Pro Perspectives 5/22/24

 

 
 

 

 

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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.

 

  

 

 

Pro Perspectives 5/21/24

 

 
 

 

 

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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.”

 

Pro Perspectives 5/20/24

 

 

 

 

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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). 
 

 
 
 
  

Pro Perspectives 5/16/24

 

 

 

 

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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.
 
 

Pro Perspectives 5/15/24

 

 

 

 

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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.    
 

Pro Perspectives 5/14/24

 

 

 

 

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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." 
 

Pro Perspectives 5/13/24

 

 

 

 

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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.

Pro Perspectives 5/9/24

 

 

 

 

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May 09, 2024

We've talked about the bounce back in stocks, from what looks like a relatively shallow technical correction (7% in the S&P 500 index).

 
As we discussed, shallow corrections are a sign of strength in a bull market. 
 
What else has had a shallow correction?  
 
Gold. Silver. Copper. 
 
All are now moving back toward the highs.
 
The bull market is being fueled by the global easing cycle that's underway.  It started in Switzerland.  Sweden was yesterday.  And today the Bank of England signaled inflation getting to its 2% target this quarter, to be accompanied by a rate cut (June).
 
With an easing cycle tailwind, UK stocks are on record highs.  German stocks made new record highs today, fully recovering the April correction.  We should expect the same in U.S. stocks. 
 
And, again, that makes the laggard small caps the spot to find relative value.  The Russell 2000 (small caps) remains 15% off of the 2021 highs.
 

Pro Perspectives 5/8/24

 

 

 

 

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May 08, 2024

This morning, the Swedish central bank became the second major central bank (a G10 country) to cut rates.
The Swiss National Bank was the first to kick off the easing cycle in March.
 
And as we discussed yesterday, rate cuts are expected to come in June for both the Bank of England and the European Central Bank.
 
Keep in mind, the Fed has tighter policy, measured by the real interest rate (the main policy interest rate minus the inflation rate), than any of these four central banks.  They should be cutting. 
 
So, despite the mixed signals the Fed gives, we should expect more and sooner action from the Fed than the market has priced in.  We should expect the closely coordinated policies of the past fifteen years, by major central banks, to continue in this easing cycle.
 
Remember, the Bank of Japan played the critical role of global liquidity provider the past two years (the liquidity offset to the Western world's liquidity extraction/tightening policies). 
 
They made the first step toward exiting that role on March 19th. 
 
And probably no coincidence, two days later the Swiss National Bank started the easing cycle with a surprise rate cut (adding liquidity). 
 
With that in mind, the Fed has convinced markets that they can patiently sit with high real rates, until they manufacture their desired inflation rate.  The actions of their central bank counterparts tell a different story.  They don't have the luxury.  They are all a liquidity crunch away from returning to the business of QE. 
 

Pro Perspectives 5/7/24

 

 

 

 

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May 07, 2024

We talked yesterday about the bounce back in stocks, from what looks like a relatively shallow technical correction (7% in the S&P 500 index).
 
Shallow corrections are a sign of strength in a bull market.  And it's a bull market driven by durable tailwinds of a new industrial revolution AND the deployment of trillions of dollars in deficit spending.
 
We've also talked a lot about the outlook for an easing cycle for interest rates, which is another tailwind.
 
The posturing on "when" it will commence, continues this week with a lineup of Fed members making the media rounds.
 
But as we discussed in late March, if there were doubt on whether or not this easing cycle would materialize, the Swiss National Bank removed that doubt with its surprise rate cut in March. 
 
As we discussed in that March note, the major central banks of the world have coordinated closely throughout the crises of the past 15 years.  They all went to ultra-easy emergency level policies in response to the pandemic, and now all (exception Japan) have interest rates set ABOVE the rate of inflation (restrictive territory).
 
And we should them to all be cutting rates, in coordination, mostly to ensure that global liquidity doesn't become too tight, and (related) that their respective government bond yields (borrowing rates) don't run away (higher).
 
With that, the Bank of England meets this Thursday.  Both the Bank of England and the European Central Bank are telegraphing the beginning of rate cuts in June.  That's driving UK stocks back to new record highs.  German stocks are less than one percent away from new record highs. 
 
And we should expect the U.S. central bank and U.S. stocks to follow.
 
But what about "sticky" inflation in the U.S.? 
 
Check out this chart … 
 
 
We had a growth shock in money supply (the green line), from the 2020-2021 policy response to the pandemic.  That was the inflation catalyst.
 
And you can see the lagging effect on inflation (red and blue lines), as it peaked 16 months after the peak of money supply growth.  
 
We've since had the disinflationary effect (falling inflation) from the decline in money supply growth.
 
Not only has money supply growth declined, it has contracted for sixteen consecutive months.  Contracting money supply is historically deflationary.
 
If we apply the sixteen month lag of inflation to the trough in money supply growth, it would project much lower inflation data (maybe deflation) by August. 
 
If that's the case the Fed will be cutting sooner and aggressively.