Pro Perspectives 1/27/25

 

 

 

 

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January 27, 2025

Let's talk about this DeepSeek news …
 
Last Monday, as the U.S. was preparing to inaugurate a new President, one that will threaten China's economic model, a Chinese "hedge fund" posted this …
 
 
This fund claimed to have developed, as a side business, a large language model that performs "on par" with OpenAI's most advanced AI model (ChatGPT o1). 
 
And they claimed to have trained it for less than 5% of the cost of the world's frontier models — and on just a few thousand old Nvidia GPUs.  And they claim these models can perform inferencing (reasoning) with significantly less computing power than the other leading models.
 
This looks like a challenge to the American tech boom (either authentically or intentionally), the technology leadership of Nvidia (the world's most important company) and the hundreds of billions of dollars in data center investments from the "hyperscalers" (Google, Microsoft, Meta, Oracle, Amazon).  
 
Still, as this was all circulating last week, Oracle, Meta and Microsoft all publicly doubled down on massive data center spending plans for the year. 
 
By Friday afternoon, Nvidia put in a key technical reversal signal, an outside day.  
This technical phenomenon (outside day) is a good predictor of turning points in markets, especially after long, sustained trends.  
 
We also had an outside day in the Nasdaq on Friday — into record highs.  
 
 
And of course, we had big declines in both to open the week.
 
So, does this new Chinese model upend the AI leadership picture?
 
What's verifiable at this point is the performance of the model.  What's not verifiable is the model development cost and the inferencing efficiencies (i.e. the claim of less computing power requirements for inferencing).
 
That said, the trust level on such a discovery coming out of China should be low, until proven otherwise.  And we should consider the motives, given the potential this model announcement has to disrupt the American financial markets and the economy, just as Trump is entering office with plans to impose tariffs and other demands on the Chinese. 

Pro Perspectives 1/23/25

 

 

 

 

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January 23, 2025

Five years ago, Trump delivered a speech at the World Economic Forum (WEF) in Davos (here), where he reported on his "Great American Comeback" that was delivering "an economic boom, the likes of which the world has never seen before."
 
He encouraged the corporate and government leaders in the room to "reject the perennial prophets of doom and their predictions of the apocalypse" … and follow the American model as an example of "a working system of free enterprise that will produce the most benefits for the most people in the 21st century and beyond."
 
This was clearly a rejection of the multi-trillion dollar globally coordinated climate agenda that was cultivated out of the World Economic Forum. 
 
Thus, solving the Trump problem became priority, above all else. 
 
It dominated the Davos meetings back in 2020.  They didn’t hide it.  It was all about Trump (anti-Trump).  Not the global economy. Not even climate change.  
 
Today, Trump improbably returned to the World Economic Forum (virtually), to detail the damage done from the globally coordinated climate agenda, and declare the beginning of "the Golden Age of America" and a "revolution of common sense."
 
He detailed his plan (already well in motion) to rapidly execute the America first agenda. 
 
This time, the tone in Davos was said to be one of optimism! 
 
Why?
 
Perhaps the "populist" political shakeup is just getting started, globally. 
 
Or, it's fair to say that the financial rewards for global corporate leaders (and government leaders) from the prospects of a complete overhaul/transformation of global energy was an enticing carrot, over the past decade, to recruit support for the global climate agenda.
 
But now, just considering financial motivations only, the Trump agenda is offering the potential for global stability in a time of chaos, and a focus on aggressively facilitating the AI-driven technology revolution, which could result in a doubling of global energy demand (which will require all sources of energy, including renewables).
 
The financial opportunity is as big, if not bigger.    
 
Not too surprisingly, the bankers, investors and techies in the (WEF) room are suddenly receptive to Trump 2.0.
 
For my Billionaire's Portfolio members, please keep an eye out for a note from me tomorrow.  We will be making a new addition to the portfolio.  If you're not a member, you can join us here. 
 

Pro Perspectives 1/22/25

 

 

 

 

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January 22, 2025

Following the announcement yesterday of the AI infrastructure investment (promise) by Softbank, Trump did some Q&A with the press, and said tariffs could come as early as February 1.
 
It's unlikely to happen before Howard Lutnick (his Secretary of Commerce nominee) is confirmed.  And it looks like Lutnick's hearing will be next Wednesday.
 
And Scott Bessent, Treasury Secretary nominee, is expected to be confirmed next week.
 
In his Senate hearing, Bessent said he was "100 percent on board for taking sanctions UP" on Russia, to bring them to the negotiating table. 
 
And with that, Trump lobbed this threat today …
 
 
So, given the confirmation timelines for Lutnick and Bessent, it looks like the first half of February will be less friendly for markets.  
 
