Blain’s Morning Porridge 5^th September, 2024: Nvidia is not the whole market – but it hints at ructions to come.

“One ping, Vasili, one ping only.” (Extra points if you say it out loud in accent.)

The market is under a glamour cast by Nvidia. It’s the most watched headline stock. In a perfect world, its position would mean there would be little to worry about, but US data and all the other market frictions are combining to challenge the market’s narrative – which is a long way of saying… THIS MARKET IS TOPPY.

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Bill’s Pub to Club Swim:

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

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Only a fool would be unconcerned by the current stock market gyrations – yet most of the market is watching one thing, and one thing only: the price of Nvidia, rather than just how sharply Treasuries have rallied in recent days. Remember – “Stocks are stories of hope and expectation, in bonds there is truth.” (Blain’s Market Mantra no 31)

Forget the weak PMI data, sliding job creation numbers, tomorrow’s US employment report, or even the excellent John Authers on Bloomberg warning the dis-inversion of the US yield curve means recession has arrived. None on these things apparently matter. It’s the daily bigger than a small country’s GDP moves up and down in Nvidia’s price over the summer that became the markets most hypnotic mind-wormed indicator: up $331 bln on July 31st (biggest company value increase on a single day) but down $279 bln on Tuesday (the biggest company value fall on a single day).

The received wisdom on Nvidia’s value is simple to understand: the biggest, richest, most stable corporations on the planet have ordered $-billions of chips from Nvidia, and the firm is reaping monopoly supplier returns from these orders – its garnered around 80% of the Chip-set orders for the new Date Centres the tech firms are spending $160 bln plus on this year. They will continue to garner monopoly returns till the new, new thing arrives – which they are determined to stay well ahead of with new more powerful and complex chip designs.

Yet, take a look at a chart of the daily up/down Nvidia price +/- ve moves. It looks just like the muzzle of a blunderbuss pointed at everything. (Which is exactly what Blunderbusses are designed to do..) Take it into the maths (yes, its maths, not math) department of a decent university, and everyone will tell you it looks exactly like the precursor of a “Chaotic Breakout” – which is when things could get really, really messy (in an up, down, flying around, looping the loop (technically impossible on a chart time-price plot), and crashing into the ground kind of way).

Conventional logic, (which is commonly hanged when markets get this fervid), would point to the weak ISM purchasing managers’ report, or the worrying scale of revisions in this year’s employment data – and tomorrow’s employment data – as indicating a worsening trend – the US economy is no longer heading for a soft landing, but weakening at speed, heading toward a bumpy landing at best. Which is why a large part of the market now expects a 50bp ease by the Fed on Sept 18^th – the more likely 25 bp ease will almost certainly now “disappoint” triggering exactly the “sell-the-fact” reaction I’ve been warning is most likely to happen when the Fed eases.

I asked some equity chums what the US data means for their market outlook, and seriously got one answer back that “Nvidia will look cheap in a slowing economy” as companies will be scrabbling to generate increased AI derived sales and upside – ie a downturn will further fuel AI. Believe what you want to believe. (I preferred a headline in the WSJ last night: “Investors are in a love-hate relationship with the stock market”. It summed up the current market: “it’s hard to allocate assets when everything has done great, yet nothing seems worth buying.”)

Surprising as it may seem, there are other things going on in markets away from Nvidia – like oil price weakness, energy concerns, and thousands of other investible companies in public and private markets, each with their own stories to tell as to their future value.

But, let’s stick with Nvidia a moment longer. There are differing views as to the glamour it weaves over the market. (Glamour as in the spells fairies weave on the big people (ourselves), rather than what Vogue purports to sell.) Everyone is focused on what they think Nvidia’s roller coast stock price ride is telling them, yet who can rationally explain it?

• Some talking heads talk about this just being the begining of the revolution, how real AI, thinking for itself, is just around the corner – they are long. (You have to ask why; if real general intelligence is about to progenerate itself…. why will we still need more machine learning chips? Surely god-like general AI would be a paradigm shift making chip makers obsolete? (That would just before it turns the world to grey-goo.))
• Others talk about the limits to how quickly machine learning AI can be innovated into the real economy – and they are generally short. (They are also probably wrong; when the internet suddenly emerged.. everyone wondered what it was for.. till they worked out what sold over it… spawning this new age of Amazon, search engine and social media marketing.)
• While analysts argue about the number of chips on a pin-head, or how Nvidia AI now dominates demand from Data Centres, putting all other chip makers in the shade, and how Data Centres are the indicator of the growth of everything – the reality is real money will likely be made supplying them with off-grid secure, sustainable power. (And, hey, I got an idea about that which is green and doable now..)
• Some think Nvidia is going up, and some mornings they are the loudest.
• Some think Nvidia is going down, and some days they are louder.

Whateva… Nvidia has become a proxy dominating markets. Its dragging down the Tech-heavy Nasdaq, its impacting attitudes to the S&P. And it’s going to hurt when the truth becomes apparent – which it seldom does. Fortunately, the truth can be avoided for a long, long, long, long, long…….(long +L1) time. Look at Tesla. Still selling us dull, boring, obsolete EVs and telling us its Jam tomorrow when they launch their Robotaxi the day after…

Meanwhile… what is going to happen in markets…?

Bear in mind Blain’s Market Mantra No 1: “The market has but one objective, to inflict the maximum amount of pain on the maximum number of participants”.  Er, that seems to be about now then? Rising stocks have done what rising stocks do – attract more greater fools into the market to invest their savings and pension plans. As that happens the smart money looks to exit. Prices keep rising – till suddenly they don’t…

The summer was one of the slowest I can recall – lots of talk, but very few investors actually pushing buy buttons. It felt like everyone was waiting for something to happen. That’s always a difficult time – whether to stay invested, hold or buy more. That leaves everyone nervous about illiquidity – the cost to exit. That’s one reason Government bonds are catching the bid.

My own guess – for guess it is – is there is a high risk of a significant market correction ahead. That is not necessarily a full-on crash warning – I don’t see the systemic weaknesses we had in 2008, but maybe I’m missing something blindingly obvious – like the degree to which highly levered Gilts trades (LDI) nearly sank the UK bond market 2 years ago. I have a feeling the 18th September is a significant date – Fed Day.

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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