TDI Podcast: Bearish Revelations (#948)

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1:24Tim Knight:cultivating financial success.

1:30Well, we got the numbers. NVIDIA earnings are out, now we know. And a remarkable about phase two. Yens at critical levels. Global markets should really be on alert. And our guest today, good timing, PermaBear Tim Knight, author, trader, and founder of Slope of Hope. All this and much more on episode number 948. of the Disciplined Investor Podcast.

2:08Hey, welcome to the Disciplined Investor Podcast. So happy that you're with us this week. Every week, it is approaching the end of November into Thanksgiving, and then we know that all important seasonally, seasonably very cooperative time of the year that we see markets do well. Known as the end of the year run Santa Claus rally. And as we said many, many times, the setup is pretty good. Now, you may be saying, well, wait a second. Does that count? When all of a sudden we see things that happened like we saw last week with the major moves on underlying tech really hacked pretty bad. The legs cut out of many of them in the beginning of the week.

2:58And then all of a sudden, a little bit of a rebound. And then we come into the NVIDIA earnings. And when the NVIDIA earnings were, you know, everybody's like, oh, thank goodness. You know, we have this wonderful rebound, reset. The reality is still there. The promise, the hope, the opportunity, everything is set, ready to go. because NVIDIA, NVIDIA, the god NVIDIA, has posted numbers, and they look pretty darn good. There's some interesting things that happened, though, last week. We saw that conference, the conference discussion by Jensen Wang and by Elon Musk at the Saudi Investment Forum. He says, this is, both of them kind of combined, I'm going to give you a combined exposure of what they talked about.

3:47The AI is in the infrastructure. In infancy, it's revolutionizing every industry. And Elon Musk pointed out that humanoid robots will be the biggest product ever. In fact, in 10 to 20 years, work is going to be optional because of AI. He said at some point, currency also is going to become totally irrelevant. They talked about working with Saudi Arabia to build supercomputers and the idea that the combination of AI and humanoid robotics is going to end poverty. Kind of was like a Miss World competition where what do we want? We want to end world hunger and starvation and poverty. This is the concept that they want.

4:44I don't know what we have from here. Are we going to start up this discussion about universal basic income? The UBI discussion? Because if, well, on one hand, if we don't have to work and we're eliminating poverty, we need money to do something. But then again, we're also talking about currency being irrelevant, work being optional. I don't know what we have to use. Maybe we're bartering. What are we doing? We're not working. So we don't have any services that we can provide because the humanoid robots, just like we saw in Sleeper, are going to be fighting. Very confusing. Is it possible? Of course.

5:27Who knows? I've been around long enough to see the, I mean, you think about the history lessons of the 1900s, just that time frame, just the 1900s, the early 1900s, even back to the 1800s. Going from an agrarian type of society and the world structure and bartering and feeding ourselves and utilizing that to the next level that we go through in the automation and industrial revolution. And then into, by far, one of the biggest changes. They're all big. The technology revolution. And there's been other things in between, of course. But I'm just pointing out the biggies, right? The ones that we really see as life-changing.

6:12And is it possible that all the things that they're predicting come true? Yeah, I'll go with that. But some of it seems rather far-fetched, and putting our money on that now seems a little bit premature. I think that's what's going on. Right now we saw that NVIDIA's numbers came out. They beat Jensen Wang. was, in my opinion, on his back heels, you know, on a few topics and clearly paying offense on other topics. The things that we would expect from him to talk about the opportunity and how much money they're making in the future and they're sold out of this chip or they're sold on that chip, all that I get and look pretty darn good.

6:57The things that he was on his back heels about, It was curious to me that he was really coming to the, on the defensive side of looking at the whole circular financing discussion. But he said, everything's good. We're good to go. Don't worry about that. Money's there. We're funded. The funding is secure, so to speak. He didn't say that. I'm saying that. Elon said that once upon a time. There was something in the details that I thought was a little bit concerning. The earnings report came out and it's one of those, hmm, this$100 billion commitment to open AI is not actually quite a done deal. It's in fact an open discussion.

