Nvidia sets the tone while the US looks a better bet than Yoorp!

Blain’s Morning Porridge Aug 24 2023: Nvidia sets the tone while the US looks a better bet than Yoorp!

“Yes, sir, I know, sir, and they’re useless, sir. They teach facts, not understanding. It’s like teaching people about forests by showing them a saw.”

Nvidia confirms the AI everything bubble! FOMO means everyone will play catch up! There is a growing divergence likely as inflation, growth and interest rates spells deep trouble for Europe and the ECB, while the USA recovers and the UK muddles through.

First up this morning – something to smile about:

Much to my delight I have been appointed Honorary Professor in The School of Social Science at Heriot-Watt University in Edinburgh. One of the most satisfying things I do is working with the excellent Dr Edward Jones of the Edinburgh Business School on the Current Topics in Investment Management course, lecturing post graduate students in aspects of market moving economic theory – for instance my concept of the Virtuous Sovereign Trinity of a stable currency, a sustainable bond market and competent politics as the basis for a successful economy – market theory and how markets actually work in practice. The Porridge has apparently become core daily reading on the campus!
It makes me incredibly proud to have received this great honour from the University where I studied Economics 4 decades ago. My name is also up on the wall of the Student Union after playing student politics.
I will never forget lecture theatre 101 on my very first day to hear the distinguished Professor Keith Lumsden begin my elucidation into the dark arts by describing economics as: “The study of horror comics, switchblade knives and pornographic literature”. 
He was spot on. It remains so.

Back in the real world…

Yesterday Putin the Terrible mounted his own Night of the Long Knives, purging generals and those considered disloyal while Prigozhin’s plane “crash” provided the distraction. Much as Hitler’s purge of the party and SA in 1934 removed all opposition leaving him unopposed, I expect this leaves Putin stronger but even less connected to the real world – meaning the stalemated Ukraine war will drag on.

What does it mean for markets? I commented Prigozhin was a dead man walking a while ago – although I would not be overly surprised if he is living quietly in exile somewhere. Emperor Xi will have taken note… there have been rumours of dissent in the Middle Kingdom. (If you want to know all about plots within plots, I can thoroughly recommend “I Claudius” currently available on the BBC iPlayer App. 47 years old, but still best thing you will likely ever watch.)

Meanwhile, in markets….

Nvidia’s spectacular estimate busting numbers yesterday were exactly what the market didn’t actually need… The record $13.5 bln result will further fuel the AI Everything Bubble, triggering a nasty rash of FOMO across anyone not yet fully invested in the AI theme. As Jensen Huang, CEO and Founder of Nvidia said: “Companies around the world are transitioning from general-purpose to accelerated computing and generative AI…” just as the firm prepares to ship a whole new generation of superchips and GPUs. (To be fair I read through the release and really didn’t understand much of the tech gibberish describing the new, new stuff, except that’s its new and therefore makes everything previous old and obsolete…)

Nvidia is very well positioned: it’s GPUs, Mellanox networking/switch tech, and CUDA AI software make it the Oracle/Microsoft of the coming AI era… or something like that according to what you believe and who the competition is. The problem for investors is recognising the investment opportunities – scouring for AI start-ups is one approach but is already bubblicious, while the real money is probably embedded in how big firms and big tech innovate AI within their operations… which is more fundamental.

Interest Rates, Central Banks, and such… 

As the Fed Gabfest at Jackson Hole opens, the real issue for markets though remains inflation and growth. There is a clear divergence between the strength of the US economy – where growth remains robust, employment conditions tight, and an increasing sense of economic resilience – versus Europe and the UK where the outlook turns bleaker by the day.

Yesterday’s UK PMIs (a key measure of business sentiment and outlook in terms of how much Purchasing Managers are buying) tumbled deeply negative across services and manufacturing. It supports the expectation the economy is heading into recession as the cost of living crisis, crashing consumer spending and confidence, and jobs fears weigh on the economy. The government will be delighted – it will help them deliver their promise to reduce inflation.. “Yay.. you may all be starving and miserable, but inflation is down…”

Things are equally bad in Yoorp with PMIs also sub 50 hinting a further downturn. German manufacturing is in decline, inflation remains high, and the ECB is still on course for further tightening ahead of year end. August is a bad time to be measuring European economic performance – long holidays are a right, not a privilege. Expect European woes to deepen if, as expected, Chinese demand significantly wanes on the back of its current economic uncertainty. (Yesterday someone was trying to assure me China remains on a strong growth tract as French Luxury Brand LVMH is up 15% this year… The moment when it’s already too late to worry about China will be when global commodities, manufacturing firms and luxury makers nose-dive.)

The issues behind the strength of the US economy versus the weakness of Europe are wrapped up in issues of philosophy, capitalism, competition and costs. How mobile are workforces, how “free” are companies, how easy is planning, how entrepreneurial economies are, what are their markets? Essentially; it’s easier to make and sell something in the US than it is in Europe. At its most basic US workers are paid more, consume more and complain less. Europeans… well, we tend to complain more.

Critically it’s how companies contribute to growth in an economy that counts. How adaptable and competitive are they? There are massive concerns in the US about the consequences of Fed possibly raising its’ inflation target rate from 2% to 3% (which is pretty much where it will be this quarter!), thus inferring real US Treasury yields around 5% (pretty much what they are).

Yet, a natural interest rate around 5% and inflation of 3% in the US would be no bad thing. It will inflate away significant debt over time, and higher interest rates will re-establish financial discipline on corporates and let capitalism work its malicious magic. Yes, many firms will fail – but that’s their fault and the Darwinian removal of over-indebted failing companies from the market gene-pool is good for the economy as it opens niches for new corporates to grow into. Higher rates will also impact indebted consumers and home-owners, inflicting much pain, but again financial discipline. That’s the way ‘Merica works..

Not so in Yoorp. Higher rates will have a very much more negative long-term effect across the diverse tribes of Europe. The more entrepreneurial economies of the North will pragmatically cope and adapt while the more volatile and state-dependent nations of the south will struggle. Where youth unemployment (and rising immigration) is already an issue there will be raised social tension.

Rising social tension and political instability spells renewed crisis for the ECB. You can’t run monetary policy by committee. That’s where the UK and US have the advantage. It’s not difficult to see how rising tensions will pressure the ECB to resume “do-whatever-it-takes” policies akin to the last 15 years of monetary distortion to calm protest, making Europe progressively more addicted to the financial Oxy-Contin of Central Bank largesse. As we saw from 2008-2022 ultra-low interest rates actually do little to drive growth – they simple inflate markets.

There is a natural rate of interest – I think a “premium” around 2% over inflation but depends on the political risk – that makes an economy tick. The US and UK have the luxury of their own currency, bond market and central banks.. Europe is likely to struggle as the ECB (central banking by committee) is pulled in multiple directions. Methinks something wicked is coming to Europe..

Five Things To Read This Morning

BBerg              Powell is Using Jackson Hole as Final Push in Inflation Fight

FT                    “Inflation Tapeworm” makes companies more susceptible to shocks

FT                    Nvidia’s AI boom exceeds Wall Street’s lofty expectations

WSJ                 SEC Takes On Private Equity, Hedge Funds

Guardian         Top UK CEOs handed 16% pay rise as millions of workers squeezed

Out of time, and back to the day job

Bill Blain

Strategist – Shard Capital