Money and Me: Is the AI Sell-Off a Buying Opportunity Now? Plus Costco and Nike

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Best of Live Well, featuring Lance Alexander.

It's not just about money, it's about you. Money and me, where wealth meets self-awareness. Only on Money FM 89.3.

Lance Alexander (0:19)

All right, it's 10.07, time to bring on Money And Me.

Energy prices, as you know, have gone up. High bond yields continue to undercut prices for stocks. AI shares have also swung sharply recently. In the US, let's talk about Costco. You've heard of this company. It's huge. It's a big warehouse club that sells bulk goods at really good, affordable, low prices, and it's seen strong sales. If you go to Australia or Japan or South Korea or even China, you'll be able to see these mega stores.

Sports brand Nike is also scheduled to announce its quarterly results on the 4th of October, US time. So let's make sense of what's happening around the world and in Singapore. We have Arun Pai, partner of Monk's Hill Ventures, joining us. Good morning, Arun.

Arun Pai (1:09)

Good morning, Lance.

Lance Alexander (1:11)

How are you feeling today?

Arun Pai (1:12)

I'm very good, sir. How are you?

Lance Alexander (1:13)

Very good. Well, I've got this sore throat because of the haze, but let's get down to business. We've seen interest rates go up in the US and Australia.

How are inflation, interest rates and monetary policy sort of shaping global market sentiment right now?

Arun Pai (1:29)

Honestly, this is the trillion dollar question, right? Where if you look at what's been the price action that's been happening in the US, when you actually get like a good print in terms of better unemployment numbers, i.e. lower unemployment numbers or inflation, the markets take a big beating because everyone gets a lot more afraid that the new Fed chair is going to increase interest rates even more. So what we're seeing right now is in spite of Trump's nominee finally coming in, Walsh, and increasing interest rates by 25 basis points last FOMC, market expectations offer another one. But it seems like at least especially looking at like the back end of the curve, i.e. the 10-year and 30-year US government yields, they're hitting like close to 25-year highs.

So the bond market definitely feels that inflation is still under control by the Fed, and it's revealing its true colors by pushing up, especially the back end yields close to 5.7%.

Lance Alexander (2:31)

So we could see another interest rate gain at the end of October by the Fed, you reckon?

Arun Pai (2:36)

Oh, definitely. As of right now, like the odds I think are like north of 80% or something, based on the dot chart, right? And some of the governors have come out stating the same thing, where, yes, yesterday night's PCE inflation number came out, quote, unquote, better than expected. But that's also because the methodology of how they calculate PCE changed. So you saw even though the number came out better, i.e. lower than expected in terms of inflation, bond yields actually went up, basically signifying that the market feels the Fed needs to get a little bit more aggressive on this. And only then will the markets become a little bit more calm, I feel.

Lance Alexander (3:13)

Arun, as we grapple with these higher energy prices and higher bond yields as well, that impacts almost everything, right? Are there any regions that's sort of showing some strong economic momentum?

Arun Pai (3:26)

So, I think the best way to describe interest rates, like Warren Buffett does it really well, is that interest rates are like gravity to assets. So the higher the interest rates means, I.e. higher the gravity means asset prices come down. That's like just a very simple way to think about how the inverse relationship between interest rates and generally like asset prices, which is why everyone is so concerned about that. But more coming from a bottoms up like value investor perspective, I think the main trend that is shaping all markets is currently AI, right? And that is from the perspective of the amount of capex that's being thrown at this, close to a trillion dollars this year by all the hyperscalers and all the other cloud providers, is having massive effects on being in terms of like, apparently, north of one, one and a half percent of US GDP growth. So that's close to like more than 50% of GDP growth in the world's biggest economy is purely predicated on AI. So I think once we go through interest rates, the next big topic and the only topic that's on investors' minds right now is what is happening in artificial intelligence? What are the ramifications of the various stacks? And I think Jensen Hong, the founder and CEO of NVIDIA, talks about this area the best, right? Where he has kind of like fragmented the entire AI stack, if you want to call it, into like a five-layer cake. Layer one, which is all the way at the bottom, is energy, right? These are where your oil guys or your solar guys or your NatGas guys, like all of them sit over there. So that's energy. Layer two, the one above it, is your chips. This is where the likes of your GPU, your memory guys, your SK Hynixes, Samsung, NVIDIA, etc. sit over here. Layer above it is infrastructure. This is your data centers, cloud networks, AI factories, your Googles, Microsofts, Metas, the large cloud business comes within this vertical. And obviously NVIDIA has gone into AI factories also. The one above it, layer four, is models. The most famous ones, obviously being Anthropic and OpenAI. And last but not least, layer five, is the applications on top. This is more like your Chat GPT, which is the application on top of the underlying model that OpenAI has created. So these are in a big picture perspective, if investors look at AI, you're talking about these five layer cake of AI, as you like to call it, as Jensen likes to call it. So then the question becomes, so we've talked about interest rates in the beginning of the show. The next biggest thing is AI. Where does value accrue in this five layer stack? And the markets went through a little bit of tumultuous period two weeks ago where I'm sure your listeners would have caught wind of this, where one guy from Anthropic, which is currently like the leading AI model, he came out on Twitter saying, I'm quitting Anthropic because I believe that the end of humanity has like, or P-Doom as they like to call it in Silicon Valley, is like north of 10%.