Pro Perspectives 2/3/25

 

 

 

 

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February 03, 2025

As we discussed last week, with Trump's two top economic cabinet members through the Senate confirmation hearing process (Bessent now on the job, Lutnick to be confirmed in the coming days), the economic and geopolitical agenda is ramping up.
 
The tariff roll out has started.
 
While concessions from Mexico and Canada dominated the news today, surprisingly less attention was given to the blanket 10% tariff on China (or 10% addition to any existing tariff).  In addition to being broad-based, it closes a loophole that has allowed small shipments from China (less than $800) to avoid any applicable tariffs.
 
And as Trump said, this is the "opening salvo." 
 
The question is, will Trump be as receptive to concessions from China, as he has with Mexico and Canada?
 
Keep in mind, China is at the core of many of the geopolitical moves being made by Trump.  Mexico and Canada are targeted for allowing fentanyl, from China, to enter the U.S.  For Panama and Greenland, it's about national and economic security, keeping shipping lanes out of the hands of China. 
 
And perhaps a more explicit clue on what this is all about, after a visit from the U.S. Secretary of State today, Panama says it will exit China's Belt and Road project. 
 
This is about regaining U.S. influence over the world.
 
If we had any question about whether or not Trump would take a hard line on China in his second term, it seems that we're getting the answer.       
 
Dealing with China is priority number one.
 
China has staged a multi-decade economic war (driven by its currency manipulation).  And in the process they have extracted from the world, the largest pile of foreign currency reserves, which they have wielded to exert influence, and expand their economic warfare into hybrid warfare (economic, psychological, biological, information, political and cyber).
 
But the stakes have gotten even higher recently.  As we discovered last week, with the DeepSeek news, we are in an AI arms race with China. 
 
And as the Chief Technology Officer at Palantir said today (one of most important AI and defense companies in the world), "we are at war with China," and "the AI race is a winner takes all."
 
And it's a tight timeline. 
 

Pro Perspectives 1/30/25

 

 

 

 

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January 30, 2025

Trump's Treasury Secretary is on the job, as of Tuesday.  And his Commerce Secretary should be confirmed early next week.
 
With these two in place, the execution of the Trump economic agenda will begin, and so will the clean up of what was left by the last administration.  And that should present some headwinds for stocks.
 
The clean-up?
 
1) Funding the debt:  Remember, as Bessent predicted in an investor letter around this time last year, Janet Yellen did indeed spend the past year financing the record peacetime deficit spending with short-term maturities —trading short-term gain (in attempt at political gain) for medium and long-term economic pain — leaving the pain for Bessent to work through. 
 
That leaves Bessent with a third of the outstanding U.S. government debt to be rolled over this year.  And the bond market has already anticipated this supply coming, which has translated into the rising bond yields we've seen in recent months, which means higher cost of debt, larger deficit (and greater risk for a market event).
2) Ending the war:  In his Senate hearing, Bessent said the Biden administration's sanctions on Russian oil were too soft, and only ramped them (to "mid-level") as they were heading out the door (which spiked oil prices 9%).  He said he would be "100 percent on board for taking sanctions UP" on Russia, to bring them to the negotiating table. 
 
3) The Chips Act:  Lutnick said yesterday in his Senate hearing, that he needs to review it, to make sure we're getting the benefit. 
 
Among the areas to review:  Given that government grants have been awarded to foreign manufacturers, does it serve the goal of domestic manufacturing?  And "review it" likely means extracting all of the hoops in the agreements, that have made compliance and execution very difficult for the recipients (like voluminous DEI requirements). 
 
That's part of the clean-up. 
 
And as we know, core to executing on the economic agenda is tariffs, to incentivize the rebalancing of global trade. 
 
And the tariff roll out is coming.
 
With that, there is a misperception that Trump is overly concerned with measuring himself by the stock market.  Trump showed us in his first term that he will execute on the plan, even if it means swings in stocks.  
 
Had he not waded into the global imbalances issue in his first term, by taking on China in effort to rebalance global trade, Trump would have had a booming market and economy and probably a glide path to a second term. 
 
Instead, he took up the decades overdue fight against China in his second year that spanned through December of 2019, when both sides finally got to a "Phase 1" of a trade deal.  
 

