Fly on the Fund Wall: Michael Brown on the AI bubble and waiting for facts

Michael Brown is a senior research strategist who has spent more than a decade explaining why markets move. On Fly on the Fund Wall he tells Kieran why the AI rally looks nothing like the dot com bubble, why an analyst's currency is credibility, and why you should wait for the facts to change before you change your view.

Key takeaways

• Michael sees two similarities with the dot com era, one sector and the speed of the rally. The difference is that real revenues and profits sit behind this move.
• His risk to watch is capex. Free cash flow at some of the biggest tech firms has gone from strongly positive to flat and could turn negative.
• A trader's first question after a headline is what it did to the book. An analyst's is why the market moved.
• When nobody knows why the market fell, he says so, then checks whether anything behind his core view has changed.
• He regards traders who spend 10 to 14 hours a day at their screens as professionals, whatever the marketing label says.

Watch the full episode:

Who is Michael Brown?

Michael is a senior research strategist covering markets across asset classes. Both his father and grandfather worked in financial markets. He started on a trading floor just after the Brexit referendum in 2016 and was hooked within months.

The draw was never the trading itself. It was being in the room when an election, a central bank decision or a big earnings release hit, then working out why the market reacted the way it did. He began in foreign exchange and moved into cross-asset research.

Is AI a bubble like the dot com bubble?

In Michael's view, no. He sees similarities in the concentration in one sector and the speed of the rally. The difference is that this technology is already being used and is already earning money.

"This isn't the dot com bubble where you've got companies throwing dot com after their name and suddenly their share price is 300% higher. This is real revenues, real earnings, real P&L going on here." 1:59

He calls the bubble label a lazy narrative, used because prices have risen a lot in a short time. Most of the capital expenditure is being funded from profits. Where debt is involved, he thinks the market is already pricing it, and he points to how differently debt-funded data centre builders have traded against the cash-rich giants.

His concern is the shift in business model. These companies used to run software with little hardware. Now they are capital intensive, and free cash flow that was strongly positive for years is flat for some of them.

What is the difference between a trader and an analyst?

The biggest difference is psychological. An analyst can hold a view while the market moves against it because there is no position on.

"Your currency is credibility ultimately, and you care more about being right than you do about a P&L because you don't have one." 17:44

A trader in the same spot is looking at a red number, margin calls and drawdown limits. That is why Michael thinks moving from one role to the other is much harder than people assume.

What should you do when the market moves and nobody knows why?

Admit it. Michael says the alternative is to reach for the cliché book of profit taking and month-end rebalancing.

"You're just honest with people and you say, I do not know why the market has done what it's done." 9:08

He then goes back to his core thesis. If earnings growth, economic growth and AI investment still support the trend, a 3% drop does not change it. He uses March 2020 as the example. Anyone who called the S&P 500 bottom on the day got lucky, because the support that justified it arrived a week or two later.

"You do need to wait until the facts change, until you change your view, rather than changing your view, and then just hoping that the facts will catch up with you eventually." 13:31

Why does he call full-time traders professionals?

Michael dislikes the word retail. Many traders he has worked with treat it as their job.

"That's not a retail trader in my view." 21:07

What they often lack is a trading floor. Trading alone means nobody next to you to say your idea is wrong, or to suggest taking some risk off after a big move in your favour. He sees part of his job as that sounding board.

How should you handle being wrong?

Expect it. Michael gets some ribbing on the desk when a call goes wrong, but there is an unwritten rule that nobody mocks a colleague for it.

"We are all going to be wrong at some point in our careers." 1:17:16

He respects anyone who puts their head above the parapet and says what they think. Being wrong matters less than how you handle it.

Watch the full episode

The full conversation also covers open outcry and dealing desks, AI sovereignty and why the UK invests so little through a £20,000 tax-free ISA allowance. Watch Fly on the Fund Wall with Michael Brown on YouTube and join the Darwinex Zero Discord to keep the conversation going.

Building your own track record? Start on Darwinex Zero.

FAQ

Is AI a bubble like the dot com bubble?
Michael Brown argues it is not. The rally is concentrated in one sector and has been fast, as in 1999. This time the companies have real revenues and profits, and most of their investment is funded from those profits. He is watching capex and free cash flow.

Can you call the top or bottom of a market?
Not reliably. Michael's example is March 2020: calling the S&P 500 bottom on the day was a guess, because the policy support and treatment news that justified it came a week or two later. He waits for the facts to change before changing his view.

What is the difference between a trader and an analyst?
A trader manages a position and a P&L, so a move against them brings margin calls and drawdown limits. An analyst has no position. Their currency is credibility, which lets them hold a view through volatility but means every idea must stand up to questions.

What is the UK stocks and shares ISA allowance?
Every UK adult can put up to £20,000 a year into ISAs, and gains inside a stocks and shares ISA are free of UK tax. Michael's frustration is how few people use it because they do not know how to invest.

The full episode of Fly on the Fund Wall with Michael is live and ready to watch:

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The contents of this blog post and video are for educational purposes only and should not be construed as financial and/or investment advice.