Can NVDA Live Up To The Hype? With Brent Donnelly

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1:24And now to the top analysis of today's markets.

1:40Can NVIDIA live up to the hype? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Brent Donnelly, president of Spectra Markets. Hi, Brent. Hey, Maggie. How are you doing? I'm doing well. I think we're all eyes, right, are glued. I mean, we saw US stocks rally, the NASDAQ up 1.7%, the S &P 500 up over, looks like it's closing up over 1 % as we head into this hugely anticipated earnings release from NVIDIA. It's going to happen after the close, sometimes probably within the next half hour, if not sooner. Gosh, it seems like it's going to be a market mover either way. I mean, I think everyone's probably staring at their screens waiting for it to come out.

2:15What are you thinking? Yeah, this has to be one of the bigger earnings releases since like, I mean, there was a Zoom one in 2020 that I remember. But like this harkens back to like Yahoo's releases in March 2000 when everyone was on pins and needles because they used to always beat by one cent and then they had missed once. So yeah, I think this is huge. I mean, the volatility around the last one was like one of the most mind boggling things I've seen. Of course, you see like tiny pharma companies go up 190 % or whatever, but this is like a company approach. It was at the time approaching$1 trillion market cap, ripping 25 % on air.

2:54It was unbelievable. So I mean, I think Like a lot of times I feel like things get overhyped, but this feels like the hype is worthy. Yeah, that's why we started the show with that because it does feel, and everyone keeps saying, oh, it's not possible that they can live up to this. But last time, I mean, can you remember a time that a company, usually they like to sort of lowball their expectations so they can beat, right? That's like the traditional. And last time they were like, oh, it's not going to be 5 % higher. it's 50 % or 60 % or, you know, one of our keen listeners will remember the exact number, but that's just unheard of.

3:32In a way they raise the bar so high for themselves this quarter, right? And they're not idiots, right? And they also do have some control of revenue in terms of like timing and things like that. So yeah, it's interesting. You don't usually raise the bar that high, but my impression as you're kind of suggesting is that in their minds, they weren't raising it that high. That's what I'm wondering. Right. Like, was it really 120? And they just said that's exactly the conversation we were having today. Listen, there's an awful lot priced into that, which is why I think everyone's watching this so closely, not only for the individual stock, but also as a kind of harbinger for AI.

4:08Right. Is it all that and is it enough to lift the broader market? We don't we don't know that. Right. I mean, can if NVIDIA does well, will the whole market benefit or is this sort of the as Tommy Thornton said, the magnificent one in a class of its own. No, I mean, I would disagree a little bit with that because there's a huge halo to mega caps, even like Microsoft. So I feel like Microsoft benefited from the AI and then obviously it had that last rip on their pricing story, which was a huge failure. But I think the broader market, or at least a narrow segment of very large companies that have huge weights in the index will still benefit.

4:49And if NVIDIA beats and NVIDIA goes up, I would think like Microsoft and especially will benefit. So you'll get a lot of lift in the index from that as well. Yeah, it's going to be so interesting. Of course, we'll try to talk about it if we catch it when it comes out and we're still on air, which we may be because this is an extended daily briefing, folks. So if you want to stick with us in the second part of the show where we're going to do a lot of the questions, you need to be a member for that. So scan the QR code. We're closed for new members right now, but get on the wait list so you don't miss future conversations.

5:25So, OK, AI aside, while we wait for that, what about the rest of the economy, Brent? We've seen such volatility in Treasury yields. Everyone's trying to game out the Fed. And we kind of keep, as someone described, rushing to each side of the boat, right? That, oh, the Fed's done, then yields over, and then everybody trampled to the other side. well, the US economy is way stronger than expected. The Fed's going to have to do a lot more. Where are we here? We had some S &P PMI numbers out. Did we learn anything from that? Did that change your view on anything? Specifically, the PMIs, no. So I'll start with the first thing that you said, which is going from one side of the boat to the other.

6:04And I mean, that's really been the theme, if you want to call it a theme of 2023 is, you know, we had hard landing, recession, soft landing, no landing, reacceleration, immaculate disinflation leads to Fed cuts in 2024. And then you had like China reopening boom, China is dead, China's Lehman Brothers. You know, there's been wild oscillations from one side of the boat to the other. And I would say that this last one to me may be the last gasp for yields and for the dollar simply because we're entering a period where I think a lot of small things will all add up to make life a little bit more difficult for the US economy.

6:44So my view is that we're near the highs, if not, or we've made the highs in yields. And then that kind of flows through to my view on the dollar and onto gold is that everything's really been tied to yields, right? And at this point, you have nominals obviously very high, but then real rates getting pretty high too. And there's kind of two lenses through which the Fed looks at rates. And it depends if you're Williams or Powell or who you are at the Fed. But the two ways you can look at rates generally is, are they nominally restrictive or are real rates restrictive? And you can target one or the other.