7:48that was a little bit surprising I think to a lot of people saying I thought we had all this financing in place if open AI is guaranteeing or is at least projecting that they're going to spend this much money and that much money over the next 10 years and we need the funding from somewhere and one of the places is NVIDIA to pass it through and along and then they can pass it through and along and if NVIDIA doesn't have this lockdown with open AI it's not even necessarily more than a wink and a nod, maybe a handshake. That's not good enough. Also, we touched on the other hot item that is related to the useful life of chips, depreciation of the asset over time.

8:32And the issue is how long the value holds of that asset, of the chips, of the product for a couple different reasons. One is from an accounting standpoint. One is from a wasting asset standpoint. One is, you know, you're going to spend a billion dollars and two years later they're obsolete. That means that I just spent a billion dollars and that's done. I got to spend another billion. What was curious for me was that he answered this question again. In a defensive, backheels nature came out with this because he knew there was a lot of talk about this. And he talked about the useful life being maybe somewhere between six and nine years.

9:10that many of these products that are in place could and have been lasting that long. Now, that's good for the asset valuation question, whereas you have an asset that you've written off but you can still use, therefore it still has value to the company. Maybe if they sell the company, there's a value there. Or if they want to look at what the book's values are worth for all sorts of different reasons, utilize some of the assets to pledge to maybe borrow. and, you know, the health of a company, right? What are your asset base? But I think that answer may have two sides to it. And many may have been looking at this whole six to nine years and saying, wait a second, if these chips are still usable for a period of time, maybe, just maybe, the replacement cycle is not what we first thought.

10:04And maybe that's why NVIDIA stock reversed hard on Thursday. Something we got to look into because there's something under the surface that is bothering investors aside from valuation these days. I think valuation question was the first thing that really started to pique the interest of many of the investors out there saying, how much more money can I throw at this? even though it all looks good, how long is that going to last? And they hearken back to, yes, the dot-com days and not the dot-com days that I'm talking about, the companies that were zero revenue and just losing money and they were just an idea, a pie in the sky, a hope for, and a prayer that something would blossom from this long term.

10:56The difference, what I'm talking about is those companies that actually were doing well and had the opportunity and were on the runway for takeoff, but then the realization was that they can't continue at this pace forever. It's just, it's physics. It's just impossible. This is so far a plane can go when it is vertical until it reaches that stall speed and has to kind of come back down to earth. Maybe not all the way, but it can't stay in that vertical posture forever. in the stock market talk, in investing, when we talk about technical analysis and charting, we call that parabolic moves. And if you look at a monthly chart of NVIDIA, that is one hell of a parabolic move.

11:49On to economics for a moment. November Josh report will be released on December 16th. That's an important date because this is after the December Fed meeting and decision. The FOMC is meeting and it's going to be meeting before. So what does that mean? Well, if you think about it for a second, what that means is that's going to throw a monkey wrench directly into the idea that the Fed is going to reduce rates in December because if the Fed is going to be and continues to say they are data dependent, they don't have data. The best data they have to work with is something from back in September, which we're going to talk about in a second because the October numbers are canceled.

12:34That's right, canceled. Government said they're not putting them out. So if the Fed wants to maintain any degree of reasonable expectation that they are believable, then they really can't do anything. The only reason that they will do something is if the market pukes or if something else bizarre comes out. Because the numbers that we saw for September was that payrolls increased by about 120 ,000. So the August non-farm payrolls were revised even lower, by the way, from 22 ,000 down to 4 ,000. July was actually revised to 72 ,000 from 79 ,000. Private sector did increase by 97 ,000 in September.

