Don't sleep on software

0:09Alex King:Always happy to welcome back Mr. Alex King from Sestrian Capital Research. He runs the investing group on Seeking Alpha called Growth Investor Pro. We've had him on many times talking expertly about the tech space in particular, but also markets in general. Alex, welcome back to the show. Great to have you as always. Thank you, Reena. Always very happy to be invited back. Much appreciated. Thank you. You're looking out at the market landscape. It's the end of August 2026. It's been another boring year full of very clear signals and messages. What are you, JK, what are you thinking about? How are you digesting it?

0:49Alex King:How are you thinking about, how would you start this conversation for investors as a way to be thinking about these specific markets? That's a great question. And I think that where I would start is, you know, there is a real difference in sentiment and attitude, I think, between professional institutional investors. And I include both, you know, large, sleepier asset managers and, you know, faster money hedge funds there, but on the one hand, institutions. And on the other, retail investors. I think there's a real difference there. And in the last few months that have come to pass, retail has been on fire, led by hot money ideas on social media, led by the Tasmanic Situational Awareness LP fund.

1:44Retail has been pouring into memory stocks, so-called AI bottleneck stocks, Korean leveraged index ETFs, all this stuff, and up to a point did incredibly well and then didn't. And so this all, as we know now, hit a peak in June and then was absolutely slammed to the floor as the leverage took hold both of retail investors, but also of that situational awareness fund. And as it turns out, Citadel quite expertly scooped up all that stuff at the lows at the end of July and the Sint, I believe, sold most of it. And so you see, I think, a lot of retail investors a bit sort of stunned because in many cases, they were concentrated in these high beta stocks.

2:39They perhaps were in them using options, often short-term options. And even if not with options, oftentimes on leverage of one kind or another. And so it's been a bit of a wake up experience. It's been a bit of a 2021 into 2022 experience for many. And we see it in just muted engagement really across social media, just an absence of interest in investing. And you've seen that in crypto in the last few months where crypto has been bumping on the floor, you know, less than no interest from prior highly interested corners of retail. Meanwhile, institutions have been scooping this stuff up in crypto.

3:23And meanwhile, in these high beta names, which look like they may be finding support now, probably institutions beyond just Citadel are going to end up looking very smart as they scoop these up, I think. And so what I would start off by saying is, whether you're new to markets or whether you've been in markets a long time, remember to just run ice cold. You know, markets aren't here to help you make money. They're here to take money off of you. And your job, as always, is to learn, you know, the rules and the guardrails of markets and learn to follow what large investors are doing, you know, not try and speculate against them, not run with the, you know, you know, invest and trade like big money, invest and trade, interest and trades.

4:08And there's a real difference there at the moment. Institutions who we see reading our work, we publish on the Bloomberg Terminal, we see who reads our work there, are very active in the sectors we cover. Retail, not so much.

4:20Alex King:If I could, maybe we could start with Bitcoin and the crypto space, speaking of ways to understand it in a way that makes you shine, as opposed to ways that make you feel despondent and like you've been a sucker, which I imagine a lot of people on both sides of that. What would you say? Bitcoin recently hit a three-month high. It's been up, I heard on our Wall Street Breakfast podcast this morning, about 28 % in August. Also, that it's been triggered by the treasury buybacks and renewed dollar selling. What would you say about, I guess, Bitcoin in particular and any other crypto that you would care to discuss?

5:02Yeah, so we can talk about Bitcoin and Ether, which is the two that are familiar to me. I don't really focus on the sector much beyond that. And for clarity, I'm long both for ETFs, IBIT for Bitcoin and ETH and one or two other things for Ether. So, you know, if you step right back, the question is, does crypto have a use case, you know, a real world use case? And I the answer for most coins and tokens is no. They're purely speculative instruments. There's nothing wrong with that as long as you know what they are. And so if you are out there making lots of money on pump fun, fantastic. Good for you.

