Front-Running Recession

In my last blog post I pointed out that bulls are playing a very dangerous game - they are rotating OUT of deflationary Tech stocks into the cyclical parts of the market while at the same time hoping for a weaker economy and Fed rate cuts. Since that blog post, markets have moved to even more extreme positioning for that outcome. I call it front-running recession.

Last time I left off by discussing the impending earnings from the "most important stock in world history". Last night, Nvidia once again posted incredible growth on the top and bottom line that in any other circumstances would have been mind boggling. However, these latest numbers are arriving in the context of a two year non-stop rally that has catapulted Nvidia to the second highest market cap company in the world. To put things in perspective, this week Warren Buffett's Berkshire Hathaway finally joined the $1 trillion market cap level - the first non-Tech company to reach that level. That's the same amount of market cap Nvidia LOST in just six weeks this summer (see chart below).

Nevertheless, since that low a mere 3.5 weeks ago, Nvidia has staged a furious rally higher, however I predict that this earnings report marks the end of the line for the AI bubble. From this point forward, the year over year comps as a % will become much harder and therefore the company will post a declining growth rate from this point forward. That rosy scenario assumes no recession. In a recession, this stock will be bidless, because the artificial intelligence ROI won't arrive in time to save Nvidia customers from mass forced de-leveraging.

A few weeks ago I posted this chart showing that this data center expansion has now lasted 15 years and encompasses both the pandemic Work-From-Home bubble AND the Artificial Intelligence bubble. Anyone can see that the growth is already slowing at the apex of the bubble.

Further confirming the top for Tech, this week saw the implosion of many former high flyers that year-to-date were impervious to any form of bad news. I am specifically referrring to Cava the top performing restaurant stock, Abercrombie & Fitch - the top performing U.S. retail stock, PDD the top performing China retail stock, Super Micro Computer the top performing AI stock.

Here we see the Momentum Tech index is imploding off of extreme overbought as it did the last the last three times:

Moving past Tech stocks, this is now day 13 of the low volatility melt-up. I predict that volatility will return with a vengeance in September which has been the worst month of the year for stocks two years in a row.

This is the 15 year view that shows this daily win streak melt-up is an outlier event.

Getting back to the $USDJPY Yen carry trade. As I showed on Twitter during the 2022 bear market, the Yen carry trade supported global stocks because the yield differential was supportive of global risk assets. Now, that yield spread is reversing with Japanese yields rising amid falling global yields. Therefore in this next decline, instead of supporting risk assets, the Yen unwind will accelerate the decline.

In summary, Nvidia CEO Jensen Huang has now officially exceeded Elon Musk for making outlandish science fiction based predictions that have ROI payback that doesn't exist in the current market cycle.

Call it artificial intelligence.