For oil, the Biden administration on the way out of the door ramped sanctions described to be "the most significant yet" on Russia's energy sector, and oil prices spiked 9% in four days. 

Pro Perspectives 1/21/25

 

 

 

 

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January 21, 2025

On inauguration day eight years ago, the Washington Post published a story at noon (as Trump was being sworn in) with the headline, The campaign to impeach President Trump has begun.
 
Much of the next three years was under the cloud of impeachment threats. 
 
The actual impeachment vote in the House didn't come until December 19, 2019, which was just six days after the Trump administration's successful execution of the "Phase 1" trade agreement with China (which, by design, existentially threatened China's ability to manipulate global economic advantage).   
 
The Senate impeachment trial started a month later, and ended on February 5th (2020) in acquittal.  And then a month later, a global pandemic was declared, originating from China. 
 
Despite all of this, and a multi-year trade war, the three years of Trump 1.0, prior to covid, resulted in an economy that grew at an average of 2.7% annualized (the best three-year average growth since 2007), with an average of just 1.7% inflation (PCE).
 
Fast forward to today, and the second Trump term is now underway.
 
Good news:  No impeachments, so far. 
 
That said, a key part of the agenda includes cleaning house of the entrenched bureaucratic resistance.  If successful, that should minimize the obstruction against executing the Trump agenda.
 
And that agenda is pro-growth, pro-business and pro-national interests.  That puts America in sharp contrast to the rest of the world, which is fresh incentive for global capital to flow into the American economy (good for the dollar, good for Treasury demand and good for stocks).
 
We're already seeing it today, with Japanese investor Masa Son visiting the White House to announce a deal to invest as much as $500 billion on AI infrastructure in the U.S.
 
Remember, as we discussed last month, global policy making has been intentionally synchronized in the post-pandemic era (even much of the post-Global Financial Crisis era).
 
But that synchronization has broken, with the populist political shakeup in the U.S.
On that note, we looked at this chart of business optimism last month (U.S. relative to Europe). 
 
 
What's reflected in this chart above? 
 
The U.S. is now pursuing cheap and abundant energy, scrapping stifling regulations and cutting taxes.  Europe is doing the opposite.
 
But it's not reflected in this next chart … yet. 
 
 
Both U.S. and German stocks sit on record highs. 
 

Pro Perspectives 1/16/25

 

 

 

 

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January 16, 2025

We heard from Scott Bessent today, the next Treasury Secretary.

Right up front, in his opening remarks of his Senate confirmation hearing, Bessent addressed the dollar. 
 
He said, "critically, we must ensure that the dollar remains the world's reserve currency."
 
And with that, he rejected the need for a central bank digital currency.  
 
He called on Congress to make the Trump tax cuts permanent, and to communicate it to markets, which he thinks would unleash animal spirits and "a new golden age" for the economy.
 
How did markets react to the incoming Treasury Secretary's three-hour long Senate hearing?  Surprisingly, minimally.
 
That's because Bessent was upstaged by some dovish Fed comments that hit the wires in the half hour prior to the start of the confirmation hearing.
 
As we discussed yesterday, a couple of Fed officials over the past two weeks have attempted to temper market perceptions that inflation pressures are building again, perceptions largely driven by views on the Trump agenda.
 
Just a few days ago the market was pricing in just one quarter point rate cut for 2025, while the most recent Fed Summary of Economic Projections (from the December meeting) was looking for two quarter point cuts this year.
 
How worried is the Fed about the market's mis-aligned view? 
 
Well, today they (the Fed) marched Fed governor Waller out in front of a camera on CNBC to tell us that "three or four cuts could be possible this year," if the data cooperates.  And that, he "could certainly see rate cuts happening sooner than the markets are pricing in."
 
This is likely a response to this chart …
 
 
 

Pro Perspectives 1/15/25

 

 
 

 

 

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January 15, 2025

The big banks kicked off Q4 earnings season this morning.

As we discussed yesterday, this is expected to be the highest earnings growth quarter for the S&P 500 in three years, at 12% year-over-year (yoy) earnings growth.

If the banks are any indication, it’s going to be another quarter of big positive earnings surprises.  From this morning’s reports, the average earnings growth for JPM, Wells Fargo and Citi was 48%.

The banks have been putting up big tech-like growth numbers, but trading at an average valuation of less than half the market forward P/E.  And between the three (JPM, WFC and C), they have over $60 billion in loan loss reserves that they can turn into earnings at their discretion.

And the tailwinds of M&A, IPO activity and deregulation are coming.

Does this indicate a resurgence of inflationary pressures?

Two vocal Fed voters (Waller and Goolsbee) have been countering this narrative over the past two weeks.

