Have We Hit The Top?

[Blake Hampton]

I've been thinking about the situation at the FED recently and how it could affect long-term rates in the future. The FED has approximately $4.7 trillion in treasury securities on their balance sheet, and they have sold about $700 billion back into the market over the preceding year. This is evidence that the FED is focused on reducing their balance sheet and should be an indicator for higher long-term rates right? Also how many bonds can the market absorb and to what level?

 

I learned about the economics of it all this morning and came to the conclusion that the effect would be the same whether they sell the bonds or not. This is because the U.S Treasury would have to issue the same debt anyway to pay off the principal of the FED's bonds at maturity, in conclusion causing the same outcome. It's odd though because I've heard the Treasury has been using short-term bills moreso to fund the government, and I wonder if they might ever do the same in that situation, but I don't know if any of that is true.

 

Thoughts?

Edited February 22 by blakehampton

[mattee2264]

'Generative A.I. has kicked off a new investment cycle to build the next trillion dollars of infrastructure of A.I. Generation factories.' 

 

Nvidia CEO understands what it is all about. Big Tech are gonna invest and so are all the start-ups that will easily be able to attract funding to invest in AI. And even if the resulting product is rubbish after sinking so much money into it they are going to market the hell out of it. And the C-suite and IT department of every company is going to want to invest in AI as well and so it goes. 

[spartansaver]

21 hours ago, mattee2264 said:

265% revenue growth in one year! And revenue expected to double over the next year. 

 

The gold rush continues. 

Has there ever been a manufacturing company in history (or any company) that added $60B of revenues in a single year? I'm just curious because that is wild, don't really care about the stock.  

[spartansaver]

34 minutes ago, spartansaver said:

Has there ever been a manufacturing company in history (or any company) that added $60B of revenues in a single year? I'm just curious because that is wild, don't really care about the stock.  

Amazon has done it several times, but that's a very different animal.  Apple in 2021. Google in 2021. 

Edited February 22 by spartansaver

[winjitsu]

34 minutes ago, spartansaver said:

Amazon has done it several times, but that's a very different animal.  Apple in 2021. Google in 2021. 

I think you might need to do a %GDP comparison, but could only think of Defense Contractors during war-time economies that might see this level and percentage of increase. 

[ValueArb]

46 minutes ago, spartansaver said:

Has there ever been a manufacturing company in history (or any company) that added $60B of revenues in a single year? I'm just curious because that is wild, don't really care about the stock.  

 

Enron? GE?

Edited February 22 by ValueArb

[Spekulatius]

2 hours ago, spartansaver said:

Has there ever been a manufacturing company in history (or any company) that added $60B of revenues in a single year? I'm just curious because that is wild, don't really care about the stock.  

Well NVDA is not a manufacturing company - they don’t build their own ships, they just design them.

[Hektor]

1 hour ago, Spekulatius said:

Well NVDA is not a manufacturing company - they don’t build their own ships, they just design them.

Thats an important distinction, I think. An idea who makes the chips for them?

[Spekulatius]

18 minutes ago, Hektor said:

Thats an important distinction, I think. An idea who makes the chips for them?

TSMC

[Hektor]

3 hours ago, Spekulatius said:

TSMC

 

With some of NVDA customers wanting to create their own chip, I guess TSMC could be a beneficiary. And probably a good bet.

[Blake Hampton]

All amounts are in nominal terms

• 2019 and 2022 M2 money supply respectively: 15.321 trillion and 21.358 trillion; an increase of 39.40%
• 2019 and 2022 S&P500 earnings per share respectively: 139.47 and 172.75; an increase of 24.86%
• 2019 and 2022 median household incomes respectively: 68,700 and 74,580; an increase of 8.56%

You can draw your own conclusions from the data, but wouldn't it be possible that we are seeing inflated earnings from the S&P?

• Shiller PE: 34.24
• S&P500 PE: 27.61

I've been thinking about where money has moved ever since the pandemic, and I think that companies have largely seen outsized inflows relative to households. Think PPP loans, increased earnings due to stimulus, and low interest rates. This is all fine and dandy until you realize that households largely dictate the earnings of these companies. What happens when consumer spending eventually decreases simply because people don't have as much money to spend?

Edited February 23 by blakehampton

[Blake Hampton]

Thinking about macro is goddamn information overload

[ArminvanBuyout]

The gap is likely filled by government deficits - corporate profits is tied to government actions + household actions, and with the amount of deficits we've been running the last few years, I'm not surprised at the strength of corporates.

 

[Cigarbutt]

2 hours ago, blakehampton said:

Thinking about macro is goddamn information overload

Apologies for adding to the information overload as there may be better things to do and what follows, almost for sure, has very little utility for 'top' and 'forecast' discussions...

