Going into Nvidia earnings, we talked about the set up for a negative reaction for stocks.

It looks like we’re getting it — and maybe a correction in what has been a very hot run for the stocks of the companies leading the AI revolution.

With that, we end the day with the (tech heavy) S&P 500 sitting on this very significant trendline.

This trendline originates from October 2023, when the Fed signaled the end of the tightening cycle. And they did so because the bond market forced their hand.  The 10-year yield was sitting at 5%, which was the danger zone for financial stability — and stocks were in an 11% correction.

The Fed flinched. Yields fell. Stocks rallied.

Nvidia reports on Wednesday.

We head into this report with some perceived gaps having been exposed in the Nvidia armor in the past month.

The “DeepSeek moment” revealed that the large language models can be improved upon, advancing the capabilities of generative AI, without requiring more computing capacity.  So, maybe AI leadership isn’t determined by who gets access to the most Nvidia GPUs?

If that were the case, the hyperscalers (Amazon, Meta, Google, Tesla, Apple) would have flinched.

We heard from them all earlier this month.

They didn’t flinch.

Instead, they are all pressing the accelerator.  If we combine the planned capex spending for 2025, guided by Microsoft, Meta, Google, Tesla, Apple and Amazon — it’s over $300 billion.  It’s huge growth in spend from 2024 — about $100 billion more.

But as we’ve discussed for many quarters now, it’s not a demand issue for Nvidia, it’s a supply issue.

And the clues have been in the Nvidia datacenter revenue growth.  It’s a $4 billion drumbeat.

You can see it here (quarter-to-quarter change within the green box) …

If they maintain the $4 billion quarterly growth through 2025, and deliver everything to the American hyperscalers they still fall short of demand by $100 billion. 

And stable new revenue dollars every quarter means the growth rate trajectory for Nvidia is down. 

At $4 billion a quarter, the  year-over-year growth rate falls to under 50% by the second half of 2025. 

Now, a little less than 50% growth is still a big number, but the market has already begun to reconsider the valuation.

As you can see in this next chart, the stock put in a top after Q3 earnings last November.  The largest company in the world then proceeded to whipsaw in an 8% range that day (a $300 billion valuation swing).

And then a new top was just barely printed early last month after Jensen’s keynote at the CES conference in Las Vegas.  And then we had this gap lower on the DeepSeek news.  The gap has since filled, heading into Wednesday’s earnings. 

Assuming neither Nvidia nor Taiwan Semiconductor has identified new manufacturing capacity, this chart looks likely to resolve in the direction of this January gap, lower.

That said, the AI revolution is real and well intact. And a correction in the AI-theme would be a welcome buying opportunity. 

Yesterday we talked about the move in the price of gold.  It trades around record highs, and is now closing in on $3,000 an ounce.

And we looked back at the bursts higher in the price of gold over the past five years, and the catalysts — which, in all cases, were inflationary policies, from fiscal profligacy.

And as we discussed, this most recent run-up in gold fits the bill — aligning with the January 1st reinstatement of the debt ceiling, a debt ceiling that was shockingly suspended (conveniently through the end of Biden’s term) in a deal made in May of 2023, which led to an explosion of new debt issuance.

So, this brings us back to the discussion we’ve had over the past few months about how the Biden Treasury has left the Trump Treasury with record debt, record debt service, a record peacetime budget deficit, and a third of the debt to refinance in year one of the Trump administration — and with bond yields already at vulnerable levels, with a bond market anticipating an onslaught of supply coming.

It’s all a formula for rising bond yields, which means rising debt service, which means a larger budget deficit, which means an even larger debt load.

And this self-reinforcing cycle (doom loop), left to market forces, has a path: debt downgrades (which we had in 2011), which would drive the cost of debt higher, which would accelerate the cycle (higher deficits, higher debt).

And the three Ds would be the natural progression:  Default, (currency) devaluation, depression.

With all of this said, the sovereign debt doom loop is global.

And the U.S. still has powerful relative strengths, and has plenty of (relative) appeal for global capital.

The most important strength is the world reserve currency status of the dollar.  Having the reserve currency has historically dampened the penalties for fiscal profligacy.

While it clearly can lead to bad behavior, maintaining the dollar’s dominance is paramount.  It provides flexibility in working through problems, such as the ones we have now.

As we’ve discussed through the years, the agreement to trade global oil in U.S. dollars (i.e. “petrodollars”) has been the cornerstone of the dollar’s role as the “world’s reserve currency,” since the end of the gold standard.  And the world reserve currency status has been key in building and sustaining the United States’ position as the economic superpower.

So, the explicit anti-oil policies of the Biden agenda (and global “climate” agenda) were a self-determined path to the loss of reserve currency status of the dollar, and therefore a self-determined destruction of wealth and sovereignty of the United States.

Conversely, Trump made it clear on the campaign trail that he put the highest priority on preserving the dollar’s reserve currency status.  He said, “if you want to go to third world status, lose your reserve currency.”

And Scott Bessent, his Treasury Secretary, made it clear, right up front, in his opening remarks of his Senate confirmation hearing that it’s critical that the dollar remains the world’s reserve currency.  And when recently prodded for an official statement on the dollar he said “there is no alternative to the dollar.”

All good news.

So, aside from embracing oil again and restoring global confidence in America’s economy and global leadership position, what move can the Trump administration make to shore up the dollar’s dominance AND, very importantly, create a new source of very deep demand for Treasuries?

Regulated dollar-based stablecoins (not a central bank digital dollar, but private stablecoins).

So, dollar-denominated cryptocurrency, pegged to the dollar, backed by Treasuries or cash, and with a regulatory framework determined by Congress (with a bank deposit-like safety profile).

This would solve a lot of problems.