AI Hallucination

To sum up the market in May, there has been a significant increase based on the US Nasdaq. The bank crisis in March and April is no longer being discussed. Thankfully, the negotiation over the U.S debt limit has been seccussfully concluded. Concerns about a default have been resolved. While talks about the macroeconomic crisis are quieting down, stocks in sectors with an AI theme are showing a significant increase. Nvidia could be mentioned as a representative example. There is a significant flaw in generative AI, which we call Hallucination. It is a major weakness of generative AI that makes lies seem plausible. I have a suspicion that there might be such hallucinations in the current stock market as well.

 

As the CEO of Microsoft said, the AI revolution indeed parallels the massive change brought about by the introduction of the iPhone, However, there will likley be a lag before these expectations are reflected in actual numbers and only a small number of companies will be able to convert these expectations into results. I too hold a considerable amount of stock in the AI sector, so this month's profits were not bad, but the excessive concentration does bring concerns. It's crucial not to get swept away in the frenzy and maintain an objective view of the market. With this in mind, I will be reviewing and checking my portfolio for this month.

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Investment Summary for May

Overall, the returns were good in May, with the exception of Korean equities. U.S stocks, in particular, showed an increase of as much as 6% compared to the previous month. Companies in the AI sector have seen significant increases, contributing to the overall return rate. The U.S. market, led by Nasdaq, which rose by 5.84%, saw a significant increase, and in Korea, semiconductor stocks similarly drove the overall index return rate.

 

Date : 31/May/2023

The U.S portfolio that I hold has shown a good trend, rising about 20% this year. Stocks that showed the best trend this month include Alphabet, Meta, and Palantir, and among the stocks that are rebalancing quantitatively, Opera and TIO have a good rate of return. Alphabet, Meta, and Palantir all have in common that they are AI-related stocks. Althought Nvidia, considered a leading AI stock, is undoubtedly a good company, I personally think it is in the overvalued zone.

 

Date : 31/May/2023

Domestic stock fell 4% compared to the previous month, despite the rise in the KOSPI. the reason is due to Wemade. Recently, the coin made by Wemade is becoming associated with politics, causing increased uncertainty. For now, I judge it to be noise unrelated to Wemade's business, and the representative of Wemade is responding by stating that he has never lobbied the political realm, so I intend to trust and go along with it. Despite the rise in Samsung Electornics, which I hold the second most, the overall return rate has decreased due to the fall in Wemade.

Date: 31/May/2023

Finally, let's talk about the pension account. Theh weight of semiconductors, such as KODEX semiconductors and TIGER U.S Philadelphia Semiconductor Nasdaq, is a third of the entire portfolio. They have risen significantly over the past month, raising the overall account return rate.

 

Both the U.S and pension accounts are adopting a strategy of gradually increasing U.S Treasury bonds.

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Will the vitality infused by AI continue?

Just last month, the sequential crises of banks and concerns about mortgage default starting with commercial real estate were strong in the market. These crises made those observing the economy think of an economic downturn. However, May showed strong gains, mainly in tech stocks. In fact, the recent performance announcements of big tech companies came out quite well. Seeing these rosy prospects. do investors think that the emergence of AI will prevent such a downturn? Morgan Stanley's Michael Wilson refuted this idea. Although his accuracy in predicting the market has dropped significantly compared to last year, I think it's worth nothing because it's quite a vaild argument.

 

Wilson is predicting that the stock market will not be good this year, citing six reasons. Those six reasons are as follows:

 

1. The valuation of stocks is too high. It's not just the top stocks that have high valuations, but overall. The average price-earning ratio is trading at 18 times.

2. The market's forecast for corporate earnings is too high. According to their model, corporate earnings forcasts should be downgraded. Their model has been quite accurate, and it will be this time too. The corporate earnings forcast for 2023 should be 20% lower than what the market currently expects.

3. The market expects the Fed to lower the benchmark interest rate 2-3 times this year, but it won't be easy. They view this as impossible.

4. The market is looking at the bank's bad debt problem too casually. Althought it is not like the financial crisis of 2008, the current non-performing problem that banks have will accelerate credit tightening.

5. Consumption has been solid so far, but according to recent surveys, consupmtion is expected to decrease.

6. Rasing the debt ceiling will result in the issuance of $1.2 trillion in government bonds and will reduce market liquidity.

 

I agree with the first five claims, but I'm a bit surprised by the sixth. Everyone thinks that if the debt ceiling negotiations are well agreed upon, it will be good news for the stock market, but on the contrary, it claims to significanlty reduce market liquidity and negatively impact the stock market. I can't look at the arket to that great extent, but when thinking simply, it might suck up capital from the capital market, but ultimately it will be achieved through fiscal spending and that money will circulate back in the market.

 

Wilson actually anticiaptes that the sixth claim will be the start of a strong reversal in the market. He predicts that stock prices will be faull due to above five reasons, but he anticipates that the start will be a market liquiditiy reduction due to government bond issuance. Also thinking this way seems to be a plausible logic.

 

I also do not view the current phenomenon of funds being concentrated in one place and only one sector rising as a sustainable phenomenon. The Fed does not lower interest rates to raise the asset market. The Fed would lower interest rates if the labor market became very bad or if deflation occurred strongly, but neither of these two conditions is currently visible. If the interest rates remain high for a long period of time, it seems unlikely that corporate profits can continue to rise significantly. Recently, many companies are showing earning surprises. The Producer Price Index(PPI) is decreasing wheras the Consumer Price Index(CPI) is not. Currently, companies in the US with strong brand power are passing costs on to consumers. In doing so, they are achieving high margins, but it is questionable whether this trend will continue. This is because Fed can't control inflation.

 

I discussed AI hallucination at the beginning. Aren't market participants hallucinating right now? AI is developing at a remarkable speed, but I don't think it can solve all the macroeconomic problems we currently face immediately. Of course, I don't intend to dispose of all the stocks in my portfolio. My strategy is to gradually increase the amount of bonds and cash I hold. Also, even among them, I should invest when the opportunity to invest comes by finding growing companies. It seems necessary to compose a good portfolio and make appropriate asset allocation.

 

Thank you.