What happening, my friends? The famous way Arthur Ashe welcomed people he knew into his life. Got caught up on a stack of Wall Street Journals last weekend and it felt to me like the world had changed. And truth be told, it has.
Miss me? I bet you have. Been sitting back a little to let this noise filled world develop actual signal, to sort through a moment in time that is truly unique. The good news is, this is the way the world always works. The bad news is that we are dealing with extreme levels at this point. And they are getting more extreme by the day, nay hours sometimes.
To complete this thought, I want to open the idea that our minds are built in a way that anchors thoughts. This happens to a varying degree to everyone. There are those who are of the oak, and those of the willow. There are benefits to being rigid at times, unyielding to change, and times when the willow tree survives as it bends when the wind blows hard as it looks to survive. Great metaphor for life, and it works. Great metaphor for now, and it works.
If I’m going to take you on this journey through the year so far for the next fifteen or so minutes of your life. And I’m going to tell you what I’ve been anchored to, and how it’s played out. This is important as I’ve been laying it out well for several years now. While I no longer run money, I would be doing great. Like top decile good. What can I say, I catch some big ideas, and some big fish as well. They are the signal through the noise. These 22 inchers don’t chase every fly that comes their way. Too smart and too big. They pick the right ones to go after. Select the right fly, present it properly, and you pick up fish like this. That's what they call a 'flex'.
Full Disclosure: This pic is from 2020, and I’ve flogged it ever since. My very own version of ‘fish porn’. I have to keep it in the quiver because the rich guys I know, and there are a lot of them, travel to Patagonia and snipe sea run browns. You know who you are, and how well you’ve done.
First, the good news. Big picture, everything is going to be just fine. Betting against America, our resiliency, innovation, and collective desire to make this place better before you leave it has been the trade you have wanted to be on for decades. This is just the last ten years for the S&P 500. Pay special attention to the grayed in area in early 2020. That’s the pandemic recession, and the reaction is the reason we are where we are in terms of the crushing inflation today. The Fed didn't know what it was doing. Aircraft hangers full of COVID victims who took the big dirt nap was a real fear. More importantly, don't short us. That's been a bad trade forever.
On goverment bonds, the ten year t-note has been rock solid for four years after a big dip in yields during the pandemic. With a stable 4% yield years after blowout spending by our government, the global fight for dominance and positioning, and a whole shyte ton of other reasons, this high cover has allowed other asset classes to party like it’s 1999. And party they have.
Corporate bonds of the quality kind have also been your friend. This chart shows yields, and it means that prices have held up just fine as well. After the COVID shock, AAA corporate bonds have averaged 4.5%. That’s four years without hesitation and stocks have ripped higher.
This is happening because corporate earnings have not only held up, they too have been cranking higher for the past few years.
The frightening downside, the Case-Schiller P/E ratio is running at a 42 times multiple. That’s 2 points off the 44 P/E peak we saw at the nadir of the dot.com bubble. In this guy’s humble opinion we are 100% in an AI inspired bubble that could very well still be in the early innings.
Above all else, never forget , “We’re Americans and have been kicking ass for 250 years.” And that’s probably the best thing of all. 'Who didn't cry when Old Yeller died?'
That’s what I have in terms of things going right. It’s a long list. This rally has had legs for good reason.The pandemic is so far in the background it’s almost as if it never happened. Same can be said of the Global Financial Crisis. That was a 'looking into the abyss' moment. Excluding Dick Fuld, we didn’t blink. The Fed’s Zero Interest Rate Policy (ZIRP) saved us and has continued to be a backstop to not ensure you never lose money unless you sell.
My career in hedge funds started at the far-left side of the chart above. I developed a special power in short selling. For those who don’t know, when the blue line goes down, I had trouble making money. When it stays near the 0% level at the bottom, I have a lot of trouble making money. For this reason Edvard Munch’s 'The Scream' lives rent free in the top floor of my mind on a long term lease with no HOA dues. I cover those.
Onward to what is happening in the underlying economy, and why the S&P 500 and NASDQ have decoupled from what we know as “reality”. It’s the top decile that own stocks, and it's the top decile running this show. Gotta love the red, white and blue of this chart. Merica’, home of the free because of the brave. Buy em’!!!
Asset owners are riding along, while those struggling to stay upright, put some money in their pocket, and maybe someday own a stock or two, are not fairing well at all. Which should come as a surprise to exactly nobody. It's tough out there for the 90% of us who aren't in the top decile of stock ownership.