5:38But the question as to is there a real world use case? The answer I think is changing. So with Ether, I think the answer is a solid yes now. There is widespread adoption of the Ethereum blockchain as a part of the financial plumbing now for or as it's called programmable collateral, or in old-fashioned terms, collateral, and also for settlements, and generally to enable the tokenization of not just financial assets, but real-world assets. So the Ethereum blockchain, the database, is becoming part of the furniture now. And to process transactions on the Ethereum blockchain, you need to own Ether.

6:20And so Ether in itself, the currency does now have a use case. Bitcoin, although a purer entity with an algorithmically controlled supply, as we know, so price in the end can be governed by scarcity of new issue, Bitcoin, I think, has had less of an argument for its use case. But I think there's two real arguments in its favour at the moment, which is to the extent that people talk about this dollar debasement trade. I'm never sure about this. The end of the US and the end of the dollar system has been foretold at least 50 times in my memory. I'm old, but I'm not that old. And so the current narrative that says it's all over for the US dollar because fill in the blank, I'm not sure that will be correct.

7:11But while people feel that way, then there is a resurgence of interest in Bitcoin as either a store of value or more likely an easily transmittable form of value across borders, not subject to all the US dollar system rules. Now, you add into that the likelihood that both Bitcoin and Ether become properly regulated, either by way of the Clarity Act, which may yet pass, or because the CFTC in the case of the commodities, Bitcoin and Ether, which they'll become, or the SEC in the case of security-like tokens, looks like they're going to enact their own rules and regulate them anyway, Clarity Act or no Clarity Act.

7:53And I think that's a great thing for the asset class, particularly the major members of the asset class, again, Bitcoin and Ether. Why? Because regulated assets mean a much bigger addressable market. There is huge swathes of the investing world today that can't or won't own Bitcoin or Ether because it still looks and feels a bit wild west to the outside. But you regulate those things and you have them regulated by the CFTC, by the SEC, and they suddenly become investable. So I think that all other things being equal, the bull case for crypto right now is pretty strong. And again, I don't mean, you know, token 462.2.

8:31I mean, the two biggest names, Bitcoin and Ether, I think it's pretty strong. And the reaction you're seeing this month is obviously extreme. And what's happening is pretty simple, which is people have been either scared out of holding this stuff or bored out of holding this stuff. It's flatlined for many months now. And you also have had plenty of people shorting this stuff and been encouraged to do so on various forums. So two things have happened. One, as prices started to tick up, as you said, triggered by the likelihood of cheaper money coming along. So cheaper money in a 50 to 100 times levered trade, which you often see in native crypto, that's fantastic for price moving up.

9:20That's triggered interest in the sector, and that's seen a lot of short covering. And this huge move you've seen in the last week or two, that is short covering and people piling in. And that will cool off, I think. The rate of price increase will cool off. But I do think we are probably in the early stages of a structural bull market in Bitcoin and Ether. And I think that's probably here to stay for some time. Again, the touchstones being actual fundamental use cases, and also what looks like grown-up professional regulation finally coming to town.

9:55Alex King:The grown-ups coming to town? What? In this day and age? Absolutely. Yeah, it's true. So as we're talking about these topics, how do bonds, how does gold figure into this conversation? How would you put those puzzle pieces in? Well, gold has been being bought up heavily by central banks for a couple of years now. And we can all speculate as to why that is. Again, the narrative says, well, you know, the dollar's going away as a reserve currency. What are you going to buy? You're going to buy euros? No. You're going to buy yen? No. You're going to buy Swiss francs? No. Let's buy gold. And that's the narrative.

10:34Again, the end of the dollar has been foretold many times that I'm not sure that it's any more likely now than it was in the past. But for whatever reason, central banks have been accumulating this stuff. And so you have, behind any day-to-day volatility, you have a real fundamental bid for a scarce asset. Like always happens in financial markets, gold got ahead of itself in 2025, huge ball run up, big correction, bottomed out recently. I think it's bottomed. And I think we're seeing a new run up in gold for two reasons. One, that fundamental bid from central banks. And two, again, the perception, reality doesn't matter, but the perception of uncontrolled inflation.