If you want to 'believe' the hot potato effect you may be interested in the following. The hot potato effect is often thought of in relation to the (initially intended) effect of QE on banks' willingness to lend (this has been shown not to be an issue or a real transmission mechanism especially since the Fed has decided to pay interest on excess reserves). However, the hot potato effect may be real on another relevant level. Most QE (90%+) was carried out with non-banks and then, as a separate balance sheet effect, new base money or new deposits are created (yes, as 'they' say, out of thin air) and then this money tries to find its way to other securities that promises to realize a superior to 0% return with a potential for asset inflation disconnected from fundamentals?

Of course, the cashier at Macdonald's does not see this but he/she may feel it?

MCD's PE ratio since...

Have MCD's fundamentals changed in correlation with higher valuation multiples or?

[Sweet]

These indicators predicting a top in the stock market get more ridiculous:

https://www.marketwatch.com/story/why-a-drop-in-oil-10-years-ago-suggests-the-u-s-stock-market-is-headed-for-a-decline-1a3b701b?mod=home-page

[ArminvanBuyout]

Interesting paper from GMO on how the last decade has been the outlier on the largest large caps outperforming, with this quote quite powerful - "Since 1957, the 10 largest stocks in the S&P 500 have underperformed an equal-weighted index of the remaining 490 stocks by 2.4% per year. But the last decade has been a very notable departure from that trend, with the largest 10 outperforming by a massive 4.9% per year on average"

 

https://www.gmo.com/americas/research-library/magnificently-concentrated_gmoquarterlyletter/

[Sweet]

For the dot com comparison guys;

start date standardised to $100 I believe.  Nvidia def frothy but dot com comparisons overblown

[mattee2264]

I do not think that interest rates or what happens this year and next in the economy really matters that much anymore. So even if the bears are right and the US follows the eurozone and Japan into recession this year it won't make a jot of difference. Even a second wave of inflation probably will only result in a mild correction. 

 

Markets are looking through to anticipated productivity gains from AI to the Roaring 20s with the expectation that it will solve most of the problems in the economy as well as extending the growth runway for Big Tech. 

 

Productivity increases will increase GDP (reducing the debt to GDP ratio) and lower inflation (allowing lower interest rates). Old economy stocks will benefit as their fortunes are closely tied to GDP growth and GDP growth has been anaemic post-GFC and pre-pandemic stimulus. New economy stocks will benefit not only from AI related revenues but also from lower interest rates. And lower interest rates will also ease pressures on the financial and real estate sector.

 

Of course the question is whether AI really will generate a near term productivity miracle. And worth remembering that even if there were near term productivity benefits from the IT spend during the dot com bubble (and growth was actually pretty amazing in the mid 90s and didn't require 7% full employment government deficits to achieve or massive increases in the money supply to achieve) it did not prevent the bubble bursting and taking the rest of the market down with it. 

 

 

 

 

[mattee2264]

Another dot com comparison point:

 

The big tech PE multiples are far less crazy (even Nvidia if you project its growth out a few years) but Mag7 market cap compared to other sectors and even other countries is incredible and unprecedented. 

 

Deutsche Bank found the Mag7's combined market cap alone would make it the second-largest country stock exchange in the world, double that of Japan in 4th and Microsoft and Apple individually have similar market caps to all combined listed companies in each of France, Saudi Arabia and the UK. 

 

And already the Mag7 has had a pretty impressive run-up with a 5 year annualized return of 24% from 2018-2023. That is 

 

Granted the world is becoming very technocentric and the best tech companies are concentrated in the USA. But markets can carry even something basically true to extremes. 

 

Another dot com comparison point. During the dot com there was a lot of value in old economy stocks. 

 

https://www.ft.com/content/92fe31a2-35a6-4d4a-bb10-ffed4f1a017d

 

FT article above suggests that S&P 500 has a forward PE ratio of around 25x if you exclude financials, stocks without earnings and Mag7. Mag7 has a forward PE ratio of around 29x and much better growth prospects. So hard to say that Mag7 are very overvalued without saying the rest of the market is also very overvalued. 

[scorpioncapital]

Ai improves efficiency in services and maybe factories? How does it improve efficiency in resource extraction or even political redistribution issues (which reduce productivity)? Do we know that the redistribution regime which is quite strong these days and likely to continue can be offset by productivity gains from AI? Human nature being what it is might also be a drag on productivity. So the question is if there is a substantial net gain after deducting the usual tailwinds.

 

[Jaygo]

I think advances in robotics will be just as important in productivity as AI will be. 
 

