Welcome to our Friday mailbag edition!
Every week, we receive great questions from your fellow readers. And every Friday, I answer as many as I can.
This week, we’ve got questions about the AI frenzy… and the Federal Reserve’s push for an all-digital dollar in the U.S.…
Why does everybody obsess over Nvidia? It cannot gain 1,000% going forward. It is not an end user of AI. We, the investors, need end-user companies: not all the big companies that are already gone.
– John F.
Hi, John, thank you for that timely question and observation.
You’re right: AI stocks have exploded this year. Stocks like C3.ai, Super Micro Computer, and Nvidia are up 154%, 232%, and 221%, respectively.
For some, it might be tempting to chase highflyers like these. But we’ve warned against that in these pages.
We’ve suggested avoiding tech stocks whose share prices have surged on AI-driven hopes but have gone too far too fast. The names above are three examples.
With that said, the AI boom is far from over. In fact, as I wrote about last week, we’re in the sweet spot for the biggest profit potential – what I call AI’s “take-off” moment.
We weren’t there six months ago. And we may be past it in six months. Now is the time to act.
The market for AI applications – apps that can’t function without AI – is on track to reach $192.6 billion by 2025, according to the International Data Corporation (IDC).
That’s compound growth of 31.2%.
And global executives see the writing on the wall, judging by a recent poll by Accenture.
Accenture asked execs whether they believe AI will play an important role in their business in the next three to five years. Nearly all – 98% – said yes.
In other words, corporate executives know they need to adopt AI systems in the coming years, or they could lose market share.
As we’ve been showing at Inside Wall Street, large investors and corporations are investing massive sums to get a leg up on AI.
According to Goldman Sachs, investment in AI is set to grow to more than $150 billion over the next two years. That’s growth of 25% per year.
And usage is spiking. AI adoption is up 2.5x over the past five years alone, according to research firm McKinsey. That’s only going to accelerate.
For instance, we can see this through user growth of ChatGPT, the popular AI-enabled chatbot.
According to a study from UBS, it was the fastest-growing consumer application in history. It went from zero to 100 million users in only two months!
To put that into perspective, it took TikTok about nine months to reach 100 million users and Instagram 2.5 years, according to data from Sensor Tower.
Second, we follow what the smart money is doing.
The insiders – venture capitalists, billionaires, major corporations – they’re all piling in now.
Like Microsoft, which poured $10 billion into OpenAI, the parent company of the ChatGPT program.
Or AI data architecture company Databricks, which raised $1.3 billion from major investors like BlackRock and Fidelity at a $38 billion valuation.
And AI defense startup Anduril, which recently raised $1.48 billion from venture capital powerhouses including Andreessen Horowitz, Valor Equity Partners, and billionaire Peter Thiel’s Founders Fund.
Even the U.S. government is betting on AI. In 2022 alone, the government spent $3 billion on AI research. But while that may sound like a lot, the U.S. is already at risk of falling behind.
See, when it comes to defense, the U.S. missed the AI frenzy. And now, it’s scrambling to catch up… to the tune of a just-announced $826 billion spending spree.
If you watched my urgent briefing last week, The AI Ultimatum, you’ll know there’s a tiny company positioned to benefit from this.
It’s trading for only $0.26. And a major announcement could send this tiny AI company soaring at any point. If you missed The AI Ultimatum, you can still click here to watch it and learn more.
If the Fed is still printing fiat currencies, why are there so many concerns about the digital dollar being ushered in? Can the Fed really afford to waste that much time and money, only to print more money? How can it contradict such a game of “ping pong,” without any winners?
– Dennis M.
Hi, Dennis, thanks so much for that terrific question.
Here’s the thing. The Fed doesn’t consider printing money in different formats a contradiction.
It’s merely an expansion of its powers if both avenues happen to overlap, like say in the transition from money as we know it to a fully digital currency-based financial and banking system.
In the meantime, the Fed could easily print money as we know it and, at the same time, create more digital dollars once the mechanism for doing so is in place.
That could be until the full conversion to digital from current dollars is made. By that point, the Fed would likely have a mechanism for converting the current dollars into digital dollars.
Also, it takes no time at all for the Fed to electronically print money – say in the event of a banking emergency.
We discussed earlier this year, when Silvergate and First Republic Bank went bust, how the Fed created more than $300 billion through its quantitative easing (QE) actions.
The Fed can do this at any time.
In the end, the Fed wants to have as many forms of money creation at its disposal as it can.
That way, if there’s any sort of financial emergency, the Fed has all the “tools,” as it calls them, to deal with it.