Pro Perspectives 1/29/25

 

 

 

 

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January 29, 2025

No surprises from the Fed today.  Jerome Powell says they are "meaningfully restrictive" territory (i.e. still putting downward pressure on prices and the economy), but also says that they are in "no hurry" to remove that restriction. 
 
The bigger news on Fed policy came from Trump.  Shortly after the Fed press conference, he posted this …
 
 
Trump has made it clear that he wants lower rates.  And remember in his first term, he voiced his displeasure with Jay Powell's Fed for taking rates up from 25 basis points to 225 basis points, despite inflation running mostly below target throughout.
 
The Fed ended up reversing course in late 2019, forced by markets back into an easing cycle. 
 
Let's talk about earnings …
 
As we discussed yesterday, we heard earnings from three of the big data center builders after the market close today. 
 
Remember, the advanced AI model out of China (DeepSeek) was thought, by some, to have exposed the big hyperscalers as having over-invested in infrastructure capacity.
 
Would they signal any pullback on spending? 
 
The answer is no. 
 
Microsoft continues to project around $80 billion in capex this year, still well behind in fulfilling on a $300 billion backlog of orders.  And Meta sees $60-$65 billion in infrastructure spend to support scaling Meta AI to over a billion people this year.
 
As we discussed yesterday, one lesson from DeepSeek is that there will be more cheaply developed AI models, which will lead to more overall AI usage (requiring more global computing power). 
 
The other lesson is that dealing with China will become, maybe, priority number one of Trump 2.0.
 
On that note, Howard Lutnick had his Senate hearing today, on his nomination to become the Secretary of Commerce.
 
He said this about DeepSeek …
 
"I do not believe that DeepSeek was done all above board, that's nonsense.  They stole things, they broke-in, they've taken our IP.  It's got to end."
 
Lutnick's job will be all about China. 

Pro Perspectives 1/28/25

 

 

 

 

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January 28, 2025

We talked about the DeepSeek news yesterday.
 
As we discussed, there are plenty of reasons to doubt that a side project at a Chinese hedge fund will upend the AI leadership picture.
 
Today, David Sacks, venture capitalist and Trump's new AI and Crypto Czar suggested this Chinese fund may have reverse engineered OpenAi's most advanced (closed source) model. 
 
If so, they would not need to train the model from scratch (bypassing the most expensive part of building a large language model).  
 
What would the savings be, to reverse engineer the world's most valuable generative AI model? 
 
I asked ChatGPT.  Here's what it estimated …
 
Sounds about right.
 
Now, ChatGPT's knowledge training cutoff was June of last year.  So it, sadly, doesn't know the news. 
 
But this is how it perceived the implications of being reverse engineered.  
 
It says, "adversaries could 1) undercut OpenAi by offering the same or similar capabilities at a fraction of the price, 2) integrate the model into proprietary systems, making it difficult to detect theft, and 3) potentially improve the stolen model and deploy it for competitive advantage."  
 
Check, check and check.
 
And with this, among the best performers in the stock market today, were cybersecurity stocks.
 
What has changed, resulting from this DeepSeek model, based on the consensus view of the AI giants, is that this may have effectively/indirectly cracked open what has been a closed source model at OpenAi. 
 
And it has revealed the ability to improve (not create, but improve) on these models at a low cost, which the industry seems to be acknowledging will broaden AI adoption ("democratize" model development) and more AI consumption.
 
And with that, more AI models mean more inferencing. 
 
More inferencing means more data creation (by the models), which leads to … more inferencing. 
 
And it becomes self-reinforcing.
 
This is why some of the best performing stocks of the past two days, have been software companies that are delivering generative AI models to their customers, and will generate significant inferencing revenues.
 
Now, if we follow this self-reinforcing logic , the more abundant the data, the greater the demand for computing power for inferencing.
 
And with that, bigger picture, AI advancement will only be limited by computing and energy capacity (and probably regulation).
 
This counters the idea that the DeepSeek news exposed the hyperscalers as having overbuilt capacity. 
 
Tomorrow, after the market close, we get earnings from three of the big datacenter builders (META, MSFT and TSLA) and we'll see how they address their capex plans and the shift to inferencing opportunities.  
 

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.