7:24And I mean, there's so many, it's like a Scottish witchcraft or whatever, There's so many ways you can interpret or Nostradamus' forecasts or whatever. There's a lot of ways you can interpret the data. But ultimately, I think through almost any lens, policy is restrictive probably by 75 or 100 basis points. And then you have Jackson Hole this week, which could be an interesting catalyst because people kind of got wrecked last year. And I think people are in this mode that the Fed will just keep on like the whole like they'll hike till something breaks kind of mentality. And generally, history has shown that that's the case.

8:03And I mean, obviously, a lot of stuff broke in March, Silvergate and Silicon Valley Bank and whatever signature, all the banks that start with S. Um, but now I don't think that's really the right framework anymore because at least through the feds eyes, which matters, like even if they've been wrong a lot and they can't forecast better than private forecasters and all that, it still matters what they think because their view or their framework is the path of least resistance for rates. So up until recently, they were saying like, no cuts, no cuts, no cuts. Now, ironically, the market's not pricing in very much in terms of cuts, probably almost the least the market's priced in.

8:43And Williams and Harker are saying, like, we can cut in 2024. In the minutes, they said that some members said we can cut and keep doing QT. So reduce the balance sheet, but cut rates. So to me, it feels like a really weird time for people to be pressing bond shorts. And there's a whole debate about bond market positioning. And a lot of people are really bullish. And a lot of people are short. And there's a whole big debate about that. I don't think the data is all that clear, to be honest, on positioning. I feel like it's more like there's huge positions both ways. And so it's easy to point to a data point and say, look, everyone's long bonds or everyone's short bonds.

9:24But I think the reality is that it looks like a really big opportunity from both sides, depending on what your view is. So I think there's big positions both ways, but it kind of nuts out. But to me, it doesn't seem like a great time to be pressing shorts because given that markets are forward looking and as you know, I'm a little bit more short term. So what I do a lot of times is try to like pre surf the change in the narrative. So I'm sort of anticipating a shift in narrative to something more dovish, not just from the Fed, but also from like student loan repayments are coming. There's going to be a government shutdown probably in September that nobody's talking about yet.

10:04We are not talking about that enough. It's like there's so much else going on that it kind of fell off the radar. And Congress is on recess for the most part and obsessed with subpoenas right now. So no one's talking about that government shutdown, but that's big. Right. And sort of like, I think one thing I try to do is I never look like two years out because that's just not my time horizon. But I think if you look just like two months out, you see that. So student loans, the government shut down. You have a lot of, like you mentioned, the PMIs, kind of disinflationary stuff coming out of the rest of the world, China as well.

10:38There's some weirdness with tax payments in California where a lot of people are going to need to raise money in October. And then you could argue Europe's in recession. UK data is getting worse. I think there's going to be calls for more fiscal austerity into the next election on the back of the Fitch downgrade. And just like that's what the opposing team is going to always do when the government spending a lot is complain. And then when they get in government, they'll spend a lot, too. So I feel like very close on the horizon are a lot of small things that all add up to be like not I'm not talking about some mega collapse, but like GDP now is printing 5.8 or whatever.

11:19and like a lot of estimates are more realistic estimates are two, three percent of GDP or two or three percent growth in Q3. I could see like Q4 zero or something like that. And like you said, when Congress comes back and people just start, you know, people generally the market has one or two themes and it's focused on those. And it'll eventually get bored of those and find a new theme. And I think that new theme will be a lot of little death by a million cuts for the US economy in Q4. So I'm trying to pick the turn in, in not the trade for me, isn't in rates, it's in FX and gold. But I'm essentially, I mean, everything's a yields trade.

12:01So I'm trying to pick the turn in all that stuff in anticipation of going back to the very first point that you made. in anticipation of, whoops, we got too far on the other side of the boat. Like I actually, the other day when I got back from Maine, I made a list of, and this was just like off the top of my head in five minutes, 23 different themes that we've traded in a somewhat meaningful way in 2023. And it was a coincidence, but it was 23 themes for 23. Um, so to me, that is obviously a sign that first of all, we have no idea what's going on and nobody understands what's happening. And then two, you should be biased towards mean reversion.

12:45If you're that kind of, and I understand some of your viewers are investors and not traders, but from the trading side, I think the, and this is not just me saying this now, I've been saying this for ages, your bias just has to be mean reversion because no one has a clue what's going on. Like, I mean, even sorry, this is getting long, but one more thing. No, no, yeah, no, it's important. Even when the BOJ started normalization, dollar yen is 800 points higher and everybody was waiting for that to happen. So dollar yen would go 800 points lower. So I think it's such a weird situation now post all these distortions that to me, the bias has to be mean reversion.

