Speculative Bubble Hype
Doug Nolan
May 24 – Bloomberg (David Ingles):
“Nvidia’s 110% gain this year is enough to slingshot the company’s value above the entire market capitalization of Germany along with a range of other major bourses.
The AI-boom poster child overtook Australia in early February, topped South Korea a few weeks later and as of the Thursday close, is now also above Germany.
The next 20% leg higher would likely add Saudi Arabia and Canada to the list.
And if the prediction from one of Bloomberg TV’s guests on Thursday is correct and Nvidia does top $10 trillion, that would make it larger than all the world’s stock markets except the US.”
AOL, Cisco, Intel, Compaq Computer, Gateway 2000, Blackberry, 3Com, etc. – the Speculative Bubble Hype list could go on and on.
And we don’t have to limit our reminiscing to the late nineties Bubble period.
There was no doubt that Tesla would dominate the EV world.
February 5, 2020 – CNBC (Kevin Stankiewicz):
“Money manager Catherine Wood told CNBC… that she stands by her latest five-year price target of $7,000 per share for Tesla.
‘Our confidence level that this stock is heading for $7,000 over the next five years is very high,’ Wood, the founder and CEO of Ark Investment Management, said…
‘We’ve arrived at that price by weighting the probabilities of 10 different scenarios, including bankruptcy, to be honest.
So we’ve tried to be as fair and balanced as we could possibly be,’ added Wood…”
Nvidia’s stock surged 15% this week, boosting market capitalization to $2.619 TN – or 62 times earnings and 32.9 times revenues (from Bloomberg).
“Nvidia CEO Jensen Huang’s Net Worth Swells From $3 Billion to $90 Billion in Five Years.”
“Nvidia’s Landmark Performance Hasn’t Been Seen ‘In the History of Capitalism,’ Says Tech CEO.”
“Nvidia Shares Are Up Roughly 28-Fold in the Past Five Years.”
“Nvidia Shows No Signs of AI Slowdown After Over 400% Increase in Data Center Business.”
“Nvidia's First Quarter Results Confirm That The Next Industrial Revolution Is Well Underway.”
May 22 – Reuters (Robert Cyran):
“For firms designing AI models and building the networks that train and run them, the response has been a spending arms race to grab new markets and prevent rivals from disrupting their existing businesses.
Microsoft, Amazon, Alphabet and Meta collectively splurged $200 billion on capital expenditure last year…, according to Bernstein.
The research firm estimates this will increase by over 50% this year, mostly because of AI.
Compared to these huge sums, the income generated by AI remains small.
Sequoia estimates generative AI now brings in about $3 billion a year in revenue…
The promise of future riches has unleashed some gigantic forecasts for the spending needed to make the advanced semiconductors, build the data centers, and generate the power to train and run AI models.
OpenAI boss Sam Altman earlier this year put the figure at up to $7 trillion…”
“New Eras”, “New Paradigms” and, these days, “the next industrial revolution.”
For now, loose financial conditions accommodate delusions of grandeur.
May 23 – Reuters (Jamie McGeever):
“If you want evidence of how much the ‘soft landing’ narrative is driving bullish investor sentiment, look no further than benchmark measures of implied volatility.
In equities, bonds, credit and currencies, ‘vol’ has not been this low in years, clearing the way for investors to push up asset prices to historic and, in the case of the S&P 500 and Nasdaq, record highs.”
The VIX (equities volatility) Index traded Thursday intraday down to 11.52 – the lowest level since November 2019 (following the restart of Fed QE).
Curiously, the MOVE (bond volatility) Index traded Wednesday at 82.49, the low since pre-Fed “tightening” February 9, 2022.
Investment-grade bond spreads (to Treasuries) traded this week at 86 bps, near the low back to September 2021.
At 2.96 percentage points, the high yield spread was within seven bps of the low back to 2021.
Keep in mind that spreads compressed in 2021 (Fed’s balance sheet expanded $1.4 TN in ’21) to the narrowest levels since (pre-subprime blowup) 2007.
Goldman Sachs (52.66 bps), Bank of America (47.40), Morgan Stanley (48.41), and Citigroup (47.81) CDS all traded this week at lows since September 2021 (JPMorgan’s 39.67 was close).
Loose conditions have become a global phenomenon.
European bank (subordinated) CDS closed the week at 104.10, the low since September 15, 2021.
European high yield CDS declined Wednesday (286.14) to within three bps of the low back to February 2022.
Emerging market CDS traded intraweek (155.62) to the low since September 17, 2021.
Compressed risk premiums and CDS prices are certainly indicative of complacency.
Closely monitoring the backdrop, I focus more on extraordinary market risk embracement and liquidity excess.
Markets don’t behave this way unless there is some underlying monetary disorder (dislocation in liquidity creation).
I have focused for a while now on the global proliferation of leveraged speculation, including popular “basis trades,” “carry trades” and such.
