Pro Perspectives 6/5/23

June 05, 2023

Over the past two weeks, we've focused on the game-changing earnings call from Nvidia, where the Founder/CEO of the world's leading player in AI compared the significance of the ChatGPT launch (in November of last year) to that of the iPhone, where all of the advancements in technology came together.
 
Jensen Huang founded Nvidia over thirty years ago.  Not only is he rare, in that he is a founding partner, and remains CEO, but he is the longest tenured CEO in the technology industry.
 
He calls Nvidia's technology, the world's engine for generative AI. This is the type of artificial intelligence that can create new content by learning from existing data.  And Nvidia has dominant market share in producing the discrete GPU technology that powers it.
 
So, with the "ChatGPT moment," there is a strong case to be made that Nvidia has become the most important company in the world.
 
Now, Huang has done a lot of media in recent months, along with a recent commencement speech at National Taiwan University. 
 
If we want to know what this AI revolution means and what the future looks like, there is no one better to tell us.  
 
Here are some things he's said that stand out to me…  
 
First, he compares generative AI to the advent of the PC, the internet, the cloud, and the mobile cloud (a computer in your pocket).  But he says "AI is far more fundamental … it's a rebirth of the computer industry and a golden opportunity."
 
He says it will democratize computing.  By that he means that AI will be everyone's "co-pilot," enabling everyone to build powerful computer applications using simple human language (not complicated computer programming language). 
 
As for corporate winners and losers:  When looking back on these previous tech revolutions, he says "it's very unlikely that the companies that were great before it (the revolution), are still great after it." 
 
Translation:  It will transform industries, and create new industries.  As with the iphone (mobile cloud), there will new and reinvented infrastructure players, new platforms and new ecosystems.
 
And it's all cost reducing (deflationary).  It's energy reducing ("green").  And it's productivity enhancing.  Huang highlights all of these benefits. 
 
For all of this to take place, Huang says over a trillion-dollars of the world's traditional computers will be replaced with new "accelerated AI computers" (moving from CPU to GPU).  This is the digital transformation.  It's underway, and it's early.    
 
Beyond that, he says the "next big reinvention" will be "when AI meets $100 trillion dollars of the world's industries."  When "AI meets the physical world." 
 
Nvidia's Omniverse software is built to power this.  Omniverse is to industry, what Facebook's Metaverse is to consumer. 
 
He ended a long interview a few months ago by saying he thought he would continue running Nvidia for three of four more decades, and that he would be a robot.  I'm not sure that he was joking. 

Pro Perspectives 6/02/23

June 02, 2023

We've talked about the very positive development for stocks over the past eight trading days.
 
It started with the game changing declaration from Nvidia, about the beginning of a "new era in technology."  We've since had the overhang of the debt ceiling drama removed.  And then the Fed followed up by telegraphing a pause on the rate cycle. 
 
With that, we finally get a breakout of this big 4200 area in the S&P.  The move in stocks is now (just in the past two days) becoming more broadbased. 
 
 
With that, as we head into the weekend, the S&P trades at a forward P/E of 18.  The average P/E in the post-GFC era (Global Financial Crisis) is 21.6. 
 
In the late 90s, the Fed Funds rate averaged 5.2% (between '95 and '99).  That's about where the Fed Funds rate stands now.  During that time (late 90s), the P/E averaged 25x.  Economic growth grew at a better than 4% annualized rate for the period.  Stocks averaged 28% a year. 

Pro Perspectives 6/01/23

 

 

 

 

 

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June 01, 2023

For the second consecutive day, we have a voting Fed member publicly making the case to "skip" any rate action in the June meeting (which is two weeks away). 
 
Clearly, they don't want to use the word "pause," as the algorithms are probably locked and loaded to buy stocks if that word hits the newswires from a Fed speaker.
 
That said they had more supportive data for a pause this morning, in the ISM report.  Remember, the Fed was concerned earlier in the year that inflation might be bouncing back.  But it should be very clear now (not just domestically but globally) that the path is lower.  You can see in the chart below, the steep drop in the "prices paid" component in the manufacturing data from May.    
 
   
With this language of the past two days, the market has quickly swung from a bet for another quarter point hike, to bet on a pause (about 80% chance).
 