13:25And then everything that I look at for like September, October, November doesn't look like collapse. It just looks like the current wave is unsustainable. Hey, everyone. We're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

13:49I think what you said is so important because we've been saying throughout the year, and we do long conversations, as anyone who's watching this knows, on our platform. If you remember, we do in-depth, right? Not 50-second sound bites. We do long conversations with people who've had a lot of experience, years of experience. Experts have made a ton of money in the past. Remember things like Yahoo going public, like you just said, right? So have been at this for a while. And all of you have said this is the most challenging macro environment. Things don't, you know, any model that anyone's using isn't exactly working.

14:26and it's hard to string out what is a result of, say, the pandemic or some of these extraordinary things that happened, and then what, and if or it's structural change or just the time lag. It's just incredibly difficult. So that echoes everywhere. So I think that that is a super honest statement you just made. And you see that with the Fed too, right? Like they don't really have a working model of inflation. Like Tarullo wrote about that in 2017, when inflation was bouncing around between 1.8 and 2.3. Now it just went to nine and they thought, I don't want to rehash that whole history, but there's people's working models for the last 25 years mostly revolved around demand.

15:08And if you can measure demand, then you know what the jobs market's going to do, you know what inflation's going to do. And now it's obviously much more supply oriented in 21 and 22. And then now we're kind of like, okay, you basically had this like earthquake and now we're looking around and all the buildings are like half fallen over and we're trying to like, in terms of economic models, not the economy. And you look at all these models of how things work and none of them work. Like that's why payrolls beat 14 times in a row because everyone had demand models and they're looking at demand kind of softening globally, but it was all about supply and supply either was there or it wasn't.

15:45And now supply is coming back and jobs, you know, there's been a lot of jobs growth. So So it's a wild and woolly environment. It certainly is. And Whittle AI, we try to sort of game in what that all means now to jobs and productivity. So in all of this, I think it's so interesting to hear people put their longer term thesis out there. Because again, as you said, there's a lot of different views about what might be going on. Raul sat down and spoke with Gerard Minnick about the business cycle. and he brought up some things that he thinks are fundamentally different. Let's have a listen to that and then we'll talk on the other side.

16:23I think there's two big changes. Firstly, policymakers have rediscovered the joys of fiscal because what they've done over the last 30-odd years is they've delegated managing the cycle to central banks and they really neutered fiscal tools in a way of managing the cycle. Well, in the pandemic, they worked out that if you send checks to people, it tends to work and it tends to be popular. And I don't think they're going to unlearn that lesson. And I think in any subsequent downturn, we will see a much faster resort to fiscal policy than what we've seen in the last three decades. That will make for much more V-shaped recoveries.

17:06And that's a big change from what we've been used to over the last three decades, which have tended to be very saucer-shaped recoveries because monetary policy became increasingly ineffectual as a macro stimulant. I got to tell you, that was an amazing conversation. It's called cracking the code to this economic cycle. That was one of the things he talked about is that fiscal side, which we've been discussing, but there are some other observations he made that really kind of dovetail with what you were just mentioning, Brent, about the changes around supply. Really, really smart stuff. I encourage you all to go take a look at that.

17:44That's on the platform. But it's interesting, this fiscal, because as you said, you're going to have, and this is an interesting tension between short-term, long-term, because short-term, you're going to have a government shutdown. You're going to have the downgrade. There are a lot of people concerned about debts. You're going to have this argument. And going into the election, you're going to have this argument about who's a better steward of the economy. And they're both going to accuse each other of spending like drunken sailors. But long term, he's kind of pointing out, oh, hang on. This might be a change where now the fiscal side, that machine, once you get that going and they see that it's popular and it wins you elections, maybe we're in a different environment right now.

18:22Well, I think that's a really important point because since 2017, essentially the orthodox thing always was Keynesian economics. When there's a slowdown, you prime the pump or you stimulate automatic stabilizers come in and you increase deficits. And then when things are better, you try to get back to flat or whatever. And then the Tax Cut and Jobs Act in 2017 was really the first time in US history that the US government went on a big, well, in this case, It was corporate tax cuts mostly, but a big decrease in revenue, but no offsetting funding arrangement to say like, okay, we're going to lose$600 billion of corporate tax, but how are we going to pay for it?

