George Noble on AI's ROI and the Specter of Financial Euphoria

In a recent discussion on Bloomberg Talks, veteran investor George Noble, known for his definitive work at Fidelity Overseas Fund and Noble Capital Advisors, shared his insightful, and at times controversial, views on the current state of artificial intelligence (AI), market euphoria, and inflation. Noble, who has been particularly vocal on platforms like LinkedIn and Twitter, provided a historical context to market bubbles, drawing parallels between the current AI boom and past speculative frenzies, all while emphasizing the importance of fundamental analysis and prudent investment strategies.

Who Is George Noble?

George Noble is a highly respected figure in the investment world, with a career spanning decades, including a significant tenure at Fidelity Investments where he worked alongside the legendary Peter Lynch. As the founder of Noble Capital Advisors, he brings a wealth of experience in global investment and market analysis. Noble is renowned for his independent thinking and often contrarian views, which he frequently shares through his online platforms, challenging conventional wisdom and advocating for a more grounded approach to investing.

AI: A Bubble Without ROI?

Noble's central argument regarding AI is not a bearish stance on the technology itself, but rather a skepticism about its current financial valuation. He acknowledges the widespread adoption and utility of AI, stating, "I'm not bearish on AI per se. I'm sure we're all going to use it, many of us are using it already." However, his critical question remains, "What's the ROI on the AI?"

The full discussion can be found on Bloomberg Podcast's YouTube channel.

Drawing upon historical examples like the South Sea Bubble, Dutch Tulipmania, and the dot-com bust, Noble suggests that current market enthusiasm for AI exhibits hallmarks of financial euphoria. He explains that these bubbles often begin with a "kernel of truth that captures the imagination of the individual," leading to an immeasurable change in price. His definition of a bubble is "something that changes human behavior, that people do things that they wouldn't do otherwise," often driven by the fear of missing out (FOMO).

Noble asserts that the sheer magnitude of capital flowing into AI today is unprecedented, far surpassing the dot-com era. He cites a calculation by Julian Garratt of MacroStrategy Partners in the UK, an erudite economist, indicating that the current malinvestment in AI is "17 times what we saw in the era of dot-com." This massive influx of capital, he warns, could lead to a far more significant fallout when the bubble eventually bursts.

The IPO Market and SpaceX: A Case Study in Manipulation?

The conversation pivoted to the initial public offering (IPO) market, with a specific focus on the valuation and structure of SpaceX (NASDAQ:SPCE). Noble expressed strong concern over the company's valuation, noting it trades at "120 times revenues," even with projections indicating cash-flow negativity for years to come. He also highlighted what he perceives as a manipulative aspect of the IPO process, particularly the staggered lock-up periods for shares.

"The best definition I've actually heard of a bubble, there are many definitions. The best one I've heard is something that changes human behavior, that people do things that they wouldn't do otherwise," Noble stated, linking this directly to the current market behavior around AI and certain high-growth companies. He argued that the practice of initially floating only a small percentage of shares (e.g., 5%) at IPO, followed by a series of unlocks, is problematic. "By December, 100% of the shares will be freely floating. The important point that investors should understand is even without any change in the fundamentals, when you go from a 5% float to 100% float, it's going to hit the bid so fast it's going to make your head spin."

Noble believes this structure amounts to manipulation, questioning whether regulators should intervene to bring the IPO market back to a more normalized state. He states, "It's not a question of what's legal or illegal, it's just not right. Society is not well served by allowing this." He views retail investors' 401(k) plans as providing "exit liquidity for this manipulation," and criticizes regulators for being "asleep at the wheel," only acting after the market crashes, a pattern observed in past bubbles like the dot-com and housing crises.

When pressed on whether Fidelity, his former employer, should sell its SpaceX holdings, Noble demurred on making a direct recommendation, acknowledging Fidelity's deep understanding of the company. However, he added, "Let's just say if I was handed a portfolio if Fidelity were to rehire me, I would sell it right away." He also called Tesla the "biggest misallocation of capital at scale in the history of stock markets," perhaps only surpassed by SpaceX, underscoring his deep skepticism about current valuations in these high-profile tech ventures.

Opportunities Amidst Inflation and Global Reflation

Despite his cautionary stance on certain market segments, Noble sees significant opportunities in other areas, particularly in the face of global reflation and inflation. He identifies energy and commodity stocks as attractive investments. "I think there are outstanding opportunities right now in energy. I'm actually quite concerned about the energy picture. I think we're sleepwalking into the biggest energy dislocation in history."

He points to the disparity between the financial and physical markets for oil and the recent sell-off in crude and energy stocks as creating a compelling risk-reward scenario. "Crude is sold off significantly in the last few weeks, as have the energy stocks. I think the risk-reward is very appealing. There's very little downside and potentially a lot of upside."

Noble also favors gold stocks, citing examples like SSR Mining (TSX:SSRM) trading at seven times earnings. He believes in reflationary trends generally and sees value in these sectors as hedges against inflation. He advises investors to adopt a top-down perspective when investing internationally, recognizing that economic cycles vary widely across different geographies. He notes that many foreign markets, including Japan, Brazil, and China, are currently exhibiting earnings growth that surpasses what is seen in the US, albeit with a heterogeneous landscape that requires careful selection.

A Nod to Fidelity's Resilient Leadership

Noble concluded with a commendation for Fidelity's leadership under Abby Johnson, particularly her navigation of the company through periods of turmoil. He described her leadership as "a miracle" and "outstanding." He recounted Fidelity's history, noting its resilience through challenging periods like the 1970s, where it experienced losses and layoffs, yet emerged to become an 18 trillion dollar powerhouse. Noble quoted a saying from Ned Johnson, Abby's father: "Never confuse brains with a bull market," a poignant reminder to maintain discipline and fundamental analysis even in exuberant times.