Let’s start with the orange elephant in the room. I’m going to do this very delicately and speak to the economic side of Trump’s policies and Trump-a-Nomics. The only thing I will say about the overall operation of the 'corporation' is that without the thousands of pardons the president is going to wind up handing out we would be talking about the undefendable ‘I was only following orders’ Nuremberg defense. It works for those with immunity, not so much for others. That is a different conversation, one that I have with only a very few.
First up on the ‘bad economic idea list’, and there are a few big ones, was the tariff wars out of the gate for Trump. In almost all cases tariffs have been legally dismissed as taxes. Congress holds the power of creating those. That body also has about a 10% overall approval rating. Take that into consideration.
Tariffs were never about leveling the playing field, and bringing back America’s manufacturing economy. No amount was going to bring that back, see the chart below. Tariffs were about the ‘art of the deal’. Threaten a nuke, negotiate with bunker buster terms, and then settle on a bazooka and claim victory. A far better idea is to retool and recognize we are apex creators of ideas and technology. The saying, ‘I want Americans to use iPhones, not make them.’ plays.
While this is a look from 2024, these trends have not changed. We do well up the manufacturing food chain. The white collars have won, the blue collars have lost. That's just how it goes.
Next up, the choice of Kevin Wash as Chairman of the Federal Reserve. I like him and respected his perspective when he was providing it in a public way at forums we could see. But I haven’t followed him closely is a while and am disappointed he might acquiesce to pressure and manipulation from the executive branch, deteriorating the creditability of a central bank that above all other central banks must maintain independence. Sorry haters, Trump isn't the only president who wanted the Fed to lower interest rates while they were in office.
A longer look at the yield curve trade showed a recession every single time there was an inversion. This time there wasn't even a mild one. The data series goes back 50 years to 1976. That is enough time to develop clear signal. There are myriad reasons for why it didn't this time. Each with its own unique spin.
In the above chart you can see the ever so slight rolling over of the curve. Is this the start of something bigger where the consumer cries uncle and sits on their wallets? I think it is while others can argue the other side. With that, I present my first piece of evidence that I believe will grow in strength as the year goes on.
Exhibit A: Trump’s Approval Rating
Exhibit A: Trump’s Approval Rating
A policy of aggressively ‘winging it’ has caught up with the president in a not small way. Some of it’s due to his own mistakes, others have been compounded from what he walked into. But it doesn’t matter what you inherited. A year in and it’s all yours baby! This eceonomy is DJT's whether he likes it or not. Exhibit B: Broad Consumer Confidence
Exhibit C: Consumer Confidence by Age.
Boomers and Gen-X, my generation, are crashing out. While I roll with some of the really rich, I am not one myself. But I can see the fear and loathing everywhere. We’ve collectively experienced a lot, and don’t like the look right now.
Exhibit D: Economic Expectations
Exhibit D: Economic Expectations
As it looks below, the hope that the near term economic future will be better than it has been rolled over. You could make the same argument for the longer term expectations.Exhibit D: In deference to DJ Khalid…”And another”
Exhibit E: My own personal anxiety index.
For reasons real and imagined, my VIX has spiked.
For reasons real and imagined, my VIX has spiked.
Writing this week from the San Francisco Bay Area and the FOMO can be cut with a knife. I’m feeling it as well. This world is spinning so fast that I had to remind myself that if I had a few good friends, a cold Coors in my hand, and big trout that want to meet me I was going to be fine. Nirvana, if not just for a brief window of time. IYKYK.
The situation is such that I spent a good ten minutes in the chicken department of a Safeway in Burlingame on Wednesday. These are boneless thighs, the everyman’s chicken. Not a single one of these 'value packs' had anything less than a $16 handle, and one was priced north of $24.
The AI apocalypse crashing down on what I do has me on edge as well. Look at the upside, I’m finally number one in something!
Now I’m going to say something I never thought I would say. At least I don’t work at Goldman Sachs. With great irony, the 'takeaways' were produced by Bloomberg AI.
Jesus H., it’s gotten so bad we are now pouring one out for the apex feeders at Wall Street's apex firm. Dystopia has officially arrived.
Another mistake, and it’s not a small one, was by those in the room when Donny decided to follow Benji’s and attack Iran because of ‘imminent threat’ and didn't think about the Strait of Hormuz? Seriously, did y’all not understand that taking of the Ayatollah was not going to wrap this thing up quickly? I watch a lot of what Anthony Scaramucci says on the Insta, and he paints a brutal picture of how the decision making took place.And now we have this to deal with...
And more importantly, this to deal with…
Which results in this that we need to deal with...
