Fat Tails and Hurricanes

Editor's note: Today in Empire Financial Daily, we're sharing an essay from Mason Sexton – founder and chief investment analyst of our corporate affiliate New Paradigm Research... Mason began his career on Wall Street after graduating from Harvard Business School – working with firms like Morgan Stanley, Salomon Brothers, and Mabon Nugent & Company. He […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] Editor's note: Today in Empire Financial Daily, we're sharing an essay []from Mason Sexton – founder and chief investment analyst of our corporate affiliate New Paradigm Research... Mason began his career on Wall Street after graduating from Harvard Business School – working with firms like Morgan Stanley, Salomon Brothers, and Mabon Nugent & Company. He has also nailed some big market predictions – including the 1987 crash "down to the minute"... the bottom of the 2009 market... and the top (and bottom) of the COVID crash. In today's essay, Mason issues a warning about the recent momentum-driven rally in all things tech and AI... --------------------------------------------------------------- Fat Tails and Hurricanes By Mason Sexton --------------------------------------------------------------- [Have you heard about 'the prophecy'?]( Something isn't right in America today. And we all feel it... From the massive spike in the cost of living... to the bank crisis... to this general distrust we now have in our elected officials and the media... We have now reached a breaking point. A recent tell-all interview featuring one of the most prolific forecasters in history explores where we're headed, and what you can do to sidestep the coming danger. [Click here now](. --------------------------------------------------------------- A tropical storm slams into Southern California, brining 35 mph winds and a year's worth of rain in two days... The newspapers call it a "once-in-a-century event." Flash flood warnings are issued for Ventura County, which experienced "exceptional drought" and water restrictions only two years prior. Waves begin to lap over docks in San Diego. Dodgers Stadium is turned into a lake. But for all the considerable destruction (and it is considerable), readers could easily imagine the silver lining... For a region beset with years of drought, Southern California now has more water than it knows what to do with. That is, of course, if it can capture that water. Sadly, it won't... You may not be surprised to learn that California has underinvested in water capture infrastructure for years. With the heavy rains earlier this year, some 8.4 billion gallons were captured behind 14 large dams. Sadly, tens of billions of gallons more washed straight out to the Pacific. Why? The New York Times summed up the situation: The era of great dam building passed long ago, owing largely to the multifronted environmental wars California is fighting, and the county has been slow to adopt alternatives. The bulk of the roughly $1 billion collected from Los Angeles County taxpayers over the past four years to store more water has gone largely unspent. One might think that capturing storm waters to sustain California's $50 billion agriculture industry – not to mentions its residents – might rank high on the list of priorities. Apparently, not... --------------------------------------------------------------- Recommended Link: ['Whitney sent me a strange text message...']( Empire editor in chief Sam Latter once received a mysterious text message... This text message revealed a "Whisper Trade" that paid off with 50% gains in only eight days. That's an annualized return of 2,281% – more than most investors will make in their entire life... To get the full story about this text message, and how anyone could use these "whispers" to make gains of 10x (or more)... [click here now](. --------------------------------------------------------------- In some ways, it's understandable. When something lasts long enough, you imagine it will last forever... In the midst of drought, nobody remembers the floods. And when the waters begin to rise, drought is a distant memory. When the sun shines for years, you forget to build levies. When volcanoes lie dormant for centuries, you erect towns in the foothills. And when markets march higher for years, investors forget the pain of the last crash. You might be familiar with the concept of "fat tails" – the exceedingly rare events on the far side of a bell curve which have an outsized effect on the order of things. The blowup of Long-Term Capital Management was a fat tail. So was the Lehman Brothers collapse. And the COVID crash... Panics, crashes, and once-in-a-century storms don't happen often. But they do happen. We are on record predicting a "new paradigm" in markets, the economy, and broader society. And in such a new paradigm, there's no telling what fat tails are likely to surprise investors. Take the incredible rally in all things AI-related, exemplified by Nvidia (NVDA)... The stock is up about 200% this year. Recently, Nvidia was selling at approximately 45 times estimated future sales, 236 times trailing earnings, and at a price-to-cash-flow ratio of 166. You are told at every turn that the stock has earned its nosebleed valuation. The future will be AI-dominated, you see! From the mightiest corporation to the lowliest consumer, all will be greatly benefited by the rise of AI. Maybe. Maybe not. At the very least, aren't you interested in a second opinion? We have no doubt that AI is "real," and that it will increase efficiencies in some industries. But we have worked in finance going on 50 years. We've seen a few things, in other words. And the benefit of age is wisdom and temperance. In our 50 years of investing, we have seen more manias than we care to recall. They all end the same way... More optimistic analysts might be able to explain why this time really is different. But in our experience, mania is not something you measure. It's something you feel. And the tremendous counter-trend rally of the past several months – driven almost exclusively by a handful of stocks – certainly feels unusual, doesn't it? Investors are free to believe what they want. Given enough time, they usually all believe the same thing. Prior to Nvidia's latest earnings, 44 of the 51 analysts covering the stock had it listed as either a "buy" or "strong buy." That feels like a crowded trade to us. And when that happens, it's usually best to get on the other side. For our part, we have been short tech in general and the AI stocks in particular these past few months. And those short trades have worked out well for our readers. Nobody knows what the future will hold... But our guess is that the momentum-driven rally in all things tech and AI will disappoint current buyers. Parabolic moves to the upside tend to retrace in a similarly parabolic fashion. There's just no telling when a fat tail will come along. The sun may be shining for now, but we see storm clouds somewhere on the horizon. The sluicegates are in disrepair. Too many homes have been built on the floodplains. In our opinion, the only question worth asking is: Where will you be when the storm hits? Regards, Mason Sexton Editor's note: Right now, Mason is issuing his next major prediction – it's so urgent that today, Empire Financial Research CEO Whitney Tilson cleared his calendar and sat down for lunch with him. Mason's rich hedge fund clients have paid him thousands of dollars for his market forecasts, but he's making his latest presentation on this new prediction completely free – [watch it here to get an early move on what Mason says is coming](. --------------------------------------------------------------- If someone forwarded you this e-mail and you would like to be added to the Empire Financial Daily e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2023 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 1125 N. Charles Street, Baltimore, Maryland 21201 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. [Unsubscribe from all future e-mails](