Street Analysis

Nvidia (NVDA) hit $5 trillion market cap, largest ever, as covered in the last week’s post.

Buffett Indicator, i.e. market cap to GDP ratio is at 220%, the highest in over 50 years, a third higher than the dot com days 25 years ago.

CAPE ratio (Cyclically Adjusted Price to Earnings for 10 years) is at 40, first time ever since the dot com days.

Outright dangerous territory…

Why? Financial markets are at unprecedented valuation levels.

Profiteers from all walks of life go after artificial intelligence (AI) frenzy like there is no tomorrow.

Our beloved magazine Barron’s writes an article that the next stop for NVDA is $6 trillion. Can it happen? Yes, absolutely, it can as the day dreamers continue to dream as long as the party continues. Eventually, they have to wake-up. Trees can flourish, though, they do not grow to sky.

Fed is on the collision course with the real specter of sticky inflation, which is under-reported.

Tariffs from the suicidal strategy, probably the largest lunacy of a century, are starting to bite the real economy where the average Joe continues to pay higher and higher for the everyday goods and services.

Voters rage at display with significant wins by Democrats recently in key election races while Republican trifecta (Senate, House and President) is in power.

Federal Government shutdown continues, the longest ever now for over 5 weeks as the second presidential administration term breaks its own record from the first term of 35 days long shutdown.

Bond holders are being very meek, though, have certainly awakened from their long slumber (multi-decade) of accepting lower and lower yields (lately in low single digits) and stock holders are being foolhardy by being the staunch “greater fool theory” practitioners.

Some sign of sanity? Yes, there is one we could see in recent days…the largest fund in the world with $2 trillion in assets, Norway Sovereign Wealth Fund, plans to vote against the ludicrous, if not inconceivable, compensation package of $1 trillion for Elon Musk, Tesla CEO, while the rest of the investor base, primarily the cronies, continue to support the hot air balloon.

10 year treasury rate is being stubborn and persistently sticking around 4% even after 2 recent rate cuts totaling fifty basis points or 0.50% by the Federal Reserve (Fed). This is where the real inflation is yet the reported print is around 3% (core CPI) having adjusted for food and energy as if we can live without food and energy. Reaching back to 2% inflation target remains a pipe dream.

Yet the Fed continues to pursue “easy money” policy due to extreme political pressure, an understatement, and owing to our addiction and current extremely fragile setup for long for low interest rates. It is going to end very badly without a doubt unless they change the course. In fact, regardless of the course, there is a price to pay. Hence, now, the Fed is NOT just boxed in as mentioned in an earlier post, though, rather on a real collision course now trying to deal with two ugly opposing realities. Either way, we are in a pickle. We go low and we overshoot an inflation. We go high and risk collapsing the economy. Either choice or option is not pretty. What is a lesser of the two evils is anyone’s guess.

Profiteers on the Street and political world keep insisting (rather forcing) on super-low interest rates, however, it ain’t happening most likely and caving into such pressures will only make things worse for the economy by stoking higher inflation and stagflation (low growth) for years to come. Sub 5% interest rates and continually trending down have been the name-of-the-game primarily after The Great Financial Crisis (GFC) of 2008 with the intense money manipulation by the central banks of the world which now has come to the end in the post COVID environment when it troughed near zero interest rates in 2020-21.

The real effects and chaos are starting to take place already for the Main Street as well as Wall Street with the effects of the Federal Government Shutdown showing up in from the food stamp program to the airport delays to missed paychecks for the government employees. Now, thankfully, the end appears to be near for the shutdown given some realization (Thank Heavens!) by Republicans after major losses in high profile races. However, there is no guaranty that it may end soon without even a larger amount of chaos given the history of current administration and its crony congress.

At this time, the Democrats appear to be winning the ideological battle of healthcare with Republicans during this shutdown. Further, the conservatives (Republicans) may fall flat on the issue this time around as well after having attempted 70 times, yes, you read it right, the repeal of Affordable Care Act (ACA), aka Obamacare in the past 15 years, one of the most successful and powerful legislation of recent decades.

Back to the financial markets…

Palantir (PLTR) at a whopping 142 times sales of $3.4 billion.

Nvidia (NVDA), the largest market darling, at 31 times sales of $165 billion.

Broadcom (AVGO) at 29 times sales of $60 billion.

Arm Holdings (ARM) at 43 times sales of $4.1 billion.

Strategy (MSTR) is at 158 times sales of less than half a billion dollars, though, it is more of a bitcoin play than the real business.

By the way, just as a reminder, these are price to sales ratios, not price to earnings ratios! A perfect trap for the next leg down with these sky-high valuations.

Yet the profiteers on the Street continue to promote the lunacy to the masses or fools who buy in to this cool-aid.

Another sign of sanity…Michael Burry, ‘The Big Short’ famed investor for the book and Oscar-winning film, who profited handsomely (in tune of $1 billion) from the housing market crash in 2008 just announced a major short bet, close to $1 billion between Palantir and Nvidia.

In response: “It’s not even clear he’s shorting us. It’s probably just, ‘How do I get my position out and not look like a fool?’” Alex Karp, CEO of Palantir said to CNBC.

We will check back in about a year or less who is a real fool between the two and who profited.

Disclosure:

The author has no long or short positions in any of the stocks mentioned in the post