We get the jobs numbers tomorrow.  The expectation is for a sub 200k payroll number, which would be the second weakest in the post-lockdown era.  Anything in-line or weaker would cement a pause, and should provide fuel for the remainer of the stock market, which hasn't enjoyed the same performance success as the big-tech-regime (thus far, ytd). 
 
   

Pro Perspectives 5/31/23

 

 

 

 

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May 31, 2023

Two voting Fed members spoke today, and both used the word "skip" related to the coming monetary policy meeting.  
 
This was deliberate, and it's big news!  
 
This comes after 10 consecutive rate hikes.  The effective Fed Funds rate is above 5%.  The Fed's favored inflation guage (core PCE) is below 5%.  As we've discussed, this is where, historically, the Fed has taken rates, to get inflation under control (i.e. above the rate of inflation). 
 
That said, the headline CPI numbers, as we've also discussed are on path to plunge, as the "base effect" will considerably change the year-over-year comparisons. 
 
We talked about it last month after the media worked themselves into a frenzy over the UK inflation number, which came in above 10%.  
 
But it was clear that the next inflation number would be measured against a significantly higher data point from twelve months prior.
 
And it was very likely, even if April inflation in the UK were to be relatively hot, that the year-over-year CPI would come down to the 8% area.  That's exactly what happened.
 
The same is happening around Europe.  The year-over-year measures are dropping.  Spain has dropped from 4.1% to 3.2%.  France has dropped from 6.9% to 6%.  Germany has dropped from 7.2% to 6.1%. 
 
And in the U.S., as we discussed earlier this month (here), because of the base effect, by June, prices will be measured against a higher base (of the year prior), and that should deliver us a year-over-year inflation number in the mid 3s (percent), if not in the high 2% area. 
 
This would support the Fed's "expectations setting" today.
 
So, this comes after the "Nvidia moment" of last week which may have marked the starting line of a major technological transformation era.  The debt deal drama should be behind us by tomorrow.  And suddenly the word "skip" should become a very powerful, positive catalyst for stocks. 
 
Notably, the movers on the day (after the Fed comments) were small caps, which have underperformed.  
 
 

Pro Perspectives 5/30/23

 

 

 

 

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May 30, 2023

Change is what reprices stocks.  And as we discussed last week, we've had significant change introduced into markets.
 
First it was the game-changing earnings call from Nvidia, where the Founder/CEO of the world's leading player in AI compared the significance of the ChatGPT launch (in November of last year) to that of the iPhone, where all of the advancements in technology came together.
 
And now we have what looks like a debt ceiling deal. 
 
What about the bank shock from March?  To what extent has that resulted in credit tightening? 
 
Here's the latest from the Fed.  There is barely a wiggle in the expansion of credit … 
 
 
With all of the above in mind, the market had been pricing in cuts by year end.  It was 100% probability, a month ago.  Now it's a coin flip.  But unless we have a shock event, at this stage, a cut seems to be overpriced/overestimated at a coin flip (i.e. my view, given the above, more likely to be no cuts).
 
We've talked about the boom in productivity growth that should accompany the transformative generative AI technology.  And productivity growth drives economic growth.  
 
With that, the S&P trades at a forward P/E of 18.  The average P/E in the post-GFC era (Global Financial Crisis) is 21.6.  In the late 90s, the Fed Funds rate averaged 5.2% (between '95 and '99).  That's about where the Fed Funds rate stands now.  During that time (late 90s), the P/E averaged 25x.  Economic growth grew at a better than 4% annualized rate for the period.  Stocks averaged 28% a year.  

Pro Perspectives 5/26/23

 

 

 

 

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May 26, 2023

In just a few days, the pendulum has swung from despair to building enthusiasm.
 
This morning, the May consumer sentiment survey was reported.  As you can see in this chart, it has been 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 is, indeed, reflecting despair. 
 
But there's good news:  We have new information entering the mix, just over the past few days. 
 
As we've discussed, the Nvidia earnings call on Wednesday, revealed a retooling of computing technology that's underway (and in early stages), and (related) transformative economic outcomes that are coming, via generative AI.   
 
Add to that, by early this morning, it was leaked that a deal was coming together on the debt ceiling.
 
With all of the above in mind, as we discussed yesterday, the markets were already giving signals of change.  
 
