Matt Goldstein, Chief Investment Officer
As we close out another week, the central question for many of our members is a precursor to a more significant drawdown. A softer-than-feared inflation print released this morning has provided a much needed sign of relief. The January Consumer Price Index (CPI) rose at a 2.4% annual rate, slowing from 2.7% in December.
This cooling data reinforces the "Efficiency Mandate" we've been discussing. While the "Fed Put"—the old guarantee of a central bank rescue—is thinning, this drop in inflation to the lowest level we have seen since March 2021. This cooling trend has already pushed the 2-year Treasury Yield toward its lowest level since 2022.
The AI Diffusion: From Software Slump to Productivity Boom
While inflation fears are subsiding, a new source of apprehension has emerged: the rapid acceleration of AI automation. We recently highlighted the "Software Slump," where over $1 trillion in market value vanished from major SaaS names as investors questioned the payoff of massive AI investments. This trend has now moved beyond software and is hitting the services and logistics sectors through what we call AI Diffusion.
What is AI Diffusion? Think of it like the transition from the steam engine to the electric motor. Innovation is when every factory, bakery, and printing press finally gets to revolutionize their own work. It is the phase where AI stops being a "tech tool" and becomes a fundamental engine of efficiency for every business on Main Street.
The Logistics Shake-up: A Lesson in Speculation and Overreaction
We saw a striking example of this "diffusion fear" on Thursday in the transport and logistics sector. Shares across the industry took a hit following news that a small company, Algorhythm Holdings—originally a maker of karaoke machines—had pivoted to launch an AI-driven logistics platform.
While the technology's stated ability to scale freight volumes by up to 400% is noteworthy, at this stage, it remains largely speculative. To put the scale of the market's reaction into perspective: Algorhythm is a micro-cap company with a market value of roughly $6 million. Yet, its announcement triggered a massive wave of panic:
- C.H. Robinson (CHRW), a giant with a market cap of nearly $20 billion, saw its stock plummet by as much as 24% intraday—wiping out nearly $4 billion in value.
- J.B. Hunt (JBHT), another industry titan, saw its market value slide by roughly 9%.
From our vantage point, this is a classic market overreaction. While the technology might be impressive in a controlled setting, the physical complexity of global logistics cannot be replaced by a software update from a $6 million firm overnight. We believe the current "sell first, ask questions later" mentality regarding these legacy operators is significantly overdone.
The Shift: Abundance vs. Scarcity
This trend is moving us into an era where AI is making things that were once expensive—like software code and basic digital intelligence—abundant and virtually free. When digital abundance saturates the market, the real value shifts toward scarcity.
To get ahead of this, we have been making active changes to the portfolio. At the beginning of February, we exited positions in Adobe (ADBE) and Spotify (SPOT)—companies operating in the increasingly "abundant" digital content and software space that are down roughly 12.4% and 12.1% respectively month-to-date.
We initiated positions in Chevron (CVX) and Corning (GLW), which have seen gains of approximately 4.8% and 27.4% over the same period:
- CVX (Chevron) represents a cornerstone of the physical energy economy; as integrated energy giant, it controls the tangible fuel and natural gas reserves essential to power the massive electricity demands of the AI revolution.
- GLW (Corning) is the world leader in manufacturing the specialized optical fiber that serves as the essential, scarce physical "nervous system" needed to handle the massive bandwidth demands of the AI expansion.
These are the "scarce" pillars of the physical economy. We believe the market will place a much higher premium on these tangible, real-world assets as the digital world becomes more crowded.
The Bottom Line
While the speed of change is exponential and markets are currently reacting with heightened sensitivity, our strategy remains grounded in disciplined fundamental and quantitative research. Our portfolio maintains exposure to these scarce, tangible assets, as well as the unique companies across various sectors poised to capture the real upside of this technological expansion.
We are watching these developments closely to ensure your portfolio is positioned for where the world is going, not where it has been.
Matt Goldstein
Chief Investment Officer ยท Exit Wealth®
All opinions expressed in this newsletter is for general informational purposes and constitutes the judgment of the author(s) as the date of the newsletter. The opinions and views expressed by the author are personal and based on economic or market conditions at the time of publication. Actual economic or market events may turn out differently than anticipated. Nothing in this material is intended to serve as personalized investment, tax, or insurance advice. These opinions are subject to change without notice and are not intended to provided specific advice or recommendations for any individual.
The material has been gathered from sources believed to be reliable, however Exit Wealth® cannot guarantee the accuracy or completeness of such information, and certain information presented here any have been condensed or summarized from its original source. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always, please remember investing involves risk and possible loss of principal capital and past performance does not guarantee future returns; please seek advice from a licensed professional.
