Daily Commentary

MarketMinder’s View: As always, we are politically agnostic, so our look here at headwinds facing the Biden administration’s signature industrial policy focuses on the economic and market aspects, not the politics and personalities. When the Inflation Reduction Act passed in 2022 with a raft of subsidies for solar and other so-called “clean energy” companies, cheer over the industry’s prospects abounded. “Green” stocks had rallied bigtime in the run-up to it, and to many, it seemed like the law ratified those high hopes and ensured a bright future. But since then, the industry has learned one of the eternal realities the hard way: Government-directed industrial strategy is a case of the government trying to pick winners and losers, but it doesn’t guarantee those hand-picked winners actually win. Sometimes they run up against competition from another country’s industrial strategy, which seems like the case now with solar. It is hard to manufacture a subsidized boom when another country got a head start on the same and flooded the market. In our view, this is the latest example of the disappointment markets saw coming as green stocks took it on the chin the past couple years. Now the industry is counting on tariffs to level the playing field, but we have our doubts. For one, renewable energy has long faced cost challenges—tariffs will only keep those prices high, impacting installation and generation costs and making other sources (natural gas, coal, etc.) more viable. This highlights how addressing a distorted market by adding more distortions tends not to bear much fruit in the long run and can inflict collateral damage elsewhere. So we see this as a situation to watch, though it is probably in too small a corner of the economy to present a risk to the broader expansion.

MarketMinder’s View: Before we begin, this piece mentions a handful of companies, so a friendly reminder that MarketMinder doesn’t make individual security recommendations. Their mention is coincident to highlighting a broader theme. Namely, the hype around Artificial Intelligence (AI) has cooled in recent months as the technology faces sizable roadblocks, including government regulation and mounting questions about the existing technology’s capabilities. Thus, AI chatter has changed tune. “Drastic warnings about AI posing an existential threat to humanity or taking everyone’s jobs have mostly disappeared, replaced by technical conversations about how to cajole chatbots into helping summarize insurance policies or handle customer service calls … While money keeps pouring into AI, very few companies are turning a profit on the tech, which remains hugely expensive to build and run.” This is all largely consistent with what we wrote when ChatGPT went mainstream over a year ago. At that time, headlines heralded how AI would massively disrupt economies and humans’ way of life (though similar technology has existed for decades), touting the possibility of huge investment returns. That may be so in the very long term, but the large language models and other forms of generative AI getting all the attention don’t fit the bill. Rather, they were the fruit of years of research and investment, the culmination of a period in which many pureplay AI firms had already gone through a full Silicon Valley hype cycle and failed. That left the large growth-oriented Tech firms with diverse enough revenue streams to subsidize big server costs—as well as those making the chips these powerful machines run on—as the likeliest winners, which has largely borne out. Now, most see AI as a way to help big companies cut costs and become more efficient—far from the paradigm-shifting tech we saw touted not long ago. We think this provides a valuable lesson for investors: Before chasing heat and diving into a widely hyped investment, ask yourself a few questions. How far out into the future are the potential returns, and how can you form a rational estimate of the probability this one company out of scores of others will be among the winners? Is it possible the hype and expected returns are overstated? Most importantly, does the tradeoff between risk and potential return fit into my long-term investment goals and needs? This mindset can help you avoid getting dragged into the temptations of a hype cycle.

MarketMinder’s View: This piece explores the main component keeping widely watched inflation gauges elevated: rents. Housing and shelter costs make up around 16% and 33% of the personal consumption expenditures (PCE) price index and consumer price index (CPI) (per the Bureau of Economic Analysis and Bureau of Labor Statistics), respectively, giving them a disproportionate influence on headline readings. While price increases for other components like food, healthcare and transportation have largely moderated from 2022’s highs, housing supply shortages have kept rental cost increases relatively high—elongating inflation’s path down. But as this piece shows, the trend isn’t uniform across the US. “In the Northeast and Midwest, rental inflation is not even a quarter of the way back down from the peak to pre-pandemic levels. In the South and the West it’s more than half-way and almost four-fifths of the way there, respectively.” Perhaps frustrating for some, but we see a silver lining here: High prices are signals for builders to ramp up supply, particularly in places with fewer regulatory barriers to doing so. See the article’s Phoenix, Arizona example. Rental inflation fell from 18% y/y in 2022 to just 3% today after high prices sparked a construction boom that replenished supply. The other good news is that “gauges of market rents on new leases have already returned to prepandemic inflation rates.” Rental inflation tends to lag other components by about 18 months due to the nature of long-term leases, so it may be a while before this improvement registers in CPI, but there is mounting evidence the dislocations of the past few years are evening out.