So it’s not out of the question for the Fed to still be printing money as we know it today while printing digital currency as well.
The first way wouldn’t be a waste of time if it achieves an immediate goal. Plus, it’s a big logistical undertaking to transform all existing currency into digital currency.
One part of that process has to do with FedNow, a digital payments system that the Fed launched in July. FedNow isn’t a digital dollar, but it is a system that enables the immediate transfer of payments between its bank and corporate users.
The next logical step in developing that platform would be to introduce a digital dollar that could be used for those payment processes.
And it would simply be impossible to do all of that testing and adapting overnight, as we’ve discussed here before.
FedNow took years from inception to its current state as a rapid payment system for the banks and companies that have signed on to it.
In the meantime, what you should know is that the Fed has the power to print money. And it can and will be able to print dollars and digital dollars at the same time.
So what I’d tell all my readers is to be prepared for that situation. How?
By ensuring your portfolio has a mix of cash outside of the banking system (in your safe, for instance), and hard assets that can be used as currency, such as gold and Bitcoin.
Regarding Nomi Prins’ Inside Wall Street article on July 28:
I am remembering how the president of India announced, without warning, that the two largest bills of rupees were going to be worthless in a very short time.
Our government saw what chaos that caused, and I hope will not just cancel U.S. fiat all at once. The resulting social upheaval would make India’s experience look like a picnic in the park.
But what if the U.S. government just dropped the $100 bill first, then maybe a year later dropped the $50 bill?
In other words, since the government’s goal is to totally eliminate cash, in your opinion would it be better to cancel all fiat currency at the same time, or would it be better to phase in the cash grab?
– Carl N.
Hi, Carl, thank you for bringing up India’s experience with taking certain notes out of circulation. That was a scary event.
For readers that aren’t as familiar, it serves as a good barometer to watch out for.
(And for readers who missed that July 28 article, catch up here. There, I wrote about the Federal Reserve’s plans to eventually implement a central bank digital currency, or CBDC, in the U.S.)
Let me give a bit of context on what India did…
On May 19, 2023, India’s central bank said it would start withdrawing its 2,000-rupee ($24.50) notes from circulation.
As things stand, people can still use those notes – for now. But they are being asked to deposit them in their bank accounts in order to exchange them for smaller denomination notes by September 30.
But the story goes back further. That 2,000-rupee note was introduced in 2016 after the Narendra Modi-led government took the smaller 500- and 1,000-rupee notes out of circulation.
That move created an acute shortage of cash. That’s because it removed 86% of the total value of India’s currency in circulation overnight.
That plan was referred to as “demonetization” by the media. This was the first time anything as quick or dramatic had ever been tried before – anywhere in the world.
The Indian government claimed its plan had to be executed so quickly to surprise those involved in corruption or counterfeiting – and also to kickstart India’s transition into a digital, cashless world.
But things got chaotic. People rushed to banks and ATMs to exchange their old notes and withdraw the new currency. There were major lines at banks.
Matters were worse for the poor who couldn’t access, or didn’t have, bank accounts through which to exchange their money.
The residue of these problems still lingers.
Now, hopefully, the Federal Reserve saw what happened and realized that removing certain bills so quickly in America would create similar chaos.
But that doesn’t mean there won’t be a slower withdrawal of printed bills.
In fact, there already has been.
According to the Fed, the print order of bills in circulation for 2023 ranged from 4.5 billion to 8.6 billion notes. Now, that’s a smaller range than the prior two years, when more money was circulated to soften the pandemic’s blow.
The lower range of the print order for 2023 dropped by 2.4 billion notes, or 34.8%, relative to 2022’s order. And the upper range of the 2023 print order fell by 1.1 billion notes, or 11.3%, versus the upper range of the 2022 print order.
You can see from this Fed chart that the $100, $50, and especially $20 bills have seen the largest comparative drops this year.
To me, that means we could see a gradual, continued decline in bill printing. The effects might not be as dramatic as what happened in India.
But the result of fewer larger printed notes in circulation could be similar: confusion and panic. So it’s still important to prepare.
I can’t give personalized advice, but what I’d say to all of my readers once again is this: Ensure you keep a certain amount of lower denomination bills out of banks. And invest in hard currency assets – such as gold and Bitcoin – to diversify your currency holdings.
And that’s all for this week’s mailbag! Thanks to everyone who wrote in.
If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition.
I do my best to respond to as many of your questions and comments as I can. Just remember, I can’t give personal investment advice.
And if there are any other topics you’d like me to write about, I’d love to hear from you. Write me at [email protected].
Happy investing… and have a fantastic weekend!
Editor, Inside Wall Street with Nomi Prins