🎙️ Are We In A Bubble?

Narratives aren’t reality. That’s the takeaway with so many things in markets, with tech layoffs being the most recent example. For over a year, headlines about mass tech layoffs looked like the harbinger of a looming recession.

Yet, focusing on layoff headlines hardly tells the whole story. At Big Tech employers, recent layoffs have barely made a dent in their total workforces, which have expanded hugely since 2018.

💭 If anything, they look more like a natural pullback after years of aggressive hiring than a full-blown recession indicator.

Our Chart of the Day shows more.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• Ray Dalio on stock market bubble speculation

• The robot startup valued at $2.6 billion

This, and more, in just 5 minutes to read.

Chart(s) of the Day

In The News

🫧 Ray Dalio Addresses Stock Market Bubble Speculation

Are we in a stock market bubble? That’s the question famed hedge fund investor, Ray Dalio, is wondering.

In a recent post, the iconic investor provided his updated outlook on the world.

• Dalio is known for formulating decision rules or “principles” about markets that can be tested and automated into trading strategies.
  

• This systematic approach has served him well, and he’s created a framework for identifying bubbles, too.

He says market bubbles form when a combination of the following things occur in high degrees:

A) High prices relative to traditional measures of value, b) unsustainable conditions like overly optimistic forecasts, c) many new and inexperienced buyers drawn in by a hot market, d) broad bullish sentiment, e) a high percentage of purchases being financed by debt, f) and companies betting boldly on their own businesses (above average growth in inventories or capital investments).

His conclusion? “When I look at the U.S. stock market using these criteria, it — and even some parts that have rallied the most and gotten media attention — doesn’t look very bubbly.”

• On a spectrum of bubbliness, Dalio believes U.S. markets are in the mid-range (52nd percentile.)

Why it matters:

That comes in light of the Magnificent 7’s massive rally, which he says is “a bit frothy but not in a full-on bubble.”

Still, that doesn’t mean a significant correction isn’t possible, especially if “generative AI doesn’t live up” to the hype priced into markets.

• See below for how Dalio compares today’s markets to past famous bubbles.

Looking at valuations: Dalio cites the 2000s tech bubble as an illustration of why we’re not in a bubble today.

Where Cisco captivated investors with promises of how the internet would change the world, similar excitement today surrounds Nvidia and AI, yet Nvidia’s price-to-earnings (P/E) ratio for expected earnings in two years is 27. Meanwhile, Cisco’s hit 100 in the early 2000s.

• In other words, despite growing its market value by 10x, Nvidia’s earnings have also boomed, keeping its P/E ratio at much more reasonable levels.
  

• As Dalio adds, “This is true of the broader Mag-7 as well; over the last couple of years, the market cap of these companies has grown by and large in line with earnings (which have increased rapidly).”

What about a flood of new investors? While 2020 and 2021 looked quite bubbly as individual investors piled in to buy popular stocks like Gamestop, such inflows of fervent new buyers looks much more modest today, according to Dalio.

• As a percentage of total trading, individual investors’ trades have fallen from over 35% to about 27% today, compared with pre-pandemic levels closer to 20%.

And to assess how bullish markets are generally, Dalio looks at IPO activity, which ran at “extreme highs” leading into 2022, with every company and their mother hoping to list shares of stock and cash in on surging markets.

• Things have entirely reversed, though, “with little to no IPO activity more recently.”

Read more (Dalio’s full article)

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🤖 The Robot Startup Valued at $2.6 Billion

A hot artificial intelligence startup counts top investors, including Jeff Bezos, Nvidia, Microsoft, and OpenAI. 

The company is Figure AI, which will use $675 million in new funding to accelerate the development of its humanoid robot. It’s valued at $2.6 billion largely because it believes its robots can be used in manufacturing, shipping and logistics, warehousing, and retail, “where labor shortages are the most severe.”

• The $675 million Series B funding round "will accelerate Figure's timeline for humanoid commercial deployment," the company said.
  

• Figure AI, founded in 2022, has a general-purpose robot, aka “Figure 01,” that looks and moves like a human.
  

• The robot walks on two legs, uses five-fingered hands to pick up plastic crates, and can place boxes on conveyor belts. The aim is to perform “everyday tasks autonomously.”

Humanoid industry? Several companies want to bring humanoid robots to the table. There’s Amazon-backed Agility Robotics, which hopes to open a factory that can produce 10,000 robots yearly. Tesla wants to build a humanoid robot, “Optimus,” and companies like 1X Technologies are raising tens of millions of dollars.

• Goldman Sachs predicts the market will hit $38 billion in a decade, noting that there could be more than 250,000 humanoid robots by 2030.
  

• Figure AI is also working with ChatGPT to “develop next-generation AI models for humanoid robots.”

Why it matters:

Humanoid robots ain’t cheap — motors, sensors and other technologies add up. Goldman says costs will come down over time: They’ve already dropped to between $30,000 and $150,000 per unit, much less than last year's $50,000-$250,000 range. 

• Bipedal robots with dexterous hands are joining the labor force this year, and they could soon be working alongside humans in numerous industries. 

The arms race to bring humanoid robots to the workforce spans Amazon (warehouse work), BMW (production line), and NASA (space exploration). 

• We might not be far from a world where humanoid robots pack and assemble our Amazon products, make our vehicles, do our laundry, and travel in space.

Watch the robot move a crate to a conveyor belt

More Headlines

😬 The SEC launches investigation into whether OpenAI misled investors

💼 Americans’ job jitters rise despite very strong labor market

🍔 The backlash against Wendy’s plan for surge pricing

💰 The Winklevoss twins will return $1.1 billion to the customers of their crypto exchange, Gemini

👉 Key inflation measure comes in as expected for January, up 2.8% from a year ago

🍻 Bud Light boycott likely cost over $1 billion in lost sales

Quick Poll

Yesterday, we asked: Do you think Apple’s best days are behind it?

— Results were evenly split. As for yes: “Its products can be replicated, and its focus is too narrow,” someone wrote. Added another: “With size comes diminishing returns without innovation. iPhone is still their biggest revenue source. Tough act to follow.”

— As for team no: “Everyone thought the best days of Apple were behind them when Jobs died and had Cook take over; they were wrong.” Yet another: “Apple has embedded itself in the fabric of our lives.”

See you next time!

That's it for today on We Study Markets!

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