19:08And the question of how are we going to pay for it essentially disappeared. And then the popularity of MMT with Stephanie Kelton and all that stuff kind of gave it some intellectual momentum like, oh, we can just spend however much money we want. That's cool. and that has now become, I would say, and agreeing with the interview clip, that's kind of the dominant orthodoxy now is like just whenever something happens, just spend. I mean, the Inflation Reduction Act involved more spending, ironically. I think analysis kind of showed that it was neutral for inflation, but it's still kind of an ironic thing that you've spent too much fiscal and that triggered inflation is kind of like the basic model.

19:49And we're going to solve it by spending more money And, you know, California did the same thing, like giving people tax rebates to fund the inflation problem. So I think it's going to be a really big problem at some point. And as I think, you know, because I think we've talked about this, but I'm very skeptical on death of the dollar, you know, US debt, doomers and gloomers, because I've been seeing that my whole life. And it's just been wrong for it's literally been wrong for 45, 50 years or whatever. So when something's wrong for that long, and then I still hear people making the same arguments they were making in like 1996, that tells you that their model of how the world works is wrong and I don't listen anymore.

20:32However, I will say it's getting a little bit closer to the point where what will probably happen, and I don't think this will happen now, but I think in the next recession, they'll probably write some number on a napkin and say like, okay, how about$9 trillion of stimulus? We'll send checks for 5 ,500 and Ford F-150s to everyone or something. I want one. And sorry, I'm being a bit too facetious, but more seriously, they're going to write a number on a napkin and that's going to be the next fiscal plan to solve the next recession. And at that moment, or maybe at another moment in the next recession, but at some point, the bond market's just going to say like no mas.

21:15And the thing is, there's so much precedent for that. So that's the whole bond vigilantes thing, which I think Ed Yardini quoted or coined in like 1985. We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

21:35Yeah, can you, can you, it was so long ago. Sure. There are definitely, I mean, I know a lot of people in our chat and I know who you are, definitely know what that is and traded through it. But there are maybe people who are listening to this on a podcast who maybe don't really know they hear that tossed around. So, you know, what was that whole period that we saw? Right. So the exorbitant privilege that the US has as the global reserve currency is generally that it can issue any amount of debt and somebody will buy it. And that has essentially almost always been the case, but not every single day of history has been the case.

22:11So there is a moment where people will say, well, listen, if I extrapolate the interest payments and now when rates are zero, it doesn't matter, right? I can borrow a billion dollars at zero and I can still make the interest payment because it's zero. So that it was totally irrelevant in 17, 18, 19 and 20. But now with rates here, then you start looking at, okay, well, what if we slap another, you know, 20 % of GDP onto the debt, then at some point the interest payments start to dwarf even gigantic spending like military and Medicaid and stuff. And it It starts to look a little bit stupid and impossible.

22:50And there's this unknowable point where they're just nobody will buy the bonds. So whether you and you know, there's it's sort of been building towards out a bit like China's obviously buying a lot less. The banks haven't been buying as many. Everyone's been buying less bonds. So at some point it just goes super nonlinear and nobody wants to buy the bonds. And this isn't some crazy fantasy like doom fantasy to happen in the UK. I was just going to say, we just saw the modern version of this when the guilt market exploded. The financial markets just tell politicians, you're crazy. This is not sustainable.

23:28I'm out. But at the same time, right? Now it can happen in an instant. Well, that's the thing is that it's just like this weird nonlinear thing that you can't really forecast. The only thing I would forecast is that the probability of it happening right around the next US fiscal announcement is probably way higher than any other moment. But the thing, so what happens in that case is the market sells your currency and sells the bonds because it's like, that's the fiscal nightmare scenario. And generally, if you look at in, in excluding emerging markets, because the whole thing is works different there, but in developed like G10, usually yields going up means you buy the currency because it's more attractive and bond managers will switch to the place that has the highest yields.

24:17That's kind of like international finance 101. But there are moments when the bonds and the currency sell off at the same time. And you saw that in the UK in October 2022, we saw like a three standard deviation move down in gilts in UK fixed income, and like a three standard deviation down in the currency. And when that happens, then there's only two things that can fix it one or both of these things probably at the same time. One is the politicians acknowledge that we've reached the limit of how much we can spend relative to GDP before the bond market cracks. And then the other thing is the central bank has to intervene and stabilize the market.

24:59So in the UK, the Bank of England came in and bought unlimited guilts or announced auctions for unlimited guilts. Trust got, well, first trust fired Kuarteng, who's the finance minister. Then she got fired. then somebody new came in and, and like got rid of all her policies that she had proposed in the mini bucket. Quickly. Yeah. I mean, you're restoring confidence. It's the wheels are coming off. The funny thing was that the, one of the tabloids in the UK said when, when this thing was all happening so fast, it had a picture of a head of lettuce and a picture of Liz's trust. And it said, which one's going to last longer.