August Investments: AI Hits Bear Market

AI Chipmakers Take a Huge Breather

After a spectacular run all year, my growth picks took a big break this month. And it was a doozy, with longs down 22.5%. That brings year to date returns to 30.9% — a still-spectacular 59% annualized.

The shorts picked up some of the fallout, rising 4.1% on the month (which hurts results — you want shorts to go down). This trimmed year to date returns on the shorts to 29% — nearly as good at 55% annualized.

Together, these took the tracking portfolios to 19.0% year to date on the “Adrenaline” Growth portfolio and an even better 20.4% on the “Market Neutral” portfolio. Both good for 35-37% annualized returns.

All of these massively beat the benchmark S&P 500 (SPY), which was flat on the month bringing year-to-date returns to 9.5% — about 17% annualized.

Where the Boom Stands

New GDP numbers came out right in time for this newsletter. Growth moderated to 1.5% in Q2 (April-June), although the Fed thinks we’re accelerating to a current 2.2% on GDPNow and projecting 5% growth for Q3.

5% would be among the strongest growth rates in decades.

Even the Q2 slowdown isn’t as bad as you’d expect with the war and oil prices. And most of it was actually an import surge ahead of expected new tariffs, with a slight ding from lower government spending, which is a fantastic way to lose GDP that wasn’t making us any richer.

Jobs, meanwhile, keep chugging along with 4.2% unemployment all year. The main point worth noting here is the AI jobs armageddon is a no-show for the 12th year running.

The other important number is inflation, where we actually got deflation last month at an impressive 5% annualized clip. That’s entirely oil coming down from its wartime highs, so it’s still noise for now. The rubber hits the road when oil prices return to the pre-war 60’s.

Then we see if the pre-war benign inflation trend returns. If it does, the Fed could do a whipsaw to rate cuts. Which will be spectacular for jobs and growth considering every 1% cut in rates is worth roughly 1 million jobs.

Zooming Out

When I started this newsletter in January I figured 2026 was going to be solid growth from tax cuts and deregulation, along with investment growth from AI infrastructure and tariff re-shoring. All with an assist from Fed rate cuts.

It was looking beautiful, with recession odds hitting fresh lows.

The war got in the way, doubling oil prices — which is bad for business. And flipping the Fed to inflation-fighting hikes, which normally slow the economy. All while tariff re-shoring got torpedoed when the Supreme Court hobbled Trump’s tariffs.

On the other hand, the AI infrastructure story picked up the slack, accounting for up to a third of GDP growth as hundreds of billions pour into data centers. PriceWaterhouse recently estimated 4.7 million blue collar jobs are building data centers, and data center construction passed office construction — a dark juxtaposition, but spectacular if you own Micron or AMD.

More important, even with the Fed flipping to rate hikes, it remains very accommodative, pumping money into the financial system after it learned its lesson in the 2010’s that you never take away the punch bowl.

Good growth and liquidity is literally the poster-child of bubble stage. So the music will eventually run out, but this newsletter is monthly so I feel confident the next 30 days we’ll remain out of recession.

Markets Review

Broad markets were flat this month, but year to date the SPY’s up 9.5%. That’s actually solid historically at an annualized 17%. Even more impressive considering the war — stocks don’t like war, and they certainly don’t like doubling oil prices.

But the big story this month was AI stocks crashing 20%, nearly cancelling the previous month’s rise. This still leaves AI stocks (SMH) up an impressive 45% year to date. But any AI speculator shopping for a vacation pad in Miami last month is looking at Jacksonville now.

The AI Semi crash was driven by some big stars aligning:

• Previous parabolic gains that made over-leveraged traders quick to take money off the table.

• A resumption in the Iran war that was looking almost over.

• A half-trillion dollar IPO by a Chinese chipmaker — ChangXin — that’s years behind on tech but reminded everybody China makes chips, too.

• And, also from China, a new open-source AI model (Kimi) that apparently matches Claude Fable on many metrics. This is apparently because they scraped Fable using “distillation” where you ask Fable everything you can think of and use that as reference. Still, it reminded the world China makes AI, too.

The more important question is what’s next for AI semis — which I’ll talk about in the investment section below.

As for the rest of assets I track, my shorts made of companies I think AI will crush were up on the month but down an impressive 29% on the year. That helped the “market neutral” portfolio that blends AI picks with disrupted shorts.

Finally, hedges — gold, silver, and bitcoin. Bitcoin finally caught a break this month, up 7% on the month. Gold and silver basically held even. Still, across the 3, year to date returns are minus 14%.

Hedges sucking might seem odd considering we’re debasing the currency with $2.5 trillion deficits in the middle of a war — which normally makes gold sing. But my best guess is it’s a reversion after the strong runs in gold and silver last year, while the speculators who usually boost Bitcoin are playing in AI for now. Leaving the true Hodlers to keep Bitcoin side-walking.

With that, updates on portfolio holdings, performance, and what’s next — especially for AI stocks. If you’re not subscribed, it’s 8 bucks a month to cover the time it takes, and your subscription includes the weekly articles and access to all archives — more than 80 articles and growing.