11:14And that perception comes from people look at treasury market actions. And they conclude from that, incorrectly, in my opinion, but just my opinion, they conclude from that incorrectly that a new wave of inflation is coming and therefore best buy gold. And so gold's on the up for those two reasons. Now, in my opinion, you know, it doesn't really matter why volatile assets like gold or crypto are rising. You know, if you learn how to read price and volume movements, then the why something is happening is sort of might be interesting for a dinner party, but it's not very relevant to trying to make money or trying to avoid losing money.

11:54You know, charts will help you navigate those prices. And the why is just opinion. We can't ever really know until after the fact. But I think the gold bull market, which again, I think we're in a bull phase in gold, and we'll see how long it lasts, but I think for a good few months, again, is driven by fears of uncontrolled inflation, which the narrative says, well, oil prices must keep rising, says the narrative, because of what's happening in the Gulf. So the narrative treats that as a fact, and the narrative says, therefore, that must be an inflationary wave heading our way. And the narrative also says, well, the Treasury's market actions must also mean an inflationary wave coming our way.

12:35So we have two inflationary waves coming together, uncontrolled by rate hikes, ergo, dollar down, gold up, goes the narrative. Again, whether that proves to be true or not, I don't think it will personally, but it doesn't matter. Gold's rising anyway. And so that's a trend that one can get hold of and ride. And so my point earlier about when retail gets tripped up versus institutions is the best institutional investors, be they funds or long-term asset managers, run cold as ice. They don't believe in any narrative. If you were to talk to Stanley Druckenmiller about why gold is rising, he might have an opinion, but his investing isn't driven by that opinion.

13:13It's driven by charts. And so that, I think, continues to be the message that we try to preach in the Growth Investor Pro service, which is just forget about the why. The why is interesting for dinner parties. But the thing that really matters is understanding price movements and how to take advantage of them, how to not be taken advantage of by them.

13:33Alex King:At the end of this week, Kevin Warsh is going to be giving a speech at the Jackson Hole symposium. Anything else to note there as, you know, the central bankers gather and words are spoken, anything to note there for our audience? Well, I would expect some, you know, volatility because people worry about events like that and they worry that something cataclysmic, you know, but bullish or bearish, but cataclysmic will come out of it. People are worried about rate hikes. Again, there's this inflation narrative that's coming our way. And the narrative is stitched together from these parts. Again, to rehearse that, why do people worry about this?

14:15They see gas prices are somewhat elevated at the pump. They read the news about what's happening in the Gulf, and they conclude that there is a supply-side inflationary wave coming our way. They look at Treasury market actions, and they conclude that free money is being rained on people, and therefore there is a demand-side inflationary wave coming. and they put that and that together and they conclude that inflation is going to be roaring and therefore that the Fed is going to raise rates. Now, my opinion, just my opinion is, I don't think we're going to see an inflationary wave. I think other forces in the economy will damp down any effects like those.

14:51But in particular, I don't think Walsh is going to be on a rate hike campaign. You know, that's not the personality of this Fed at all. You know, the Federal Reserve is always, always attuned to whatever incumbent administration is looking for. You know, they may be publicly attuned or privately attuned. But the notion of complete Fed independence has never been a thing. And it's not a thing now. And it wasn't a thing under the last administration or the one before that or one before that. So if you're Kevin Walsh and you're reading the room, the room is don't hike rates. And so I see, in my own opinion, 0 % chance that rates are hiked anytime soon.

15:39And so I think that whatever volatility might come to pass around that Jackson Hole event will settle down. And so if one is trading very short term and one is skillful, then is there some money to be made from that volatility? I'm sure there is. But as a longer term investor or a swing trader, I think it's ripples that will pass. And I think it'll end up being a nothing burger. Famous last words, but that's my opinion.

16:05Alex King:Yeah. I would say the other big event or the other noteworthy event this week is Wednesday after market close, NVIDIA reports its quarterly earnings. What would you say about NVIDIA these days? And if you want to then go into the semi-space, happy to hear that. So some context here. So first of all, I'm old and I was here for the dot-com boom and bust. I was also here for the GFC boom and then bust. And I've been a technology investor my whole career, which spans three decades now. The second thing to say is that I am an absolute, absolute huge believer that we are very early in the AI cycle. Now, by that, I don't necessarily mean stock prices.

