Latest | Billionaire's Portfolio

June 12, 2023

As we discussed last month, nothing has had more influence on stocks over the past eighteen months than inflation, and the fears over a draconian Fed response to it.

With that, we get the May inflation report tomorrow.

What should we expect?

As we discussed last month, even if inflation runs at the average monthly rate we’ve seen in this post-pandemic hot/record inflation environment, the year-over-year headline inflation rate will have fallen off a cliff by next month.

It’s because of this …

As you can see, the June 2022 CPI steps significantly higher. That will come into play in next month’s report (of June prices). The year-over-year headline inflation calculation, against that higher base, should give us a number that will fall into the mid-3s (percent).

As for tomorrow’s report, it will still calculate against a lower base, but if the consensus view is right (expectation of a 0.2% m/m change in May prices), we may very well get a headline year-over-year inflation number tomorrow in the 3s (like 3.99%).

Keep in mind, a year ago, it was 9.1%.

Now, it may not feel like prices are rapidly cooling.

But remember, the massive monetary and fiscal response to the pandemic (plus the subsequent agenda spending binge) ramped the money supply by 40% in just two years. That was ten years worth of money supply growth (on an absolute basis), dumped onto the economy over just two years.

With that, the price of everything resets (higher).

What we don’t want to see, at this point, is the level of prices decline (i.e. deflation).

Deflation would kill growth, and leave us with trillions-of-dollars of fiscal bullets fired, with no growth to show for it (only the massive increase in debt, with no growth offset).

So, what matters is rate-of-change in prices. And that rate-of-change has slowed dramatically.

We now need a period of hot growth, rising wages (to repair the living standard damage), and stable (but higher than average) inflation (to inflate away debt). Growth solves a lot of problems.

Again, nothing has had more influence on stocks, over the past eighteen months, than inflation, and (related) the Fed.

For the reasons we discussed above, the Fed has given us the signal in the past two weeks, that they may “skip” at Wednesday’s meeting (i.e. end the series of rate hikes).

With all of the above in mind, stocks go into this inflation number and the Fed meeting, sitting on big technical trendlines …

Both the Nasdaq and the S&P broke-out of this bear market trend in Q1. This set up (given the catalysts ahead) looks very favorable, for some aggressive catch-up in the big blue chip stocks and small caps.

This bodes well for our Billionaire’s Portfolio, which is full of small-cap value.

Add to that, we have the (likely) removal of the monetary policy headwind, which should unlock growth in the economy. And that comes as a technological revolution is underway, and in the very early stages (generative AI).

If you haven’t joined us in my new AI-Innovation Portfolio, it’s a great time …. Find details here. I’ll be adding the first two stocks to the portfolio tomorrow.

Pro Perspectives 6/8/23

June 08, 2023

I try not to consume much financial media. Though I listened to some today, while traveling. I heard a lot flippant comparisons to 1999 – the late stages of the speculative internet-stock boom.

This view, of course, relates to the recent resurgence of the big tech stocks, including the leaders of the AI-revolution.

But as we've discussed, it's early innings. The guy that runs the technology that powers AI says, himself, that the realization of this revolution just happened six months ago (with the launch of ChatGPT).

And of course, the reference to 1999 has a lot to do with the fact that some of the professional investing community has been wrong-footed this year — positioned for a recession (likely the one we already had, in the first half of last year).

My view: This is indeed looking like the 90s analog. But it looks more like 1995. The beginning of the boom.

With that, we've looked at this period in my daily notes, particularly related to the Fed stance.

In 1994, the Fed went on an aggressive rate hiking campaign. They did 300 basis points in 12 months (raising into a recovering economy- worried about "sticky" and "persisting" inflation). Then they paused. Within five months they were cutting rates.

Following the Fed's pivot in '95, the economy went on to average 4.5% quarterly annualized growth through the end of the 90s. And stocks did this ...

PS: If you know someone that might like to receive my daily notes, they can sign up by clicking below …

Pro Perspectives 6/7/23

June 07, 2023

We looked at this chart early last week …

The big-tech driven Nasdaq was outpeforming the broader small cap market by more than thirty percentage points on the year.

That gap is closing aggressively, helped by the nearly four percentage points of outperformance today, by the Russell 2000.

What's going on?

We've had a market that has been positioned for a hard landing, bearish outcome. And yet, the overhang of risks have been removed one by one.

>Debt limit decisions are now, not only pushed out to 2025, but the Treasury now has license to issue unlimited debt between now and then (a greenlight, if given an excuse).

>By next month, we should be seeing a headline inflation number in the mid 3s (percent), thanks to the "base effect." And that has the Fed chattering about a "skip" in the rate hiking campaign (otherwise known as "pausing," more likely ending).

>The bank shock has proven to be just that: a shock, not a crisis.

That said, there was news yesterday that the Fed may be looking to hike bank reserve requirements by 20%. The last time I checked (still here), they took the reserve requirement to zero, during covid, and haven't changed it since. That gave banks a license to make unlimited loans. While twenty percent of zero is still zero, perhaps its a signal that the Fed is cleaning up some bank risk.

So, with risks being removed, the investors that have been positioned on the wrong side this year (which includes underinvested in equities), seem to be buying the market laggards.

PS: If you know someone that might like to receive my daily notes, they can sign up by clicking below …

Pro Perspectives 6/6/23

June 06, 2023

Yesterday we talked about Nvidia Founder/CEO's view of AI, and the future it will power (you can see that note again here).

We left off on his view of the "next big reinvention," where "the digital world meets the physical world."

Huang says it's Omniverse technology will power it, and will reshape $100 trillion worth of global industry.

How far off might this "next big reinvention" be?

Apple announced a new "augmented reality" device yesterday.

Here's how they describe the product: "Apple Vision Pro seamlessly blends digital content with your physical space."

Sounds familiar. What's most interesting about this new technology era, is that it's made for building faster and cheaper.

With that, the speed of change, in this "industrial revolution" could be unlike those of the past.

Among the many questions: Who will be the winners and losers? Who will be the AOL (the left behind)? Who will be the Amazon (become more relevant, as they leverage technological advancements)?

And will it all, ultimately, be executed in a way that changes the way we live for the better?

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.