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May 29, 2024

Last Thursday, following another huge earnings event from Nvidia, the S&P futures put in a technical reversal signal (an outside day).  So did the Nasdaq.  
 
And the Russell 2000 (small caps) moved sharply lower, breaking the trend of the past month that described 11% bounce from the April lows.   
 
 

So, stocks shrugged off the Nvidia news, and all of the related insider insight into the new industrial revolution. 

 

With that market behavior in mind, we stepped through some notable geopolitical and domestic risks that were bubbling up:  

 

1) The U.S. Treasury Secretary had just made public comments prior to the G7 Finance Ministers meeting in Italy, where she took some provocative shots at both Russia and China, signaling coordination among G7 partners to transfer ownership of seized Russian assets

 

2) Adding to that, she vowed a “wall of opposition” to China’s trade practices.

 

3) And then, as we also discussed yesterday, the date for closing arguments was set in the Trump trial in New York, which put a timeline on a potential conviction.

 

With all of this, as we discussed last Thursday, the market seemed to be underpricing the rising geopolitical and domestic news risk, if not shock risk — as you can see in the chart of the VIX. 

 

 

So fast forward to today, and the Trump trial has now moved to the jury deliberation stage.  Markets were down across the board (stocks, bonds, commodities).

 

Is this trial "noise" or "signal" for markets?

 

If it alters (and maybe permanently) market psychology and perception, it's signal. 

 

In this case, the potential jailing of a U.S. presidential candidate driven by partisan lawfare should raise concerns for every investor about America's role in the world as the reliable anchor of law, fairness, and stability.

 

Add that to the threat of confiscating Russian assets, and it's not hard to imagine the erosion of trust in the "full faith and credit" which underpins the U.S. Treasury market.  And the dollar (and fiat currencies, in general) works only with trust and credibility of the issuing government.

 

Clearly these are scenarios we don't want to see play out.  The vulnerabilities are already well known, particularly after the ramp in debt and deficits in recent years.  Introducing a catalyst becomes very dangerous.

 

This all strengthens the case for the continuation of the trend in this chart (and commodities, in general — up!) …

 

 

We've often looked at this longer term chart of gold over the years.

 

This is a classic C-wave (from Elliott Wave theory). This technical pattern projects a move up to $2,700ish.  The price of gold has continued to make progress along that path. 

 

How do you play it?

 

Get leveraged exposure to gold through gold miners, or track the price of gold through an ETF, like GLD.

 

Full disclosure, we are long gold miners, including Barrick Gold in our Billionaire's Portfolio 

 

 

 

 

 

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May 28, 2024

We get inflation data this week (in Australia, Europe, Japan and the U.S.).
 
And then over the next three weeks, major central bank meetings are on the calendar.  Remember, the easing cycle has already started in Switzerland and Sweden.  And the European Central Bank is expected to follow next week.  And there's about a coin flips chance of a cut coming from the Bank of Canda next Wednesday.  
 
As for the Fed, the market is now pricing in a little less than one cut by year end.  Again, this is the pendulum swinging from one extreme (as many as seven cuts projected earlier this year), to (now) less than one.
 
As we've discussed, the Fed tends to be more comfortable adjusting policy reactively, rather than proactively.
 
What could put the Fed in the position of reactive easing?  Losing control of the bond market.
 
And we have a potential catalyst.
 
Closing arguments started today in the Trump case in New York.  If the political opponent to the President of the United States of America is jailed, that might be the final straw for the bond market and the dollar.
 
We could see capital flight from the historic global safe havens (U.S. Treasuries and the dollar).

 

 

 

 

 

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May 23, 2024

We talked about Nvidia’s big earnings report yesterday.  It was good for new record highs in the stock today.

Adding to the earnings and outlook fuel, was the 10-for-1 stock split that was announced — to take place at the close on June 7.  The split will expand the universe of potential Nvidia shareholders by bringing the cost to own a share down to around $100 a share.

This looks like the 2014 Apple split.  Apple announced a 7-for-1 split when the stock was in the mid-$500s.

It was around $700 by the time of the split.  The stock was bought pre-split in anticipation of 1) an increased appetite for Apple shares at a lower price (broader investor base), and 2) the potential for Apple’s inclusion in the Dow (DJIA), made possible by the lower share price (for a price-weighted index).

Nvidia may see a similar path.

Now, while Nvidia had a good day, almost nothing else did.

