Scott Kahan: Artificial Intelligence, Inflation & Tariffs
Are we in an Artificial Intelligence bubble that’s about to burst?
A small group of AI companies and chip makers like Nvidia and Palantir have had their valuations driven up over the past year as the transformational economic potential of artificial intelligence has gained public awareness. Much of their stock appreciation is driven by expectations and as markets can be irrational in the short term and rational in the long term there is always the potential for a 20-30% correction.
However, as you know, we try to avoid the day to day noise of the market and stay focused on our long term financial plans. Which, of course, begins by setting aside emergency cash funds. Planning for near-term extraordinary expenses like buying a house or paying for college through the use of money market funds that are currently yielding around 4%. And managing a fully diversified portfolio of stocks and bonds against established allocations.
With this in mind, we don’t get panicked by the predictions of another 2001 Tech Bubble bursting. Rather we remind ourselves that when the Nasdaq crashed a lot of other stocks including value stocks, and bonds did well.
Long term what does AI mean to the market and the economy?
We’ve been telling people that AI is going to be a driving force for years to come. To understand its long term impact on the economy we look to the Industrial Revolution—an 80-year period from 1860 to World War II—that had its ups and downs. Famously surviving the Great Depression that lasted 10 years. But over this time, it helped make industry more efficient that drove profits and economic growth and investor wealth. The impact of the personal computer of the 1970s also played out over decades.
Likewise, AI will have a long term impact on business efficiency and generate decades of growth and investor wealth. But, like the Industrial Revolution and the personal computer economic era that didn’t prevent the Great Recession of 2007-8—AI will not eliminate economic cycles. There will still be market corrections. The lesson here is that even the emergence of dynamic forces like AI don’t change the financial planning formula.
It looks like the inflation story just won’t go away…
January inflation came in at 3.0 percent and has risen slowly from its 2.4% low in September, 2024. I don’t think this should be a great concern. If you look at the full year, inflation was 3.1% in January 2024—basically the same as January 2025. In between, inflation reached as high as 3.5% last March and as low as 2.4% in September. This is not atypical of the way inflation moves as a result of Fed actions—like stock or bond prices, nobody ever said they only move in one direction.
Is a market correction coming?
The market continued to eke out modest gains in January although there was an uptick in volatility throughout the month and into February. The daily ups and downs are clearly related to the new presidential administration of Donald Trump. Specifically, his often changing policies on tariffs. At the end of January, Trump announced plans to implement higher tariffs on Mexico, Canada and China. Markets reacted immediately paring back January gains. Markets continued to drop in early February until Trump did an about face and announced delays on tariff increases to first Mexico and then Canada.
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