There was further evidence this week that this historic speculative Bubble inflation continues to luxuriate in “Terminal Phase Excess.”
May 20 – Bloomberg (Alice Gledhill):
“A leveraged trade that’s worrying regulators worldwide has caught the attention of the European Central Bank, which pointed to signs the strategy is gaining traction in the region.
The ECB noted a group of offshore hedge funds has become increasingly present in Europe’s government bond repo market, suggesting growing use of the so-called basis trade.
The strategy, which looks to exploit price differences between futures and bonds, has come under scrutiny in the US after it contributed to market turmoil at the start of the pandemic in 2020.
The hedge funds in question are mostly domiciled in the Cayman Islands and hold more than half of investment funds’ positions on euro-area government bond futures...
They also account for almost all the activity of non-EU investment funds in the region’s government repo market.”
As is typically the case, policies (i.e., QE) and speculation strategies (i.e., “basis trade”) that take U.S. finance by storm soon permeate the world.
The ECB revelation follows last month’s Reuters article, “Hedge Funds Shake Up the Euro Zone’s $10 Trillion Government Bond Market,” with the zingers “three traders estimated that hedge funds have been buying between 20% to more than 50% of auctions in some instances” and “two thirds of Italian bond trading on Tradeweb comes from hedge funds…”
May 24 – Bloomberg (Alice Gledhill):
“Exploiting differences in interest rates is set to become one of the most popular investment strategies in coming months as markets bet shallower cuts will keep volatility subdued.
Strategists across Wall Street are touting carry trades, which harvest the extra income on higher-yielding currencies and bonds, and thrive in calm markets when there’s a lower risk of wild price swings wiping out profits…
Carry has gained traction since Federal Reserve Chair Jerome Powell effectively ruled out further rate hikes.
That removed a potential volatility trigger and set the scene for cautious easing alongside major peers like the European Central Bank and Bank of England…
‘The Fed’s signaling of no further hikes is a green light for carry trades in fixed income and elsewhere,’ Bank of America strategists including Ralph Axel wrote…
‘Carry trades are being put on ‘everywhere’ as investors prepare for this quiet period, according to Peter Schaffrik, global macro strategist at RBC Capital Markets.”
This is critically important:
“The Fed’s signaling of no further hikes is a green light for carry trades;” “removed a potential volatility trigger;” “carry trades are being put on ‘everywhere’.”
Taking additional rate hikes off the table eliminated the risk of a Fed-induced tightening of financial conditions (with the likelihood of de-risking/deleveraging and liquidity dislocations).
At this late stage of the speculative cycle, there was powerful impetus to partake in lucrative levered “basis” and “carry” trades (not to mention equities margin borrowing and options trading).
Signaling the end of rate hikes (along with a predisposition for cuts) momentously improved the risk vs. reward calculus for leveraged speculation in U.S. markets and globally.
The upshot has been ongoing leveraged speculation-induced liquidity creation and abundance – necessary sustenance for arguably the most financially and economically consequential mania in human history.
The headline from Robert Cyran’s Reuters article (excerpted above):
“The $5 Trillion AI Boom Could Both Succeed and Fizzle.”
Whether it’s $5 TN or Sam Altman’s $7 TN, there should be no doubt that the A.I. Bubble has unleashed an epic spending black hole.
Data centers. Semiconductor chips and equipment. New computers and servers.
The power grid and energy infrastructure.
Software and equipment upgrades across corporate America.
Over-liquefied and highly speculative markets.
A medley of historic developments ready and willing to finance an arms race to change the world.
May 23 – Reuters (Heekyong Yang and Ju-min Park):
“South Korea announced… a 26 trillion won ($19bn) support package for its chip businesses, citing a need to keep up in areas like chip design and contract manufacturing amid ‘all-out warfare’ in the global semiconductor market.
Under the package, President Yoon Suk Yeol said a financial support programme worth about 17 trillion won was planned through state-run Korea Development Bank to back investments by semiconductor companies…
‘As we all know, semiconductors are a field where all-out national warfare is underway.
Win or lose, that depends on who can make cutting-edge semiconductors first,’ Yoon said at a meeting with top government officials.”
The global government finance Bubble “all-out national warfare” phase.
How could things not go terribly wrong?
We have failed to safeguard Capitalism.
Tens of Trillions of central bank liquidity and repeated market interventions and bailouts completely distorted price mechanisms, with financial markets degenerating into runaway speculative Bubbles.
Are we to trust that markets and governments effectively allocate financial and real resources?
A.I. is important, and its development will surely have far-reaching consequences.
But this arms race spending Bubble has entered the realms of crazy and reckless – and broken markets have turned perilously dysfunctional.
Over recent decades, there have been bouts of outrageous exuberance, hype, and excess.
But today’s A.I./tech mania has gone completely off the rails.
The past decade’s massive spending boom on all things EV and autonomous driving implore some caution and a healthy dose of skepticism.