I have some machines that cost under 25k that now reduce my needed workforce by 1-2 people per day. Let’s call it 1 per day to be on the safe side. The kicker is that the machine is still producing the same outcome as before but with one man vs 2 or 3. 

 

these are still human controlled machines but with robotic or computerized features that really boost the bottom line. 
 

I am pretty sad about our society lately   but productivity is a ramping up and to the right imo. 

[mattee2264]

Yeah that is the bull case. That AI will lead to a productivity miracle. Much needed considering that for much of the post-GFC period US GDP growth has been sub-3%. And it will also dampen inflationary pressures as wage increases will be offset by headcount reductions and some of the efficiency improvements from AI can be passed along to consumers in the form of lower prices. So that will allow central banks to lower interest rates before the strain on the economy becomes too much. And if GDP can grow rapidly that will help to ease the debt burden over time. And of course if every IT department starts to allocate a sizeable chunk of its budget to AI then Big Tech can continue to grow earnings at a double digit rate and at 30% of the S&P 500 that is going to be a major kicker to S&P 500 EPS growth. So I am not surprised that bulls are talking about the Roaring 20s and setting targets for SPY 8000. 

[ValueArb]

On 2/25/2024 at 6:49 PM, Jaygo said:

I think advances in robotics will be just as important in productivity as AI will be. 
 

I have some machines that cost under 25k that now reduce my needed workforce by 1-2 people per day. Let’s call it 1 per day to be on the safe side. The kicker is that the machine is still producing the same outcome as before but with one man vs 2 or 3. 

 

these are still human controlled machines but with robotic or computerized features that really boost the bottom line. 
 

I am pretty sad about our society lately   but productivity is a ramping up and to the right imo. 

 

If only it was that easy for most manufacturers. Four years and $1M and people are still better at straightening candle wicks.

 

https://www.wsj.com/business/robot-straighten-candle-wick-difficult-e1c80bb8?mod=Searchresults_pos20&page=3

 

Robots on PIPs (performance improvement programs) because they don't perform correctly.

 

https://www.wsj.com/story/the-factory-workers-that-corral-wandering-robots-66afc9fc?mod=Searchresults_pos9&page=1

 

[ArminvanBuyout]

First example I've seen of AI actually driving profits through layoffs (which acts as deflationary force). Basically saying AI is handling 2/3 of CX tickets now, and that will save $40 Mn per year

 

https://www.fastcompany.com/91039401/klarna-ai-virtual-assistant-does-the-work-of-700-humans-after-layoffs

[Jaygo]

1 hour ago, ValueArb said:

 

If only it was that easy for most manufacturers. Four years and $1M and people are still better at straightening candle wicks.

 

https://www.wsj.com/business/robot-straighten-candle-wick-difficult-e1c80bb8?mod=Searchresults_pos20&page=3

 

Robots on PIPs (performance improvement programs) because they don't perform correctly.

 

https://www.wsj.com/story/the-factory-workers-that-corral-wandering-robots-66afc9fc?mod=Searchresults_pos9&page=1

 

I think we are in the very early days of this. Candle wick straitening may be tough because of dexterity but the amount of real world productivity improvements are pretty vast.

 

The loom was not perfect at first and the luddites made a mockery of it until the French loom arrived and they realized its efficiency so they tried to burn them down to save their jobs.

 

Take a super rudimentary thing like splitting firewood. The average guy could split a face cord and feel good about himself in one or two hrs with already cut up trees. A super simple and very inexpensive firewood processer can cut to exact length and split about 3 cords or 15 times that amount each hour. so spend 6 grand and 15x your speed safer with better quality. 

 

Sure this example is really off the beaten path but if our entire ecosystem sees productivity improvements we will have a major jump in freed labour.

 

Ive been researching building supply companies and the housing industry is ripe for robotics in the supply and finishing side. With Fanuc robotics and the touches of a Florida tech company Builders First Source is providing entirely pre-cut house framing packages that are accurate within 1/8 of an inch using nothing but robotic saws and the architectural drawings. This project is in its infancy and only available in Florida but they discuss it in their investor day so i'm thinking its working.

 

Another one. The roadway reflective cats eyes are now starting to be installed at roughly 18 miles per hr by an automated epoxy and robotic stamp on a truck. This process takes roughly 2-3 hours per mile today with the most widely used practice. 

 

Our current way of doing most things is changing fast and smart machines combined with AI will be truly revolutionary. Now i'm pretty sure that the spoils of this is going to fall to corporate America and Capital in general. He who owns the machines...

 

The working man better get ready to stand around and watch robots, maybe cigarettes will make a comeback just out of boredom.