“The baby boomers are the most spoiled, most self-centered, most narcissistic generation the country’s ever produced.”
– Steve Bannon
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May 22, 2024 – After the market close, Nvidia will report its quarterly earnings. The market’s infatuation with NVDA as a proxy for the AI bubble on Wall Street is remarkable. And from a survey of the financial news since Friday’s record closes in the Dow and S&P 500, it’s causing even the most stalwart of bears to contemplate the dreaded “capitulation.”
First, what can we expect from today? A UBS equity strategist, Jonathan Golub, who was talking to Bloomberg, said he expects Nvidia to continue to post earnings well ahead of “market expectations.”
Over the past year, “The company has beaten consensus forecasts by an average of 20%: by 11.8% in the fourth quarter of 2023, 19.1% in the third, 28.8% in the second, and 18.4% in the first, announced exactly a year ago.”
Now, the AI chipmaker represents 5.2% of the S&P 500’s total market cap.
And this evening, its earnings per share are expected to expand by another 411%… which would mean one company alone – one – will make up 2.5% percentage points of the market’s 10.3% growth.
The S&P 500 finished last week above 5,300 points for the first time, its 23rd all-time high this year. With today’s slight pullback, the index is about 40 points from its all-time closing high.
If the pattern holds, we can expect another new S&P high tomorrow. But it’s not just the broadest index.
The Dow recently closed above 40,000 points for the first time in history.
Even more remarkable, all these record highs come amid very low trader anxiety. The VIX – a measure of volatility in the markets – dropped below 12 at the same time… the lowest close since November 2019.
In the commodities markets, Gold closed above $2,400, a new record high. Silver smashed through $30 for the first time since 2013. Copper reached new all-time highs of above $5 per pound.
According to the highly recommended Global Markets Investor X Feed, World stocks also reached new records last week. European stocks hit an all-time high. Chinese stocks have outperformed the U.S. so far this year.
Last week, 14 out of the 20 largest stock markets in the world hit or are near records.
In fact, the Russell 2000, a broad measure of small caps, is the only major index that did not make a new high.
“What could possibly go wrong?” Even the typically bearish Kitco News seemed to be searching for an explanation for global market euphoria.
Buried deep within a piece called The greatest macroeconomic story ever told? How high rates and boomer spending saved America, we found a short bit of gratification. Or at least an analyst who seems to agree with our Boomers’ Revenge thesis from several weeks ago: Boomers made the market in their own image.
During a decade of zero-interest-rate-policy (ZIRP), they locked in low interest rates on real estate and have taken advantageous positions in stock and bonds.
Now, higher interest rates are paying them off handsomely.
CONTINUED BELOW…
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CONTINUED…
The Real Reason for The Booming Market
Exhibit A: Kitco’s Ernest Hoffman offers a more lengthy analysis in his piece. It’s worth the read. This section in particular is helpful:
“The reason the economy is doing well is because the U.S. budget deficit was about 6.5% of GDP last year,” Marc Chandler at Bannockburn Global Forex told Kitco news earlier this week, “and it’s expected to be about 6% this year, and real wages adjusted for inflation are growing faster than inflation.”
Chandler told Kitco he thinks much of America’s purported economic strength is concentrated in one area:
“You basically have three sectors to the economy. You’ve got the government sector, in the U.S. government is a big debtor. You’ve got the household sector, and you can see from the consumer credit that many households are stretched.
“And then you’ve got corporations, and this is where the argument makes the most sense to me,” he said. “Why have corporations’ stocks, earnings, and profits done so well in a much higher interest rate environment?”
Chandler said the reason is that large S&P 500-level corporations have swung from being net borrowers to net lenders and savers:
“That’s the thing, they don’t really need to borrow. I think there’s something there with corporations, because the businesses are net savers, net capital surplus, and they’re earning interest on that.”
In the past, this would boost their capital investment more than it would the average American’s income, but that’s not the case today. Chandler continues:
“Even though businesses have this windfall by being net savers in a higher interest rate environment, they do not seem to be stepping up their business investment. Instead, I suspect that they’re doing two other things: boosting dividends and share buybacks. Rather than investing in new plant and equipment, they’re giving it back to shareholders.”
“This aligns with what we’ve seen throughout this surprising bull market,” Hoffman comments, “companies have indeed been paying out larger dividends and buying back their own stock, and the companies that have done so have been rewarded by investors.
“But which investors, precisely? Just as the Fed goes on about the need to drill down past the headline numbers to figure out where exactly the inflation is occurring — is it transitory or permanent? Goods or services? Essentials or luxuries? — it may also be necessary to understand who stands to gain from high interest rates, because it won’t be everyone.”
For now, we recommend enjoying the global mania for securities. But also do not forget the old Wall Street adage: “Nobody rings a bell at the top of the market.”
So it goes,
Addison Wiggin,
The Wiggin Sessions
P.S.: As far as government spending propping up the economy and by extension the global stock market, we paraphrase (Niall) Ferguson’s Law – any great power that spends more on interest payments than on defense is not going to be great for very long.
As we noted yesterday, the Chinese — among other BRICS nations — have just sold off the most U.S. government debt since they began gobbling it up upon opening their market to Western nations in 1991.
(How did we get here? An alternative view of the financial, economic, and political history of the United States from Demise of the Dollar through Financial Reckoning Day and on toEmpire of Debt— all three books are available in their third post-pandemic editions.)
(Or… simply pre-order Empire of Debt: We Came, We Saw, We Borrowed, now available at AmazonandBarnes & Noble or if you prefer one of these sites:Bookshop.org; Books-A-Million; or Target.)
Please send your comments, reactions, opprobrium, vitriol and praise to: addison@greyswanfraternity.com