Broad stocks were down on the day.  Commodities were down.  Bonds were down.

Let’s take a look at stocks …

Last month, after a nearly 30% rise in five months, the S&P futures put in a technical reversal signal (an outside day).  That signal predicted a 7% technical correction.

We’ve since traded back to new highs, and we get another reversal signal today.  Same said for the Nasdaq.

Did Jensen Huang’s insider view on the new industrial revolution impact the market’s outlook on interest rates?  Was it just a hot PMI report this morning that triggered broad selling across markets?

Or was it something else that may be raising the global risk temperature?

Perhaps it’s the U.S. Treasury Secretary in Italy, meeting with G7 Finance Ministers, that stated an agenda this morning that includes transferring ownership of seized Russian assets, and presenting a “wall of opposition” to China’s trade practices.

Or perhaps it’s the prospects of the United States President’s political opponent being jailed by the end of next week.

Last month, after a nearly 30% rise in five months, the S&P futures put in a technical reversal signal (an outside day).  That signal predicted a 7% technical correction.

We’ve since traded back to new highs, and we get another reversal signal today.  Same said for the Nasdaq.

Did Jensen Huang’s insider view on the new industrial revolution impact the market’s outlook on interest rates?  Was it just a hot PMI report this morning that triggered broad selling across markets?

Or was it something else that may be raising the global risk temperature?

Perhaps it’s the U.S. Treasury Secretary in Italy, meeting with G7 Finance Ministers, that stated an agenda this morning that includes transferring ownership of seized Russian assets, and presenting a “wall of opposition” to China’s trade practices.

Or perhaps it’s the prospects of the United States President’s political opponent being jailed by the end of next week.

As we discussed in early April — when the U.S. administration spent a day recklessly mixing geopolitical signals that ranged from policy confusion on Israel and Taiwan, to threatening Russia with Ukrainian membership in NATO — markets will ignore domestic political infighting and geopolitical posturing until they don’t.

It’s fair to say that there is greater geopolitical and domestic news risk in the world, if not shock risk, than is being reflected in this chart …

The VIX tracks the implied volatility of S&P 500 index options.  This reflects the level of certainty that market makers have, or don’t have, about the future.

To put it simply, if you are an options market maker, and you think the risk of a sharp market decline is rising, then you will charge more to sell downside protection (ex: puts on the S&P) to another market participant  just as an insurance company would charge a client more for a homeowner’s policy in an area more likely to see hurricanes.

An “uncertainty premium” would translate into the spikes (or higher levels) in the VIX.

Again, as you can see in the far right of the chart, we haven’t had it.

 

 

 

 

 

 

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May 22, 2024

Today we heard from the most important company in the world on the state of the new industrial revolution.

It continues to unfold, and at a very, very fast pace.

And yet, it’s still very early.

For Q1, Nvidia reported another multi-billion dollar growth quarter, on expanding margins, and with the outlook for another multi-billion dollar growth quarter — with demand outstripping supply for the foreseeable future.

Take a look at the hyper-growth (both relative and absolute) in this financial summary from Nvidia …

Keep in mind, this is the first year-over-year comparison since Jensen Huang shocked the world a year ago by declaring “the beginning of a major technology revolution.”

Remember, in that earnings call a year ago he told us that a trillion-dollar “retooling” of the world’s data centers was underway.  For perspective, Nvidia has over 80% market share, and has done only $65 billion in data center revenue thus far (since the roll out of ChatGPT in November of 2023).  It’s still early.

So, after putting up quarter after quarter of triple digit growth, Jensen says today that they now are “poised for the next wave of growth.”

Nvidia’s new Blackwell chip is powering the newest iteration of ChatGPT (version “4o”) — launched just nine days ago.

We talked about this back in February.

The CEO of OpenAi (developer of ChatGPT), Sam Altman, had said the next iteration of ChatGPT “will change the world.”

It’s here.

With that, let’s revisit what he said about it.

He said it’s a tool for productivity — it will magnify what we can do (a personal AI “assistant”).  Costs will go down.  Capabilities will go up.  He says it will be more reliable than earlier versions, have better reasoning abilities, and be customizable to everyone’s individual styles, and we will run it on our own data.

He said it will be “multimodal.”

What does that mean?  It means the model will understand and interact with not just text, but images, audio and video (OpenAi demo video here).

This opens up an entirely different level of human-computer interaction.

