Blain’s Morning Porridge Sept 3^rd 2024: Nvidia, the Peak of the 1960-2025 cycle. What next?

“We’re going to need a bigger boat…”

I just found my best reason to sell Nvidia, confirming we’re at the top of the market. What might come next? How about 20-years of rising inflation, rising rates and a global commodities super-cycle as nations scrabble to secure future strategic resources?

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Bill’s Pub to Club Swim:

Let me remind readers about Bill Blain’s Pub to Club Swim on September 14^th. Its a Charity Event in support of Wessex Heartbeat, the cardiac care charity.. I will be swimming 2.5 miles down the River Hamble as a thank you to the Medical Staff who care for cardiac patients and their families. You don’t have to anything except click the link – here – and make a donation.

Without Heartbeat, well, you would not be reading the Morning Porridge.

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Nvidia – the best reason yet to sell…

I came across a critical observation on Nividia from the excellent James Eagle yesterday: “A recent poll highlighted a considerable portion of NVIDIA employees, nearly 37 percent, reported having a net worth exceeding $20 million, a reflection of the company’s soaring stock prices. This financial boom is largely due to NVIDIA’s dominance in the AI and GPU markets, which has turned many of its employees into millionaires.” (James is an expert in illustrating market trends with powerful data visualisations – what we used to call graphs.)

Will you be investing in Nvidia when 37% of the workforce are already multi-millionaires? Having spent a career in finance, working with very successful people, and knowing my own inherent laziness and greed… If I was in that position – what would I be doing? (I would buy a really nice yacht and go sailing.) But, putting myself into the mindset of a Silicon Valley petit-ranker, I’d probably keep working, clipping the dividends, wondering how to spend them, making sure I kept being paid them, all the while thinking about how I could turn $20mm into $2bln.

But, it gets worse. Across the rest of the firm, nearly 40% of the Nvidia’s employees have a net worth between $1-20mm, leaving just 23% of the staff with any real daily financial pressure upon them.

Do you think that poor quarter of Nvidia peons are really going to bust their guts for guys who are already rich and highly motivated to protect their wealth and position? Do they think Nvidia will rise a further 700%? Will they be happy remaining exceedingly poor relative to their peers and bosses? Or is it more likely the enormous wealth in the office means the poorer, but still highly motivated staff, are going to figure their wealth chances will be better elsewhere?

Ah… the all-distorting effects of greed and wealth on human behaviours…

Markets are all about human behaviours. The markets are just a voting machine reflecting how the participants think. You want to influence the direction of markets – then change the way people think and are motivated. Fake news, social media, jealousy, FOMO, and making them feel poor, are among the many ways to influence and push the market’s buttons.

More broadly, I’m pretty sure Nvidia’s extraordinary market valuation represents the top of a cycle – something I’ve written a lot about recently. (See Economic Cycles and Thinking Outside the Sovereign Debt Box.)

• Some folk think lower interest rates, as promised by the Fed later this month, spell joy unlimited for markets. (I think it may still be a sell-the-fact moment.)
• Others are more pragmatic – that interest rate easing will be limited.
• I subscribe to the view we are in new era of normalised interest rates – 4-6 % being what I would call a normalised range. 5% is not high – it is normal.
• And many, including myself, believe a new long-term economic cycle could reverse the last 40 years of diminished inflationary pressures. (The last long-term cycle began in the 1960s with steadily increasing inflation till the 1980s, before the next 40 years of bull markets as inflation fell.)

What makes me fear a new rising inflation phase of the next cycle has started?

The consequences of low inflation and moderating interest rates proved critical in driving bull markets over the last 35 years, and particularly so since 2009 and the beginning of QE and ZIRP in the wake of the Global Financial Crisis of 2008. It led to all kinds of effects in relative risk pricing, distorted corporate decision making, and fuelled the long-term stock market bubble – that essentially remains unpopped. (More a cyst than a bubble?)

• One reason for the lower inflation trend was the expansion of global trade from the 1980s as the Cold War wound down. It saw emergence of open markers allowing cheaper goods from China and elsewhere to deflate the costs of everything – China effectively exported deflation around the globe.
• A second factor was improving and cheapening global supply chains as global tariffs were effectively negotiated away and trade deals favoured increasingly frictionless exchanges of goods and services.
• A third was the decline in the real cost and volatility of commodities – including oil. Raw materials got relatively cheaper as global trade expanded.

Today, the World Trade Organisation is effectively neutered. National leaders threaten tariffs with nary a blink. The UK chose Brexit over trade. Increasing trade friction will increasingly be felt in higher prices – inflation.

Meanwhile, not many folk rank a new commodities cycle high on their list of market criticalities. However, the pursuit of secure supplies of raw materials and energy has become increasingly critical – and has apparently been best understood in China.

Forget what you learnt about demand/supply economic equilibrium in markets at school. In times of rising tension and potential conflict, markets are not about demand… they are about securing the supply of scarce resources. If supply is threatened in a time of apparent economic threat, then the price will rise even if demand stays constant or even falls.

Take a look at global trade as tensions have risen. The energy shortages in the wake of the Ukraine invasion, the likelihood Europe will be stressed again this winter, the Chinese flexing their muscles in the South China Seas, and the ongoing potential for conflict in the Middle East as Iran continues to pour sand into the engine of global prosperity. Rising threats of conflict have reinforced the need for nations to reassess their strategic resource plans.

There has been a lot written recently about the potential vulnarability of Government Debt markets to bond vigilantes – that bond markets will reject govt bonds unless borrowing is reigned in, and deficit funding is swiftly addressed by cutting debt quantums. (I suspect that’s an overhyped argument – having spent 40 years in bonds you come to realise investors buy bonds because they have to, and it makes sense to buy – not necessarily because they want to.)

There are certainly pressures on my concept of the Virtuous Soveriegn Trinity – that a nation with a stable currency, a sustainable bond market and political competency will do well.

We are seeing cracks appear. The fact China has halved its US Treasury holdings over the past decade (due to changing global trade and the slow rise of the renminbi as a trading currency) highlights the risk that the US financing its budget deficit as a by-product of the dollarized global economy may not hold forever.  (That is why Trump embracing a US Strategic Bitcoin Reserve makes absolutely zero economic sense.. but, heck, it will get him crypto bros’ money.)

Another factor to be concerned around is politics – and the rise of populism around the theme of immigration and protecting jobs from foreign competition, which is fuelled by the increasingly wide income inequality between the haves and have-nots. Income inquality is a let them eat Greggs issue, right up to the moment something radical happens.

The themes for the final four months of 2024 are going to be about future direction:

• Where goes the stock market?
• Where will rates settle?
• What signals to watch for in terms of resurgent inflation?
• Watch politics.

Out of time and back to the day job..

Bill Blain

Author of the Morning Porridge, founder of Wind Shift Capital

www.morningporridge.com

www.windshift.capital

billblain@morningporridge.com

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