Apple spends $10 billion on development, only to abruptly shutter the entire operation.
“Ford Lost $130,000 on Every EV It Sold in the First Quarter.”
“Electric Vehicle Failures Offer Lessons for the Next Boom.”
“Major Robotaxi Firms Face Federal Safety Investigations After Crashes.”
We are likely witnessing history’s greatest episode of global resource misallocation and malinvestment.
Do we really want to aggressively promote colossal arms race spending on technologies where the only certainty seems to be massive energy consumption?
There are today few of us who care about how resources are expended and the quality of investment.
If the Fed even has a modicum of concern, I haven’t seen evidence.
It recalls the old Jay Leno Doritos commercial: Spend all you want.
We’ll make more (“money”).
Always more “money” is how we got into today’s predicament.
Granted, it’s so much easier to create “money” than to produce real economic wealth – especially during the waning days of a historic boom cycle.
And it’s all this monetary fuel stoking inflation, market distortions, speculative Bubbles, resource misallocation, and historic maladjustment.
I’d rather not be compelled to pound away week after week.
But the environment is historic and perilous.
Nvidia adds $341 billion of market capitalization this week.
Manias have such a seductive way of masking reality.
“Radio was the internet and AI of its day.
All you had to do was include ‘radio’ in the name of your company and the price of your stock would shoot up, even if there was very little behind the company.
A stock like Kolster Radio, which manufactured radio receiving sets rose from 10 to 95 between 1927 and 1929, then crashed down below one by 1930 when it filed for bankruptcy.
During the 1920s…, RCA stock rose from 5.825 in 1921 to 420 in 1928, split 5 for 1 in March 1929 and peaked at 114.75 in September 1929 before beginning its 98% decline to 2.50 in May 1932.”
RCA and the Roaring Twenties, Bryan Taylor, Chief Economist, Global Financial Data, November 13th, 2023
May 24 – AFP:
“China warned on Friday of war over Taiwan and said it would ramp up countermeasures until ‘complete reunification’ was achieved, as Chinese forces conducted military drills around the self-ruled island.
Warships and fighter jets encircled Taiwan on the second day of exercises…
The exercises were launched three days after Lai Ching-te took office and made an inauguration speech that China denounced as a ‘confession of independence.’
Beijing's defense ministry spokesman Wu Qian said… that Lai ‘has seriously challenged the one-China principle... pushing our compatriots in Taiwan into a perilous situation of war and danger.’
‘Every time 'Taiwan independence' provokes us, we will push our countermeasures one step further, until the complete reunification of the motherland is achieved,’ he said.”
“Taiwan independence forces will be left with their heads broken and blood flowing after colliding against the great... trend of China achieving complete unification.”
Is this belligerent bluster from the Foreign Ministry spokesman of China or North Korea?
A more dangerous phase of conflict has commenced in the Taiwan Strait.
Sure, it’s natural to dismiss China’s latest Taiwan military operations.
We’ve seen it all before.
Besides, if there was a real threat, markets would surely be responding.
Right?
It recalls the complacency as Russian tanks and equipment organized along the Ukraine border in early 2022.
It was widely viewed as too irrational for Putin to actually mount an invasion.
I’m uncomfortable with China’s rhetoric, especially as it follows last week’s Putin jaunt to plot with Xi.
I used “thug bromance spectacle” in the previous CBB after careful consideration.
There was something more alarming – vaguely sinister - about last week’s dictator PDA (public display of attachment).
Xi’s China is in financial and economic dire straits.
If his priority was to thwart crisis dynamics and reestablish China's growth trajectory, I doubt Xi thumbs his nose at the West with his balmy Putin embrace.
But if he narrows his focus on Taiwan, the enemy of his enemy is his dear friend and no limits partner.
I’ll assume Beijing this week initiated the noose tightening process.
Get ready, they might be proceeding down a well-crafted list of threats, intimidation, and ultimatums.
By the way, how much longer will Xi tolerate U.S. weapons shipments and military support for our important ally, Taiwan?
With the Fed failing to tighten conditions, market Bubbles are today extraordinarily vulnerable to a geopolitical shock.
I’ve been surprised that global bond markets have been so accommodating to A.I. and equities Bubble dynamics.
So long as loose financial conditions stoke Bubble excess, we should be prepared for more upside inflation surprises.
Too soon to make much of it, but global bonds indicated some vulnerability this week.
What's up with U.S. munis?
At the “periphery,” EM bonds, stocks, currencies and CDS seemed to hint at incipient risk aversion.
Dollar/yen was back to 157 (yen down 0.85%), while Japan’s 10-year government yields jumped six bps to a 13-year high 1.01%.
China’s renminbi declined 0.27%, nearing the low versus the dollar since November.
There’s enough fragility in the world for markets to be susceptible to another pop in the dollar.
0 comments:
Publicar un comentario