We end the week, with the interest rate market now pricing in a 71% chance of another rate hike next month.  A week ago, it was just 17%. 
 
And the probability of rate cuts coming by year-end are being priced-out, rapidly.
 
This rate outlook is not driven by a firm inflation number this morning.  This is incorporating the shifting view toward bright economic growth prospects.  And that view changed on Wednesday, with the Nvidia report. 
 
As I've said here in my daily notes, we need this following formula to grow out of, and inflate away, the debt burden:  a period of hot growth + stable (but higher than average) inflation + rising wages. 
 
On that note, the AI transformation should bring us a productivity boom.  And a productivity boom should bring about the above formula. 

Pro Perspectives 5/25/23
 
 

 

 

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May 25, 2023

Nvidia neared the $1 trillion market cap level today. 

As I said yesterday, the Q1 earnings report, the incredible growth guidance for the rest of the year, and the discussion on customer demand for “re-tooling” for the generative AI transformation was a big wake-up call. 

Maybe the most important thing said yesterday:  The founder and CEO of Nvidia, the leading provider of technology that powers AI, said “when the ‘ChatGPT moment‘ came (the November 30, 2022 launch) … it helped everybody crystallize how to transition from the technology of large language models to a product and service…”  

That (ChatGPT) was the defining “moment” for the industry.  We’re just six months in. 

Just as the world is pondering recession, if not depression (and deflationary bust), this earnings call (the “Nvidia moment”) might be the defining moment for the rest of us — the moment that resets the perspective on the next decade, for perhaps a boom period. 

The interest rate markets seem to be reorienting toward this.  The 10-year government bond yield has risen from 3.27% to 3.60% in just two weeks. 

Of course, the narrative surrounding that has been “debt default.”  But at the peak of the debt default frenzy, gold was on record highs.  It’s now 6% lower, and falling.  The dollar is rising.  The Nasdaq just made another new high for the year.  And the interest rate market has swung, over the course of one month, from pricing in an absolute certainty of rate cuts by year end, to about a coin flips chance – and, moreover, now pricing in the chance of another rate hike.

Remember, AI will drive productivity growth.  Productivity growth drives economic growth.  And it’s early.   
Pro Perspectives 5/24/23

 

 
 

 

 

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May 24, 2023

We talked about the “AI effect” on the stock market yesterday.  And with the booming stock performance in the tech giants this year, where AI powers are heavily concentrated, there were building expectations that the earnings report by Nvidia this afternoon might undershoot.

That was not the case.  In fact, it was the opposite.  This Nvidia report might be the big wake-up call on the massive technological transformation underway (and in just the early stages).

After the bell, Nvidia reported a huge earnings and revenue beat.  With an even bigger upgrade in guidance.

They grew revenues at 19% since last quarter (Q1). 

And they think they will grow revenues for Q2 by 33% —  driven by “a steep increase in demand” related to generative AI and large language models. 

Again, that’s quarter-over-quarter growth. 

A key question in the earnings call: Can they continue that kind of growth? 

The answer:  “We have visibility (on demand) that is probably extended out a few quarters … Yes.  We are expecting a substantial increase in second half compared to first half.”

And, importantly, they say they have secured “substantially higher supply for the second half of the year,” to meet surging demand.

For perspective:  Nvidia is the leader in producing graphic processing units (GPUs) which enable the move from “general purpose computing” (powered by CPUs) to “accelerated computing” (powered by GPUs).

On the earnings call, they say the world’s $1 trillion worth of global data center infrastructure is based on CPUs — and there is aggressive demand to “re-tool” (across industries) to accelerated computing.

Keep in mind, before today’s report, Nvidia was the seventh most valuable company in the world ($770 billion market cap).  With this explosion in growth, Nvidia may be challenging Microsoft and Apple as the biggest company in the world very soon (joining the multi-trillion dollar market cap club).

As I said yesterday …

Just as the 1920s were defined by innovation (the automobile and widespread access to electricity), we have the formula here for another “roaring 20s.”

 

Pro Perspectives 5/23/23

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May 23, 2023
 
Stocks put in a technical reversal signal today.  It happened first in the dollar-denominated Nikkei (which was up 20% on the year, at the highs overnight).  And then in the Nasdaq (up 24% ytd at the highs).  The S&P also finished with a bearish outside day.
 
