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.

Stocks have shaken off trade barriers, disruptions in the public sector, geopolitical ultimatums, a threat to U.S. AI supremacy, and a reduction in market expectations for rate cuts.

The bond market has shaken off hotter inflation data, and growing evidence that significant amounts of the massive deficit spending of the past several years may have been economically unproductive because of waste, fraud and/or corruption (very publicly detailed by DOGE).

So, why has there been little-to-no pain in markets?

Is the market uncharacteristically seeing the big picture, and pricing it in?

That big picture:  Bringing the wrecking ball to DC, unshackling the private sector, embracing the asset side of the American balance sheet, rebalancing global trade, realigning the world to democratic values, and promoting American AI leadership.

It’s all a formula for a much faster growing, fiscally sound, and more prosperous economy.  Very good for markets.

All of that said, if Trump 2.0 did nothing more than stabilize what has been a very unstable world (which, importantly, includes restoring American global leadership), it would clear the way for the new industrial revolution to deliver a much faster growing, fiscally sound, and more prosperous economy.

This morning’s inflation report showed an uptick in prices in the month of January.

The monthly change in core CPI (excluding food and energy) was the hottest since April of 2023. 

As for headline CPI, the year-over-year change has been ticking higher every month since the Fed started its easing campaign back in September.

Does this mean the Fed made a mistake cutting rates? 

Is that why the market has taken the 10-year Treasury yield (the market-determined benchmark interest rate) 100 basis point(+) higher, while over the same period the Fed has taken the Fed Funds rate 100 basis points lower?

Unlikely.  This divergence has more to do with the health of the U.S. government bond market, than it does inflation picture.  

Keep in mind, the Fed still has the Fed Funds rate well ABOVE the rate of inflation (well over 100 basis points).  That “restrictive” stance continues to put downward pressure on the economy, and downward pressure on inflation.  So, the 100 basis points of rate cuts has merely reduced restriction. 

As for government bond yields, remember, as we’ve discussed coming into the year, the exiting Treasury Secretary (Yellen) has left the incoming Treasury Secretary (Bessent) with a third of the outstanding government debt to rollover this year, while saddled with planned budget deficit spending at record peacetime levels.

With that, let’s take a look at this chart below …

This chart dates back to 2011.  The blue bars represent the rolling 80-day change in the 10-year Treasury yield when that change exceeded 100 basis points.  

The bar on the far right (“recent”) is the most recent episode of this rare magnitude in the rate-of-change in bond yields.  And that bar denotes the sharp rise in the 10-year yield from this past September through January.  The rise started when the Fed made its first (50 bps) rate cut.  And it ended, topped out, just prior to the inflation report last month.

And as we discussed earlier this week, that top in yields came at 4.80%, an uncomfortable level for the Fed.  And with the 5% level in spitting distance (a vulnerable level for financial stability and fiscal sustainability), the tide was turned with just a slightly cooler core inflation number — but mostly from Fed officials overtly talking the interest rate market down.

With that, if we look at these other bars on the chart, we can see some commonalities with this recent episode.