP indexes will have to buy soon that getting in ahead of them means sure profits. Oh, if it were only that simple. Do you really imagine that Elon Musk and Goldman Sachs are not aware of the need for indexes to buy the stock? Do you really think they’ll just leave that money on the table for you to scoop up? Ever hear of a greenshoe? If not, you might want to read up on that.

Is AI going to take all our jobs?

I can’t tell you for sure but history says no. Every major technological leap in human history has triggered a massive wave of public panic, a flurry of doom-laden media coverage, and an ultimate result of more jobs, higher wages, and entirely new industries. In economics, the belief that a machine taking a job leaves one less job for a human is known as the “Lump of Labor Fallacy**”. It assumes there is a fixed, finite amount of work to be done in an economy. In reality, technology increases productivity, lowers costs, frees up capital, and creates an explosion of new demand. There are tons of examples throughout history, but the one I like is more modern – the ATM. The ATM was supposed to kill bank teller jobs but instead there are more today than there were when the ATM was rolled out. Bank branches got smaller and more numerous while the job of bank teller changed but the ATM was nothing for them to fear.

Software engineering – coders – is the most directly affected industry from AI and it has certainly had an impact. Job postings for Software Development on Indeed have fallen significantly since 2022. But they’ve already started to recover. As for the rest of the economy, the number of job openings has been falling since the peak in early 2022 but I’m not sure we can attribute all that to AI. Some sure, but not all. In any case, job openings appear to have bottomed and are up 16% from the recent lows.


Is reshoring good for the US economy?

That is the goal of the President’s tariff regime, to bring manufacturing back to the US and restore us to a golden age of America, but does it work? Not really. There may be good reasons for some manufacturing to be located in the US; national security is the one most often cited. Personally, I don’t even buy that one. Ask yourself this question: Are we better off imposing tariffs on Canadian aluminum and making it more expensive for US consumers or just maintaining good relations with Canada? Canada has abundant, cheap hydro power we don’t have and can produce aluminum a lot cheaper than we can. That’s called comparative advantage and common sense says we should let them make aluminum while we do something we’re good at, like designing microchips or making Kentucky whiskey or making movies, or any of a long list of things Americans are really, really good at. Okay, I’ll grant you that good movies are hard to come by these days but I believe the comic book superhero era will end. Eventually. God it can’t come soon enough. 

There is also the matter of the seen and the unseen. If a factory gets built here, you can believe the administration will make sure you know about it. But what about the business that doesn’t get built because the capital for it went to the re-shored factory? What about the cost of the product? With those aluminum tariffs – and steel tariffs and a host of others – it will almost certainly cost more to manufacture the product here than somewhere else. If the manufacturer passes the extra cost on to it’s customers, those consumers will have less to spend on their other wants. If the manufacturer eats the extra cost, they might not invest as much in the future as they might have otherwise. This is the unseen a good economist thinks about when considering a policy like tariffs. I’ll let you decide what that says about Republican economists who hated tariffs right up until their job depended on it.

Can the companies building the AI infrastructure generate a return on their investment that justifies their spending?

Sequoia Capital, the dean of Silicon Valley venture capitalists, calls this the $600 billion question. Based on the amount being invested by the cloud companies, AI will need to generate roughly $600 billion of annual revenue to make an acceptable return on their investment. And that doesn’t consider the investment in new power generation, grid upgrades and the cost to companies not involved in AI. What is the impact on phone manufacturers from higher memory costs? What about PC makers? What about industrial users? What will they not invest in because they had to spend more on memory chips because AI spending pushed up the price by 600%? How will that impact consumer prices? The return to the cloud companies doing all this investing is iffy. The return to the economy as a whole is even murkier. In the end, I do expect a positive return but it may not be to the companies that everyone is talking about today. 

Ultimately, there are no easy, definitive answers to the complex questions confronting investors today. When Euripides urged us to “answer nothing,” he was advocating humility. We should not assume that simply because we have asked a question and learned—or relearned—a historical truth, we now possess the infallible insight required to act; more often than not, the exercise merely reveals the vastness of our own ignorance. Investing, after all, remains a “loser’s game” where victory belongs to the one who makes the fewest mistakes. Risk-taking must always be disciplined, calculated, and strictly contained by an honest assessment of our capacity for loss. In a market driven by a cacophony of charlatans, the ultimate competitive advantage is a quiet, deliberate moderation. While the crowd sprints blindly toward the next “seen” miracle, it is the humble investor—the one who respects the limits of what cannot be known—who quietly survives.

Joe Calhoun

*Alhambra and or its clients may own some of these ETFs.

**The lump of labor fallacy applies to immigration as well.