16:50I mean, the actual technology that exists today, I think, is fledgling. The penetration across the workplace and across consumers of AI technologies beyond simple chatbots is barely, barely scratched the surface. And so I think that we are a couple of years into what is truly, truly the next industrial revolution. And for anyone that doubts that, I would encourage them just to dive in and pick your LLM of choice and get it working in an agentic capacity. Have it write you a website. Have it improve your own work. Have it do some financial modelling. Treat it, if you're an investor like myself, treat it like an analyst or an associate or a VP that might be working for you.

17:45And the response you'll get from it, particularly as time goes by and it learns what you're looking for and it learns how to do things better, nothing short of remarkable. And that's on this V1.0 technology. So I think that companies like NVIDIA, Anthropic, OpenAI, Google, Perplexity, all of these names are in the early innings of their, if you like, unit growth. You know, the number of tokens being served is going to rocket in the coming years. unit growth in semiconductor in hardware systems in software used to deploy and control and configure AI data centers is also I think in its early stages of unit growth the stock prices of these things as always happens has obviously run a fair bit ahead of unit growth that's normal so at some point these things will correct and they'll correct hard we haven't seen it yet but we will at some point see, you know, a dot-com type correction.

18:46But, you know, everyone's terrified of a dot-com correction, but, you know, we already had one in software. Like if you look at high beta software from around September 2025 to around April 2026, if you own very high growth, not very profitable software companies, there's a good chance you were down 50, 60, 70 percent, maybe more for some names. And so people have this, you know, embedded fear if they lived it themselves or we've been taught about it, this dot-com collapse, this nuclear winter. But it happens from time to time in all sectors, and it will come to semiconductors as well. It just hasn't happened

19:18Alex King:yet. My own view is we're probably in the final innings of a big run-up in semiconductor bull markets. I think that the June high was an artificial high induced by sucking people into those situational awareness names. The end of July low was a wrecking ball, very skillfully swung by Citadel. Again, situational awareness on one hand and Jane Street on the other. And then the run up you're seeing now, just maybe the start of a run to new highs before a correction as a result of some actual price discovery returning to the market. Nvidia, their guide for this quarter is strong. I would be very surprised if they didn't hit or beat their numbers.

20:03So I don't think there's any question about whether that company is continuing to do well. The price reaction, as you say, will determine a lot of things across the market, not just the NVIDIA stock price, but all of your, you know, applied opticals and Marvell's and even Bloom Energy's, you know, data center derivative stocks like that. So, you know, to your point, NVIDIA earnings is probably more important than Jackson Hole, I would have thought.

20:29Alex King:Talking about AI and where we're at in the cycle and agentic AI, what would you say? I was reading today on Seeking Alpha about agentic AI in the cybersecurity space. Anything to note there for investors? I would say if you haven't read a book called The Infinity Machine, which is a biography of Demis Hassabis, who I'm sure people know was the founder of DeepMind and now runs or until very recently ran the Google DeepMind division, if we sold it to Google, go and read that book. It's called the Infinity Machine. And there's a sort of eureka or epiphany type moment in there, at least for me, when Hassabis, who's at this point, he's aged about, I'm going to say, 17, 18, 19, something like this.

21:19and he's a boy genius, realises that units of information might be the fundamental building block of the world as we see it. And his secondary realisation is, he doesn't use this word, but metadata, the ability to describe constructs, and then the ability to write software, which can itself write software, might just be, and again, he couldn't put these words together at 1980, 1990, might just be the next industrial revolution. Now, in cybersecurity, you know, forever, since ever, you know, since, you know, as long as I've known how to use a computer, which is a very long time, it's always been a game of cat and mouse between basically bad people trying to hack things and good people trying to write software to stop them hacking things.