They’ve been reminding markets that the “base effects” in PCE and lagging features within CPI are propping up the year-over-year inflation data.

What does that mean?

The headline CPI number ticked UP to 2.9% in this morning’s report.

Waller (Fed governor) has made an attempt to cool the perception of an inflation resurgence by pointing to the lagging features in the data.

Here’s what he’s talking about:  Of that 290 basis points of year-over-year increase in prices (CPI) in December, 163 basis points of it was auto insurance and rent (Owners’ Equivalent Rent – OER).

It’s heavily influencing CPI.

In the case of OER (which is nearly a third of CPI), it’s old data – not reflecting the current rent climate.  As you can see below, the national median asking rents (from rent.com) have been mostly declining for more than a year.

On “base effects,” Austan Goolsbee, the Chicago Fed President (and voter on monetary policy this year) has been emphasizing the more recent PCE trend — the annulaized monthly PCE of the past six months, which is running right around the Fed’s 2% target.

 

Pro Perspectives 1/14/25

 

 

 

 

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January 14, 2025

We had the second post-election small business optimism report this morning.  And as we suspected back in November, a repeat of the Trump effect is back for small business.
 
Optimism surged again in December, to a six-year high …
 
 
This surge of the past two months was after spending 34 consecutive months UNDER the 50-year average.
 
And as you can see in this next chart, small business earnings is coming off of the lowest levels since the Great Financial Crisis. 
 
 
So, the past four years have been good for Wall Street, but haven't been good for small business. 
 
But notably, the highest point on this small business earnings chart was delivered by the first Trump administration.  And this recent survey says small business owners expect better growth, lower inflation and better business conditions under Trump (2.0), but they expect it to be "a bumpy ride."    
 
We get CPI tomorrow, and we hear from three of the four big banks on Q4 earnings.
 
This will kick off what is expected to be the highest earnings growth quarter in three years. 
 
So, there will be a lot for markets to digest tomorrow.  In the case of a hot inflation number and hot earnings, we should expect the trajectory of this chart to be most important.  
 
 
We've talked about this 5% level for the 10-year yield (likely the danger zone for financial stability and fiscal sustainability).  This is where the Fed flipped the script in October of 2023, and signaled the end of the tightening cycle, suggesting that the bond market had done the tightening for them. 
 
That said, look where inflation expectations were at that time, relative to now …
 
 
As we discussed yesterday, if bond yields test the 5% level again, we should expect the Fed to quickly swing the pendulum to unanimously dovish, and be vocal about it, in order to talk bond yields down. 

Pro Perspectives 1/13/25

 

 

 

 

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January 13, 2025

We've talked about the bond market as a shock risk that could quickly get to a flashpoint. 
 
With that, the strong jobs number this past Friday has extended the surge in the U.S. 10-year yield to as high as 4.80%.  That's the highest level since November of 2023 (more than a year ago).
 
And as we've discussed, this rise in bond yields (which has diverged from the direction of Fed policy) has put pressure on stocks.  
 
Let's take a look at a couple of charts …
 
 
Above is a look at the interest-rate-sensitive small caps index. 
 
The trendline represents the bull cycle for small caps that started in October of 2023, when Jerome Powell signaled the end of the tightening cycle.
 
If we look at the Russell compared to the less rate sensitive Nasdaq (below), we can see these divergences along the way. 
 
In this first circle, the divergence closed with the Russell falling (the orange line), as the Fed started curbing what were very aggressive rate cut expectations priced into markets.   
 
 
In the second circle, the divergence gap was closed with a sharp rise in the Russell.  And it was triggered by inflation data that showed the first monthly price decline since May of 2020. 
 
And now, in this third circle, we have another divergence between the Russell and Nasdaq, with small caps now in a 12% correction.  And this comes as we enter another big inflation data point to be reported on Wednesday (the December CPI report).  
 
With that, we go into this inflation report with the market already leaning in the direction of a more hawkish rate path for the year than the Fed has projected (which has weighed on small caps). 
 
The market is now pricing in just one quarter point rate cut for 2025, while the most recent Fed Summary of Economic Projections (from the December meeting) is looking for two quarter point cuts this year.
 
So, what are CPI expectations?  Pretty hot. 
 
Reuters has the monthly headline inflation change expected at 0.3%.  The Wall Street Journal's consensus Wall Street view is higher at 0.38%.  
 
A positive surprise (i.e. a touch softer inflation) would relieve some pressure in the bond market, and fuel a bounce in small caps. 
 
A hot number would push yields toward 5% (and stocks a lower) …
 
 
If so, we should expect a 5% yield on the 10-year Treasury to be the "uncle point" for the Fed, again. 
 