Robots will understand human commands, voice and gestures, facial expressions, tones of voice, etc.

Autonomous vehicles will have a better understanding of their environment.  In-car assistants will truly be an in-car assistant (engaging in natural language, interactive, responsive to verbal and visual cues).  Your car will know your behaviors and preferences.

Education will be more engaging and interactive, and tailored to the styles of needs of every student.  As Satya Nadella (CEO of Microsoft) said, every person in the world will have their own personally tailored AI tutor.

And considering all of that, remember the real difference maker in this next version of models, is the “learning” feature of generative AI.  In the above examples, the models will need less and less human command over time.  They learn from previous commands, interactions, feedback and they adapt and optimize their behaviors.  And they become more and more accurate in their predictions/output.

This technology will revolutionize product development, improve disease diagnosis and solve complex problems — and do it all much faster than has been done in the past.

Again, this transformational technology is now here.

What else was revealed today?  There’s another (more advanced) chip coming behind the Blackwell chip (the chip that delivered all of these capabilities we just discussed).

Moreover, Jensen said they are in a “1 year rhythm” in chip development.  This implies AI’s growth (model size, computational power and applications) is on a more accelerated path than the typical two year cycle observed in Moore’s Law.

As we’ve discussed over the past year, this is a new industrial revolution.  And we should expect it to grow the economic and stock market pie.

With all of the above in mind, we’ve been working on identifying and thoughtfully building a portfolio of companies on the leading edge of this transformation, in my AI-Innovation Portfolio.

We now have 19 stocks in the portfolio, since we launched in June of last year.

But again, it’s still early in this technology revolution.

In an era that has already brought us multi-trillion dollar companies.  More are coming.

Here’s how you can join me…

The AI-Innovation Portfolio is about allocating to HIGH-GROWTH.

For $297 per quarter ($99 per month), you’ll gain exclusive access to my in-depth research, expert analysis, and timely investment recommendations focused on the Generative AI revolution.

You can join me by clicking here — get signed up, and then keep an eye out for Welcome and Getting Started emails from me.

 

  

 

 

 

 

 

 

 

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May 21, 2024

As we head into tomorrow’s Nvidia earnings, let’s reflect on where we were one year ago.

In May of 2023, we were two months removed from a major shock event, bank failures, and the threat of a broad run on the banking system.  Regional banks were still considered “at-risk,” particularly those with the combination of high uninsured deposits and large duration risk.

Meanwhile, Congress was in another standoff on the debt ceiling.  The Treasury Secretary was lobbing debt-default threats (in attempt to create negotiating leverage). More than half of Americans expected a severe recession within six months (as severe or worse than the Great Recession).

And back in May of 2023, we observed this chart on consumer sentiment.  It was plunging back to levels of the Global Financial Crisis, and the 2011 debt ceiling standoff (which was also accompanied by a sovereign debt crisis in Europe).

This chart reflected despair.

It all changed last  year, on May 24th.  That’s when Nvidia reported earnings — the “Nvidia moment.”

Jensen Huang revealed that a retooling of the world’s computing technology was underway, and in the very early stages.

That was the catalyst that swung the pendulum from despair to enthusiasm.

The interest rate market flipped from rate cut expectations to projecting more rate hikes — as growth prospects and the economic outlook suddenly became much brighter.

How did stocks do?

The S&P 500 is up 30% from that “Nvidia moment.”

With that, let’s revisit some of my analysis on the long-term path of the stock market …

The blue line represents what the S&P 500 would have looked like, had it continued to grow at its long-run annualized rate of 8%, from the 2007 pre-Great Financial Crisis peak.

The orange line is the actual path of stocks (which includes the deep financial crisis decline and the subsequent recovery).

Through the years of looking at this chart above, there has been plenty of chatter along the way about the performance and status of the stock market — plenty of bubble and overvaluation talk.  But the reality is, we were knocked off of the path of the long-term trajectory of stocks (the orange line).

And that path of a long-term 8% annualized appreciation has never been regained (the blue line).

What can we attribute this gap to?

Post-recession economic recoveries in stocks are typically driven by an aggressive bounce-back in growth, to return the economy to “trend growth.”

We didn’t get it in the post-great recession era.  Growth was dangerously shallow and slow.  Deflationary pressures persisted.