13:30Again, everything was revised about August down significantly. In September, the unemployment rate was 4.4%. Everybody was thinking about 4.3%. So things are moving in the wrong direction. for both inflation and for employment, which brings up, I don't want to say it. I don't want to say stagflation. Stagflation, it's, you know. That word, stagflation, that's the basic recipe right there. And probably why President Trump backed down and said that we're going to be taking off tariffs on, what, beef, coffee, bananas, about 200 different food items, because we want affordability. Taking a page or a chapter from the Mondami playbook.

14:25It worked there. Let's see if it worked here. Now, the problem is that now that just crushes any believability of what the president is saying about this because they talked about how consumers weren't paying the tariffs, and now all of a sudden they're saying by reducing it down, consumers are going to save a bunch of money. Can't have it both ways, fellas. so average hourly wages and earnings were up a little bit, but bottom line on all this is that the unemployment numbers are a big, gigantic black hole right now because we saw that gigantic revision in August. September's numbers looked okay, a little bit of a bounce back.

15:10There is nothing in that report, which is the last report they're going to get before the numbers come out in December, which is after the fact of when they vote. And therefore, probably doesn't lend itself to another reduction. At least that's what everybody's thinking, about a 40 % probability of a rate reduction by 25 base points in December. But it would seem to me that with all that's going on, the Fed may say, you know what, let's just wait one more month. Just my two cents on this whole thing. So we have Nvidia earnings. Markets got pretty, you know, squirrely. Yen at critical levels. That's a big issue.

15:53We're hitting about 154, 155. Not the high, but hitting a midterm high over the last year. And that is a big concern that, you know, when I say high, the dollar is hitting high against it. So the yen is dropping in value, just to be clear. because currency is always a two-part. One's moving up, one's moving down. So that cross-currency exchange rate, when I say high, it's about 154. That's up, but that means the reverse. If I'm confusing you, I'm sorry. That means the reverse of what's happening is that the yen is actually dropping in price dramatically. And what's interesting is that does tell us a little bit that the thought is that somehow, which I don't really feel that's necessarily the reason, that the U.S.

16:34is going to be in more of a tightening policy mechanism than the yen, which I just don't see that. I just don't see that. It seems like they need to be tightening more because their inflation rates are hitting pretty high numbers. I think the big issue right there is the fact that there's going to be a lot of concern over policy and that the concern is manifesting itself inside of the currency itself. That's what's going on. Bitcoin, did you see that? I think it hit 88 ,000-ish, 87 ,000 for a little while there. That's down about 30 % MicroStrategy stock that we've watched for a long time and wondered like, what?

17:13MicroStrategy, well, it's called strategy now. Michael Saylor's company is a leveraged Bitcoin play hitting a 52-week low. And we're seeing lots of little areas and pockets that are seemingly getting hit pretty hard in the last three or four weeks. We're going to talk about that with our guest in a minute. And I have a, I'm just looking right now at my list. Lots of questions. And crypto is on there. Politics is on there. Why interest rates are going down. I have this whole long list. So we're going to talk about that with him in a moment. Before we do that, I want to talk about interactive brokers and ask you a question.

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18:44Make your prediction. Go to ibkr.com slash forecast and start predicting today. By the way, the last day for this contract, for the Bitcoin contract, is December 31st. Well, let me introduce our guest, Tim Knight. Now, he's been charting and trading since 1987. Now, that's an important date, right? That was the time he made his first stock trade. In fact, it was October 19th, 1987, the day of the crash, which probably is the reason why he has this disposition towards bearishness. Yes, he's a bear, a self-proclaimed perma bear. We've had him on many times. I try to find a time that I think in the future, we book three, four months in advance, that maybe there's going to be a correction.

19:33And boy, we hit it again. Last time we hit it in April, we hit it again here. He's written several books, and his most recent writing has been focused on charting and the history of financial markets. in the book Panic, Prosperity, and Progress, and more recently in Silicon Valley, Babble On and Solid State, his first novel. He's been running Slope of Hope since March 29, 2005, written about 30 ,000 posts. And besides running the Slope of Hope and being the founder, he also hosts a daily show on the Tasty Live Network called Trading Charts with Tim Knight. Let's get right to and bring him in, open the phone line.