22:15And the good people were always, always trailing the bad people by a year or two, mostly because there was less money. And I wonder whether AI changes that because there's nothing that can sniff out cybersecurity problems faster than a well-trained AI system. Why? Because it thinks like a machine. It doesn't think like a human. It doesn't think anything like a human. And so if you want to explore and find machine weakness, the best thing to ask to do that is a machine and self-learning, self-creating, self-replicating machine at that. So I think that the whole notion of cybersecurity has already changed, not going to change, but has already changed.

23:00And it's now a game between bad machines and good machines, bad machines trying to find loopholes and exploit those in systems. and good machines trying to sniff out the loopholes and seal them, close them off ahead of time. And we are already in that place. Now, there aren't really pure play companies with publicly traded stocks that you can use to play that angle yet. We're all familiar with the names out there, your CrowdStrike, Zscalers, Cloudflare, Rubrics, all of these things. And they all took a good game on this. But those companies were all founded a long, long time before this new environment.

23:39So cybersecurity has already changed fundamentally. And so companies will come to market in the next year, two years, three years that have never known a world that wasn't machine controlled. And I think that's where we're headed. So the whole playing field has changed. And again, this is it will never go back. It's now always going to be machine versus machine. I mean, we are, you know, to all intents and purposes in cybersecurity. security, we do now live in a matrix environment where humans have a peripheral involvement, but only peripheral. Machines now rule the day on the cybersecurity surface.

24:16Alex King:As we talk about the entire landscape, what would you say about the international picture and how China influences and affects our conversations about this narrative and anything else you would add in terms of geopolitics playing a part. Yeah. Curious your thoughts there. You mean in cybersecurity or more widely? Both. Yeah, both. Cybersecurity more widely. Yeah. Well, in cybersecurity, I mean, naturally, for some time now, you know, it is a cybersecurity is a conflict zone between nation states and has been for some time. You know, So it's been a long time since the Stuxnet virus was deployed into power stations amongst the enemies of the West.

25:06And it's been a long time since Russia, China, other people were deploying cybersecurity attacks on Western countries and governments. So I don't think there's any new developments there, except to say that the battles between machine and machine is already now taking place at nation state level, as well as just between individual actors and company IT systems. I think from a wider perspective, I think the world order is going to be shaped. There's all the kinetic forces that we all know about, but probably more consequential forces. Who has access to AI technology? And so I think if we step back in time and we look at what is it that determined the eras of the great powers over history, It's usually some technical development or other.

26:07And so in the 20th century, it was nuclear weaponry, which gave the ultimate threat to terrorism and was held by a small number of countries, the US alone for a long time, as we know. And it was also rocketry, which led to space dominance as a sort of, you know, cosplaying of military dominance on Earth. And the US topped those races because it was able to solve two things. One, funding on a massive scale. And two, the sourcing of scientists and with that, the distribution of technology. So if you look at the Manhattan Project, for instance, various labs around the world had put together bits and pieces of the things that were necessary to build the bomb, but they hadn't been able to do that in a unified way, in what we would today call a vertically integrated way, from design through raw materials production, through manufacturing, tests and deployment.

27:11And they hadn't been able to do it in a way that could be operated industrial scale. And the reason the Manhattan Project was a success was because the US threw unimaginable sums of money at it, put the full force of the federal government behind it, and crucially cracked industrial scale production of the materials necessary. If you look at the Apollo Project, something similar happened. As everyone knows, Russia was ahead in the space race. It was the Sputnik satellite that spooked the US government into are really committing to the space race. And again, through a combination of huge federal funding, widespread federal and public support for the program, and an assembly of scientists, engineers, materials, manufacturing, distribution, the US won the space race and established geopolitical dominance that way.

28:03AI is as consequential as those two things. And the things that the US has massively in its advantage are, of course, NVIDIA as a national champion, increasingly Intel as a national champion, not just for chip design, but also for fabrication. It has Micron as a national champion memory, various comms stocks, comm chip stocks, and all of the major frontier labs for software development. China doesn't have any of those things, and it doesn't have the fundamental ability to write, you know, essentially limitless checks into these projects. But what it has is that limitation can be turned to its advantage.