However, the pandemic fiscal response, unlike the great recession fiscal response, put cash in the hands of consumers.  And you can see what the short-lived boom-period did to close that gap in the chart (the orange line converging to the blue line).

But despite the 30% gain of the past twelve months, the S&P 500 still hasn’t “returned to trend.”

 

 

 

 

 

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May 20, 2024

The biggest market event of the month comes on Wednesday. 
 
It's Nvidia Q1 earnings
 
As we discussed earlier this month, this will be the first year-over-year comparison to the earnings report and earnings conference call that delivered the "Nvidia moment" — when CEO Jensen Huang shocked the world by declaring "the beginning of a major technology revolution," while forecasting billions of dollars of quarterly revenue growth.
 
Here's a visual of how that forecast has played out …
 
 
 
The trend is clear: Adding billions of dollars of revenue growth each quarter, and beating what has proven to be conservative guidance. 
 
For this most recent quarter, which they will report on Wednesday afternoon, they have guided to do $24 billion in revenue.
 
If they hit guidance on Wednesday, it would be a quadrupling of revenue since the fourth quarter of 2023.
 
But we already know, based on the earnings reports from the tech giants of the past two weeks, that Microsoft, Google and Meta (alone) spent north of $32 billion last quarter on investment in computing capacity.  And they bought as many Nvidia GPUs as Nvidia could supply.
 
We should expect another "better than guidance" number.  And based on the pre-orders of Nvidia's new Blackwell chip, the guidance should continue to rise.   
 
So, we'll head into Nvidia earnings with the stock back near the record highs, having more than tripled since the "Nvidia moment," but also having gotten cheaper along the way. 
 
How?  Not only have revenues quadrupled over five quarters, but the profitability of each dollar of revenue has doubled over the same period. 
 
Net income margins have doubled over five quarters.  That's economies of scale at work and internal efficiencies gained from AI. 
 
With that, here's a look at the trajectory of Nvidia's valuation, taking end of reporting quarter price over the annual earnings run rate (end of reporting quarter EPS x 4).  
 
 
At the current share price, the Wednesday report will probably bump this higher to about 40 times — still cheap for a company growing at a triple-digit year-over-year pace (still). 
 
Now, we have the Dow breaching 40,000.  The Nikkei has revisited record highs of three decades ago.  Four tech giants have valuations exceeding $2 trillion (Microsoft exceeding $3 trillion).  Gold is on record highs.  Copper is on record highs. 
 
Are these red flags — signals of over-exuberance or excess speculation?
 
Neither.  It's a continuation of the revaluation of both hard and financial assets relative to fiat money (i.e. it's a continuation of the devaluation of paper money).
 
With that in mind, let's revisit an excerpt from my daily Pro Perspectives note almost four years ago, to the day
 
May 21, 2020
 
Remember, the intent of policymakers (here and globally), to combat the global economic shutdown, by flooding the world with money, was to ultimately inflate economies and deflate debt.

This was an explicit devaluation of cash against asset prices.  And as we've discussed, these policy moves will reset the price of everything (consumer stables, consumer products, services, labor … and also stocks, real estate, commodities … everything). 
 

 
 
 
  

 

 

 

 

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May 16, 2024

After yesterday's inflation data, the 10-year yield broke this trendline.
 
 
Let's take a look at how yields rose from 3.81% to 4.74% over just the past three months. 
 
Remember, in mid-January the market was pricing in six quarter-point rate cuts for the year, with a chance of a seventh.
 
The Fed started pushing back against that sentiment by late January, and Jerome Powell curbed the enthusiasm about the rate outlook in the January Fed meeting.  That started this pendulum swing in the rate outlook, from one extreme to another. 
 
This trend higher in market rates (in the above chart) was then strengthened by rumors that the Bank of Japan was preparing to exit emergency level policies – a signal that inflation was even sustaining in Japan. 
 
The trendline held again on a hot U.S. inflation report on Good Friday.
 
And by mid-April the pendulum on the rate outlook had swung from expectations of as many as seven quarter-point rate cuts this year, to maybe none/zero.
 
With that, fittingly, the tide turned, on this rising trend in yields, following the Jerome Powell's clearly dovish message following the Fed's May meeting. 
 
And then this trendline broke, with yesterday's CPI report, where it showed a decline in year-over-year inflation, and weak inflation if we exclude the effects of auto insurance and owner's equivalent rent.
 
