What Austin Bought And Sold In October 2024

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What Austin Bought And Sold In October 2024

This is the next installment in our monthly series on the portfolio of our macro analyst, Austin Rogers. Please note that our main focus will remain on the HYL Portfolios, but since many of you have expressed interest in knowing how Austin manages his portfolio, we are posting this to give you extra value.

It was a slow month for portfolio activity for me, but it was a relatively exciting month in the market.

I'll start by asking what year 2024 most resembles, and then I'll explain why I remain optimistic about inflation falling. Finally, I'll get to my top 10 holdings and the minimal portfolio recycling I did in October.

What Year Is It?

There are plenty of folks out there who hold the view that the stock market is in the midst of another tech bubble.

Even if history isn't repeating what happened in the late 1990s, it at least appears to be rhyming. That is, something similar is playing out.

The biggest tech companies today are investing heavily into AI, just as the biggest tech companies in the late 90s were investing heavily into the Internet.

Here's how much the mega-cap tech names like Google, Microsoft, Amazon, and Meta have invested in capex since Q2 2023:

Data by YCharts

As you can see, Google and Microsoft are really ramping up their capex spending, and a huge portion of that is directly related to AI.

But the thing is, the financial beneficiaries of this spending have been very limited so far. Yes, lots of folks enjoy using ChatGPT and similar programs. Students are certainly enjoying the use of it in assisting them with writing papers.

But in terms of financial beneficiaries, the biggest by far is Nvidia (NVDA), the maker of state-of-the-art AI semiconductors. Since Q2 2023, NVDA's revenue and profits have absolutely exploded.

Data by YCharts

Now, I am not a Tech Bro. Artificial Intelligence and its uses are way outside my sphere of competence.

But I have to wonder what kind of financial return the companies spending most heavily on AI are going to see on their investment. Do executives actually see huge returns to come from all this capex? Or are they largely greenlighting it because their peers are doing it, they don't want to get left behind, and they have no other use (besides buybacks) for the cash sitting on their balance sheets anyway?

I suspect the truth is somewhere in the middle.

Will the future look different than the past because of AI? Yes, absolutely.

But will tech companies see a huge return on the capital currently being invested into AI? Eh, I'm skeptical.

So, if my hunch is right that there is some irrational exuberance at play here, the real question is "what year is it?"

Is it 1997, when tech stocks still had a huge run ahead of them? Is it 1999, when the bubble still had its last hurrah ahead of it? Or is it 2000, when Wile E. Coyote was still running in mid-air with no ground under his feet?

Or maybe the 1990s isn't a good analogue at all. Maybe tech companies will eventually realize that monetizable opportunities in AI are less abundant than they initially thought and quietly pull back on AI spending. It certainly seems like that's what Meta has been doing with the metaverse.

In any case, given the degree to which REITs have become discounted to the broader market (especially tech stocks), I envision multiple years of outperformance going forward.

That's exactly what happened in the years after the Dot Com bubble popped in 2000:

Data by YCharts

Now, I don't necessarily see tech stocks performing as badly as they did after the Dot Com bubble.

But notice that, from October 1999 through October 2005, REITs not only outperformed the tech stocks in the Nasdaq index (QQQ) but also outperformed value stocks, which did not run up to high levels in 1999-2000.

Though the degree of outperformance may not repeat, I could envision a similar multi-year period of REIT outperformance going forward.

How I Learned To Stop Worrying About Inflation And Love Lower Interest Rates

I see some financial pundits and commenters starting to wring their hands at the idea that Fed rate cuts will cause inflation to make a resurgence.

I believe their idea is that every Fed rate cut will mechanically trigger an increase in homebuying and other spending on durables, business investment, and stock prices, which will cause a wealth effect that overheats the economy.

This narrative is highly incredulous to me.

If lower interest rates mechanically cause an uptrend in inflation, regardless of the economic context, why didn't they do so in the 2010s during the ZIRP ("zero interest rate policy") environment?

I would argue that one of the main reasons was that the money supply was not growing terribly fast during that era.

During the multi-decade disinflationary era from 1980 to 2020, annual growth in the money supply averaged about 6%.

Data by YCharts

During the 2010s, growth in the money supply mostly hovered around that 5-7% area, at least until the Fed began sapping money from circulation via its quantitative tightening program (selling off its government security assets) late in the decade.

The classic definition of inflation is "too much money chasing too few goods."

While I enjoy being clever and contrarian, I think this definition is a good one. It implies that inflation can come from two main places: (1) too few goods (supply constraints), or (2) too much money (high growth in the money supply).

During COVID-19, we had both -- in a big way.

Supply chains, production, and the labor force collapsed, while consumer demand via fiscal stimulus soared.

Hence we find the dual mountain peaks of money supply growth followed by inflation:

Data by YCharts

Today, the money supply is slowly rebounding as the Fed slowly eases off quantitative tightening while federal government deficit spending grows and the economy continues to expand.

Also, year-over-year money supply growth numbers now have pretty easy comparables to beat, given than M2 growth was negative all through 2023.

The M2 money supply remains 2.3% below its all-time high hit in 2022. And, of course, the current 2.6% YoY growth rate remains well below the ~6% average annual growth rate from 1980 to 2020.

In an economic environment characterized by normally functioning supply chains, slow money supply growth, and modest GDP growth, Fed rate cuts do not cause higher inflation.

Keep in mind also that as the CPI falls, the real (inflation-adjusted) Fed Funds Rate gets higher. Right now, the real FFR remains around its highest level since 2007:

St. Louis Fed

If you were to use a real-time inflation gauge such as Truflation, which currently shows YoY inflation of around 2.25%, the real FFR would be even higher.

This is an extraordinarily restrictive monetary policy. Making it less restrictive wouldn't increase inflation.

Top 10 Holdings