We should expect a similar response to what we saw in October of 2023:  A Fed that will quickly swing the pendulum to unanimously dovish, and be vocal about it, in order to talk bond yields down. 
 

Pro Perspectives 1/8/24

 

 

 

 

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January 08, 2025

We've talked about the divergence in the interest rate market, between the direction of the benchmark interest rate that the Fed sets (the Fed Funds rate), and the benchmark interest rate that's determined by the market (i.e. the U.S. 10-year Treasury yield).
 
The Fed has cut the Fed Funds rate by 100 basis points since September, and yet the U.S. 10-year Treasury yield has gone UP by over 100 basis points.
 
And as we've discussed, we have this breakout in yields.  If this continues to extend, the probability of a financial shock event rises.  
 
 
This move in the 10s has been attributed to inflationary policies of the incoming Trump administration. 
 
The minutes from the December Fed meeting were released today, and revealed that Fed officials did indeed adjust their inflation outlook based on their view of Trump policies — and they also cited concerns that upward pressure on inflation could come from continued "positive sentiment in financial markets and momentum in economic activity."
 
If this is the driver of the activity in the U.S. bond market, then we shouldn't see a similar dynamic unfolding in European bonds, where there is no economic momentum, and where Trump trade policies would be disinflationary, if not deflationary.
 
If we look at Germany, the historic growth engine of Europe, the economy has five years of no growth, which is expected to continue in 2025.  The European Central Bank has cut rates by 100 basis points since June, and yet the German 10 year yield is also breaking out (i.e. higher) …
 
 
The UK economy is flatlining.  The Bank of England has cut rates 50 basis points since August, and yet the yield on the 10-year gilt is breaking out (i.e. higher) — now trading at the highest level since 2008. 
 
 
A couple of things to keep in mind:  1) The government debt burden (as percent of GDP) in the UK has more than doubled since 2008, amplifying the debt service burden … and 2) just a little more than two years ago, the Bank of England had to intervene in the bond market at these levels to avert a financial meltdown that would have spilled over globally. 
 

Pro Perspectives 1/7/24

 

 

 

 

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January 07, 2025

Jensen Huang gave the keynote to kick off the Consumer Electronics Show (CES) in Las Vegas last night.
 
Let's talk about what the guy that runs the most important company in the world had to say about the future.
 
He laid out the waves of AI in this graphic below. 
 
 
It started with the "ChatGPT moment" just a little more than two years ago.  This was the introduction of generative AI, and it set into motion the race to "retool" the world's data centers to accelerated computing.
 
The big hyperscalers have already spent a couple hundred billion dollars, and might only be one-fifth of the way there.
 
The next wave is "agentic AI."  This is the digital workforce.  It's already happening — autonomous agents performing tasks and operating independently of direct human control. 
 
Jensen sees agentic AI as a multi-trillion dollar industry.   
 
And this leads into the theme of 2025, which is physical AI. 
 
This is AI systems integrating with the physical world.  And Jensen has said in the past that physical AI will reshape $100 trillion worth of global industry.
 
So, this is the big takeaway from the presentation.  It's about robotics. 
 
And Jensen says "the 'ChatGPT moment' for general robotics is just around the corner." 
 
He says over the next several years, the combination of agentic AI robots, autonomous cars and humanoid robots will become "the largest technology industry the world has ever seen."
 
Remember, Elon Musk thinks with the introduction of humanoid robots into the world, there will be "no meaningful limit to the size of the economy."
 
This all makes incremental surprises in daily economic data, the uptick in global bond yields, and parsing Fed communications on the next quarter point rate cut, seem relatively unimportant. 
 
But just as the technology revolution of the late 90s, driven by internet adoption, drove a stock market and economic boom, there were shocks along the way (like the Asian Currency Crisis, Russian Default and the related failure of the hedge fund Long-Term Capital Management).
 
And with that, we have plenty of shock risks that warrant respect. 
 
Among them, the one that could quickly get to a flashpoint is the bond market.  
 
Remember, we looked at this chart in my Dec. 23 note (here).
 
 
As we discussed in that note, the big downtrend in the U.S. 10-year Treasury yield has broken.  Yields have now moved 110 basis points higher, despite the Fed taking the Fed Funds rate 100 basis points lower.
 
And remember, the current Treasury Secretary, Janet Yellen, has left the bond market in a vulnerable position, by financing record peacetime deficit spending with short-term maturities.
 
That leaves incoming Treasury Secretary, Scott Bessent, with a third of the outstanding government debt to be rolled over this year, creating risks for rate volatility (a bond market attack) and “the potential for a financial accident.”