Small caps were bucking the trend on the day, up 1.3%, but reversed in the afternoon to close down on the day. 
 
What's going on?  
 
The noise about the debt ceiling continues.  The speculation about a June pause by the Fed continues. 
 
But this looks more like profit taking on the artificial intelligence trade going into tomorrow's Nvidia earnings. 
 
Nvidia is considered to be the leading provider of technology that powers AI, including ChatGPT.  The stock has more than doubled since the beginning of the year, making it the sixth most valuable company in the world.  Seven of the top ten are involved in AI (which, by market cap, is about a third of the S&P 500).
 
I suspect the markets are hoping for an earnings miss tomorrow, from Nvidia, for the opportunity to buy it cheaper.
 
More on AI …  
 
I've been using it since it launched in November, ChatGPT, and more recently Google's AI.  
 
My view:  The automobile is to mobility, as AI is to productivity.
 
A productivity boom is coming, and it is well needed.
 
Productivity growth is the key to improving living standards.  As ChatGPT says, "sustained productivity growth of around 2% per year has historically been associated with positive economic outcomes and improvements in living standards." 
 
We averaged just 1% for the decade prior to the pandemic, and negative 0.7% since the fourth quarter of 2020.
 
Just as the 1920s were defined by innovation (the automobile and widespread access to electricity), we have the formula here for another "roaring 20s." 

Pro Perspectives 5/22/23

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May 22, 2023
 
Last week we looked at charts on Japanese and German stocks.  And we looked at the U.S. benchmark (S&P 500).  All continue to trade around technical breakout levels (you can revisit that Thursday note, here).
 
This is the Vanguard Total World ETF.  This too, after retracing to pre-covid levels, is at a similar inflection point.   
Interestingly, the chart on Chinese stocks looks like the inverse. 
As we know China is still recovering from the zero-covid policies (finally abandoned in December of last year).  But exports are well above pre-pandemic levels.  The economy is growing at near 5% (above estimates), which is fast relative to the rest of the world, but still in recession-like territory for China. And the PBOC is allowing the yuan to weaken, nearing the levels of the 2019 (trade war) lows — which is intentionally stimulative to exports. 
 
Add to the above, in the past two weeks, in a "reopening quarter" the big four tech constituents of this Chinese ETF (FXI) all beat earnings estimates.
 
Valuation:  The P/E of FXI is 11 (ttm).  The P/E of the S&P 500 is 21 (ttm).
 
All of this said, coming out of the Great Financial Crisis/ Great Recession, Wall Street told us the era of developed world dominance had come to an end, and that the future of investing was in China.  By 2010, it was obvious that China couldn't thrive while the Western world economies were suffering.
 
Here we are again, coming out of a global crisis, but this time Western world economies are dealing with booming, rather than busting, nominal growth. This should be a time for a booming bounce-back in Chinese growth — unless the Western world decides to push back on China's economic and geopolitical ascension (and related, power).
 
It may be the last chance. 
 
And based on the G7 leaders meeting that took place through this past weekend, it may be happening.
 
The G7 communique mentioned China 20 times.  That's the most since 2014 (when the communique expressed concerns about human rights, trade practices and military expansion).  This is the first time since 2019 (in the depth of the Trump trade war), that the G7 leaders said they would work toward "diversifying" supply chains, to reduce reliance on China.  They addressed Taiwan, human rights, China's ability to influence Russia, and the importance of "playing by international rules."
 
What did China think about this?  China's state-controlled media called the G7 meeting, an "anti-China workshop."
 
Now, keep in mind, China intentionally, and aggressively, ramped it's influence building in Western world economies over the past 15-year (post-GFC, particularly in Europe).  And with that, the approach on dealing with China has appeared influenced.  Mike Pompeo called China enemy number one.  In contrast, Biden has called China a "tough competitor."  This, as Xi has continued to explicitly state his goal of world domination.
 
So, with this G7 statement, maybe the G7 leaders are finally prepared to hold China to account on what they call "economic coercion" (a term, before this past weekend, which has never been used before in a G7 communique, related to China).   
 
And with that, maybe FXI (the Chinese stock ETF) is rightly  communicating the geopolitical risk (i.e. vulnerable to breaking down).