But it’s not just gasoline, electricity is also raining down pain on everyone. Energy is everywhere and not a single person you will see today, tomorrow, or forever in the future, will be immune to price spikes.
And the chart…
Last item before we get to bubble talking fun and stock speculation, is the federal deficit. This is a long term problem that my kids, and their kids are going to be dealing with. I’m 54 and maybe I see it at 84, but who knows. We kick a good can around here. That said, if we keep the economy on the rails we will theoretically be okay, but just okay. It’s the interest on the debt that is going to kill us.
Good news to all of you on the left, or on the right, we’ve got two donkeys in charge and two elephants during this period of mega 21st century spending. I put a pox on both of their houses.
As this is now getting long, even by my standards, let’s end with some good news and bubble fun. If you own stocks, or like to speculate in them, congratulations. We have ourselves another wonderful and beautiful bubble on our hands. This from guy who has seen several pop in his 30 years on Wall Street.
The dot.com bubble…
The telecommunications bubble…
Multiple oil drilling bubbles…
The housing bubble(s)...
Full disclosure, I’m not a hater of bubbles as a lot of people I know have made FU money during them. And a lot are making it now. We aren’t talking Piper Cub money; we are talking PJ money. Like the big kind.
From my gut, and I certainly have one, there is about a 50% chance that we are in the 3rd inning of this AI inspired bubble. A 30% chance we are in the 5th. And a 20% chance we are in the 7th. Too many actual dollars being spent with far less debt issued. Keep in mind, AI is still its infancy in terms of how it's going to be used. Maybe it’s a teen in three to four years. But this is going to be a big one. Yankees v. Red Sox big!
Unless you live under a rock on a deserted island, you have to know that there is a trade of all trades going on right now. It's centered around something that was off the public's radar four or five years ago, at least in terms of the magnitude of what was about to happen. For you newbies, let your AI education begin.
AI is important, it’s going to change the world. People should be both afraid, but also excited. Life just got a lot easier, while at the same time getting a whole hell of a lot harder. And the ‘hyperscalers’ are putting down real cash money to not just lead the game, but to dominate it. That’s what Alpha predators do. They eat, they get bigger and stronger, and then they eat again.
This thing is so real that ‘things’ we thought couldn’t happen are happening. For example, Microsoft has signed a 20 year lease with Constellation Energy to buy 100% of the power generated by Three Mile Island. Yes, that Three Mile Island. The power is going to be used to fuel data centers. The switch is set to be turned on in 2028.
But there is a potential problem, all of this costs them money. A lot of money. And while these companies are as cash rich as it comes, all money is green and they are spending in a frenzy. If you didn’t tell me why, and I saw the free cash flow burn of these companies, I would call them all shorts. As a recovering short seller, this is like putting an eight ball in front of John Belushi and telling him not to touch it. Every one dollar spent today is seen as generating ten in a few years.
But just like a Bolivian marching powder party, it would'nt end well. This is an overlay on a Microsoft chart.
Now the other half of the story. If these hyperscalers are hyperscalers, where is that free cash flow going? Chips. Chips. And apparently more chips. That’s the semiconductor variety, not potato. This is an overlay of a Nvidia chart. SanDisk blows up the perspective as SNDK is ahead now by 3,669% from where it had been a few years ago. It's also your Iomega of this bubble and my late father worked there for a couple of decades.
Nvidia is up 1,555%, Intel 109%, Micron 876%, AMD 504%, and Taiwan Semi 271%. Importantly, if you are looking for a sign of a bubble, watch for parabolic moves like this. While the AI story has been playing out for a while, the chips that are going to power this thing only really took off this year.
One last parabolic chart to show you, and that is of capital spending on the actual build out of AI date centers. If these numbers are correct, and they come from the BLS so I think they are, $15 billion was spent on construction in 2023. Two and a half years later it’s tripling to $50 billion. Give or take $5 billion.
Thia is the proposed data center in Cheyene, Wyoming. If everything plays out, it will be the biggest one in the country. The math on how many people they are going to need, and the water that it will take to cool, is almost beyond comprehension. All I ask is that you leave my trout streams alone and come spend money at my soon to be constructed bar, “The Cowchip”
If you’ve made it this far, I love you. I truly love you. You’ve made a commitment to go as far down the tunnel of intellectual curiosity as I could build. As the hip kids say, “I appreciate you”. I want this ride to go on forever but know it won’t. Skidding in loudly, in a cloud of smoke, thoroughly and totally used up sounds to me like one hell of a great plan. The odds are in my favor.