20:12So Tim Knight, welcome. Thank you very much. You know, I did this for you, you know. Well, we all know that and we're all grateful. I appreciate that, truly. There was a time that Tim and I were talking and he's like, look, look, markets are going up and you know me, I'm a perma bear and it would be better if we had at least something that's not going directly up when I come on the show. And I said, the next time you come on, I'm telling you I'm going to pick the date in advance, months in advance, that the markets are going to be going down. That was back in April. This time around, I said, I'm going to do the same thing for you.

20:45And markets are not too happy right now, are they? Why didn't you do this years ago? This is amazing. You and I could be a great team. What's happening? What is the problem? I mean, I have been, let me just give you a little bit of undertone of some things. I have been with a strange eye looking at the whole issue with regarding vendor financing, circular financing, all these empty promises that could maybe possibly could. And everybody's getting all lathered up about this and saying, uh-oh, this is troubling me. And Michael Burry style, right? The difference is I didn't close my shop. and um and is that what's happening right now with this nvidia earnings that came out that that everybody's like okay well that's great earnings but uh we're not sure well it was really you know so i on on my website i've done literally like 50 000 posts i mean that's a real number and i think the post i did last night i've got a if it's not the best post i've ever done it's got to be in the top five.

21:51And I just had, I made a crazy assertion, which was that, you know, NVIDIA has come out, everything's blasting higher, the NQ's up hundreds of points. I'm short 35 positions. They're going to wipe the floor with me at the opening bell, but I can't wait for the market to open. And there was just something about the, there's, there's been a character change in the market such that we are in a downtrend. It is a series of lower lows and lower highs. We have broken all the trend lines. And my supposition, which turned out to be very correct, was that the blast higher we were going to get at the opening would probably be the best shorting opportunity for the rest of the year.

22:40And that's exactly what happened. And so I, I came into the day about a hundred percent short and I was literally like 200 % short and 90 minutes into the open and all holy hell broke loose. So is that on tilt short or on plan short? I'm not sure what the distinction is you're making. On tilt is when you are in a casino and you're losing and you're playing blackjack and you're losing and just double, you know what, here, take, I'm going to, or, or when you're in playing poker and you're losing hand after hand and you just like to start putting up more and more and more money. No, it wasn't, it wasn't a kind of a desperation situation.

23:21On the contrary, you know, my, what, what I, what I trade, the portfolio I put together is so, such a Frankenstein's monster that I sort of look at how it behaves and it's basically two portfolios and the market open, everything was blasting higher, hundreds of points, everything was green. And one portfolio was down like 3 % and another was like unchanged, which is like incredible. It's like a guy jumping off a building and then levitating. It's like, how is that even possible? And so the nature of how they were behaving told me that, hey, this isn't too bad. And so it's like, so I just went pigged out and shorted all this stuff.

24:01I shouldn't short like SMH and AMD and things like that. So It was a really exciting day. So how'd you finish the day, though? You didn't finish 200 % short. No, but I'm still pretty aggressive. So I came in 100%, peaked at about 220, ended around 150. So still pretty aggressive. I mean, I don't have the, I can't wait till tomorrow opens feeling that I did 24 hours ago. Because as I'm looking at the chart, you could absolutely make a case that the market's oversold. So I got out of the friskier stuff like SMH, like AMD. I'm seeing some weird stuff that looks super toppy, which ain't going to care about NVIDIA, like WD-40, my hand to God, WD-40 Corporation, stuff like that.

24:53So I'm getting some really goofy picks out there that we kind of immune to, you know, well, AI's done another$50 trillion deal with OpenAI and and Oracle or God knows what else. So what about cryptocurrency? I mean, so my harebrained absolutely on, there is no qualification for what I'm about to tell you, but just, hey, what about this idea? And that is that there was a lot of margin and leverage in the system, like the largest amount ever, right? The largest net or largest total amount of margin outstanding for margin debt in brokerage accounts. And I said, OK, well, that's interesting. And then we saw that Bitcoin started coming down, right?