So now we have the pendulum on rate expectations moving back toward the middle in the U.S.  We have expectations for rate cuts coming from the euro zone and UK next month.  And the Bank of Japan's plan to tighten policy has already hit a road bump, after the economy contracted in the first quarter.
 
 

 

 

 

 

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May 15, 2024

The inflation numbers this morning were in-line with expectations.
 
With that, we had a decline in year-over-year inflation (i.e. a fall in the consumer price index).
 
And as we discussed yesterday, the hot spots continue to be auto insurance and shelter (which includes the influence of rising insurance prices).
 
Let's take a look at what the inflation number would look like without the effect of a 22.6% annual increase in motor vehicle insurance (the orange line). 
 
 
Now, what would it look like if we stripped out auto insurance and owners equivalent rent?
 
Both auto insurance and owner's equivalent rent make up about 30% of the CPI.  And both of these CPI components are lagging features of an asset price boom. 
 
As you can see, excluding those two inputs we get a CPI that is more representative of the demand trend.  And it's running well below 2%
 
The Fed holding rates at historically tight levels does nothing to solve the influence of auto insurance premium and owner's equivalent rent on the headline inflation number.  If anything the Fed's high rates are artificially boosting demand for rentals, because the (related) high mortgage rates are prohibitively expensive for potential home buyers. 
 
So, unless the Fed is trying to induce an asset price bust (deflationary bust) and economic contraction, which would mean we get all of the debt from trillions of dollars of fiscal stimulus and none of the growth, then they should be cutting rates.
 
The market seems to be getting that message.    
 

 

 

 

 

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May 14, 2024

We get the April inflation report tomorrow. 
 
There continues to be a lot of noise about "hot" inflation data. 
 
For perspective, let's revisit the chart of CPI as we head into tomorrow's report. 
 
 
This chart should do nothing to promote fear of another surge in inflation.  It's a "stall" in the disinflation trend.  And as you can see from the orange dotted line, if the April monthly change in prices is in line with the consensus view, the year-over-year CPI will fall tomorrow. 
 
And as we've discussed here in my daily notes, the stall in CPI is largely due to a couple of hot spots in the data (shelter and insurance).  On the latter, the auto insurance component was up 22% year-over-year in the March inflation report.  Just pulling that out, the headline CPI drops below 3%.
 
On that note, let's take a look at what the Progressive CEO said about auto rates in the Q1 earnings call:  "Inflationary trends are showing indications of stabilizing … It's comforting to be able to report that we're pivoting to a more normalized operation, where in most states we can take small bites of the apple when it comes to rate (i.e. prices) … so, we'll continue to focus on having more stable rates." 
 

 

 

 

 

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May 13, 2024

When you constantly threaten a "higher for longer" interest rate, at a level that's already historically very tight, and you attribute that stance to a persistently higher than desired inflation rate, the market starts believing you — on both fronts (the interest rate and the inflation rate). 
 
On the former, due to the Fed's hawkish rhetoric of the past few months, the market has reduced its expectations on rate cuts this year by more than 125 basis points (i.e. pricing in a higher interest rate for longer).
 
On the latter, the Fed's hawkish rhetoric may have also influenced inflation expectations, higher (higher inflation rate for longer)!
 
We've had two consumer surveys on inflation expectations reported over the past two trading days, and both jumped higher.
 
As we've discussed in the past, what the Fed fears more than inflation itself, is losing control of inflation expectations (consumer and business). 
 
When people lose confidence in the Fed to stabilize prices, behaviors change – and we can get one of two scenarios. 
 
Scenario 1:  Expectations of higher prices, can lead to consumer and business behaviors that lead to higher prices (pulling forward purchases, leading to higher inflation).
 
However, in the current case, a spike in inflation expectations was accompanied by a plunge in sentiment
 
With that, we can get the opposite outcome for behaviors, and prices …  
 
Scenario 2:  A plunge in sentiment, due to high prices can lead to a plunge in spending.  Things become unaffordable, and people stop spending.  High prices can cure high prices.
 
But that puts the economy at a significant risk of a downturn, and suddenly deflation can become the greater risk.
 
With all of this in mind, we had a similar dynamic in November of last year. 
 
The University of Michigan survey on the expectations for price changes over the next five years spiked to around 12-year highs (of 3.2%).  And sentiment was in a multi-month plunge.  
 
What did the Fed do?  Did they posture for more tightening?  
 
No.
 
They signaled the end of the tightening cycle.