25:37That whole risk off trade was starting to, you know, just to simmer a little bit. What about the idea that margin was being taken out and the idea that stocks could never go down and let's go find a riskier asset to put our money into? And when Bitcoin started coming down and when margin calls started happening, we saw that Bitcoin is down, what, 30 percent in the last however short period of time here. Yeah, no, it's, I don't really know how the relationship, the plumbing relationship between Bitcoin and equity, but I do know there's this sort of miasma of risk on risk off behavior. And, you know, the fact that Bitcoin has just absolutely crumbled, I felt that had to have some negative influence in terms of people's just sheer confidence and cockiness.

26:27and so yeah we got up to around 127 ,000 I think early in October I want to say and we were like at 85 today and I don't yammer too much about Bitcoin this and that because crypto bros are psychotic and I don't really want to deal with their blowback but as a chartist it is kind of interesting. Calling this psychotic is not going to give you any blowback don't worry about that. Oh, no, they're nuts. I mean, there is no theology on the planet. There's no radical Islamic zealot that's anywhere close to crypto, bro. So I tend to just like tiptoe around and say, you know, Bitcoin's just peachy keen and we all use it every day, don't we?

27:10You know? Yeah, exactly. It's ridiculous. So going back into this, I taught you what on tilt means. You teach me what miasma means. Oh, well, I hope I'm not misusing it, but it's sort of just think of it kind of like a just a general mist in the air, just kind of a zeitgeist, if you will. Yeah, gotcha. Yeah. So the whole frothy optimism that we saw earlier this year was a combination of crypto doing well, Washington DC, aka Trump, supporting crypto every which way he could, um stocks going higher and higher uh the ai mania all the rest of it and i've got a sort of special view of that because i'm right here in palo alto and i've got very firsthand experience about like what's going on in these ai companies and what kind of money's sloshing around and it's just like you know this is this makes 2000 look so conservative and prudent this is just ya ya so um well the difference is i was writing about this today i think the difference between 2000 When people think about$2 ,000, then they come back with you and give you the defensive posture of, well, companies weren't making money then.

28:19And that whole thing that they talk about, right? And they bring up the WebVam and the Peapods and they bring up the Amazon at the time. And they bring up this whole idea that, well, that's why it's different because companies have money. They have access to money. But what's similar about this, what is the funny thing, what the similarities about this is, there was pie in the sky promises on an unproven technology. Right. And the amount of money that was being dedicated. The other thing that was, I bring this up a lot. This is a story that I just can't shake. And tell me what you think. Back in the day, we'll say 1999 or whatever the year was, maybe even 98, when we're all getting computers.

28:58We're just buying computers. We're buying computers for basic stuff before internet, right? But what were we buying? We were buying Dells. And the Dell stock was through the roof. Parabolic, direct up, you know, moonshot, great stuff. Because the growth numbers of revenue because of sales was astonishing. But when we did a calculation one time and said, okay, if they continue with this 50%, you know, period over period increase in sales, Everybody in the world is going to have to have three Dells on every one of their desktops. That makes no sense. Right. And the idea that NVIDIA is having this kind of move, and then, by the way, and I talked about this in the beginning, where they even talked about how, and they had to defend the replacement cycle, saying, well, it's not quick, it's maybe six to nine years, and I'm thinking, well, that's not good either, because the replacements won't happen.

29:56That's what reminds me of 2000. Yeah, no, it's a very different world. And if one were to, you know, because like, you know, Facebook back then had, well, no, there was no Facebook. But social media had like, billions of people. And today, it's like Facebook has like, what, three and a half billion. It's like, well, there's not a whole heck of a lot left, growth left there. And as far as this NVIDIA thing goes, if you said, all right, give me a bare case for NVIDIA, just tell me what's gonna change in the world that changed their story. It's just so easy because naturally they are selling out of GPUs.