Mad Hedge Technology Letter
August 21, 2018
Fiat Lux
Featured Trade:
(THE CHIP MINI RECESSION IS ON),
(NVDA), (AMD)
Mad Hedge Technology Letter
August 21, 2018
Fiat Lux
Featured Trade:
(THE CHIP MINI RECESSION IS ON),
(NVDA), (AMD)
Demographics is destiny.
If you ignore it as an investor, you will be constantly behind the investing curve wondering why your performance is so bad.
Get ahead of it, and people will think you are a genius.
I figured all this out when I was about 20.
I realized then, back in 1972, that if I could just get ahead of the baby boomer generation everything magically seemed to work.
Buy what boomers want to buy next, and the world will be your oyster.
That strategy is still working today.
Back then, that meant buying residential real estate in California and New York, which has since risen in value 100-fold, and more once the generous tax breaks of home ownership are added in.
Now it means investing in health care and big pharma.
Except now, there is a new crowd in town: The Millennials.
As a long-term observer of America’s demographic picture, I was shocked to hear of a recent report from the U.S. Census Bureau (click here for the link).
The U.S. population grew by a scant 0.72% in 2012, the lowest since 1942.
You can’t start or expand a family when an essential partner in the process is off fighting WWII, and there were 17 million of them back then.
This is far below the 2.09% replacement rate that the country was holding onto only a few years ago.
At the end of 2016, there were 323.1 million Americans. This accounts for 4.3.08% of the global population of 7.5 billion, which was up 1.1%.
This places American population growth at the bottom of the international sweepstakes, down with Italy (0.32%), Germany (0.11%), and Poland (0.02%).
According to the World Bank, 22 countries suffered population declines, such as Portugal (-0.29%) and Japan (-0.20%) (click here for the link).
The tiny Sultanate of Oman, one of my old stomping grounds as a military pilot, enjoys the planet’s highest growth rate at 9.13%.
But then it helps if you have four wives.
The obvious cause here of America’s demographic dilemma was the recent weakness of the U.S. economy. There is a high correlation between economic health and fertility a year later.
So, we can only hope that the improvement in the economy this year sent more to the maternity ward.
If it doesn’t, it could be great news for your investment portfolio. Fewer births today translate into a shortage of workers in 20 years. That brings rising wages, flying inflation, and rapid price hikes. And stock markets love inflation because companies can pass costs onto consumers, while bond holders can’t.
Corporate profits go through the roof, as do share prices. It also produces fewer relying on government services in 40 years, which makes it easier for the government to balance the budget.
This Goldilocks scenario is already scheduled for the coming decade of the 2020s, when a 15-year demographic headwind flips to a tailwind, thanks to the coming demise of the “baby boomer” generation, now a big cost to the economy.
Demise, that is, except for me. As long as I hike 10 miles a day I’ll probably live forever.
The new data suggest that the coming “roaring twenties” could extend well into the 2030s and beyond.
California was the most populous state, with more than 39 million, followed by Texas and New York. Two states saw population declines, Maine and West Virginia, where the collapse of the coal industry is sucking the life out of local businesses.
Parsing through the report, it is clear that predictions of population trends are becoming vastly more complicated, thanks to the increasingly minestrone-like makeup of the U.S. people.
By 2040 no single racial group will be in a majority in the U.S. That is already the case for the entire state of California now. Hispanics now account for 38% of the population of the Golden State, followed by Caucasians at 37%.
America will come to resemble other, much smaller multiethnic societies, such as Singapore, South Africa, England, and Israel. This explains much about the current state of politics in the U.S. today.
Texas saw the greatest increase in population, with a jump of 387,397, to 26,020,000, as people flock in to take advantage of the big increase in local government hiring there.
Some 80% of new Texans were Hispanic and black, confirming my belief that the Lone Star State will become the next battleground in presidential elections.
This no doubt explains the recent rise of the white nationalist movement and the election of Donald Trump.
Single ethnic groups historically will only lose their majority with a fight.
This is why gerrymandering (redistricting) is such a big deal there, with the white establishment battling to hang onto power at any cost.
Further complicating any serious analysis is the rapid decline of the traditional American nuclear family, where married parents live with their children.
With a vast concentration of wealth at the top, and a long-term decline of middle-class earnings, this is increasingly becoming a luxury of a prosperous elite.
As a result, the country’s birthrate has declined by half since 1960.
Those who do are having fewer kids, the average family size dropping from three to two. In 1964, the final year of the baby boom, 36% of Americans were under the age of 18.
Today, that figure is just 23.5%, and is expected to fall to 21% by 2050. Only 80% of women have children now, compared to 90% in the 1970s.
One possible explanation is that the full, end-to-end cost of child-rearing has soared to $241,080 per child now.
I was a bargain as a kid, costing my parents only a tenth of that. Rocketing college costs are another barrier, with 70% of high school grads at least starting some higher education.
I went to Boy Scouts and Little League baseball, each of which cost $1 a month. A full scholarship covered my college expenses.
When I look at the checks I have written for my own children for ski lessons, soccer, youth sailing, braces, international travel, and assorted master’s degrees and PhDs, I recoil in horror.
Fewer women are following that old adage of “marriage before carriage.” Some 41% of children are born out of wedlock, up 400% in 40 years.
It is definitely an education and class driven divide. Only 10% of college-educated mothers are still single, compared to 57% for those with a high school education or less.
It is a truism in the science of demographics that educated women have fewer children. It makes possible careers that enable them to bring home paychecks instead of babies, which husbands prefer.
Blame Roe versus Wade, the Equal Rights Act, and Title Nine, but every social reform benefiting women of the past half-century has helped send the birthrate plummeting.
More women wearing the pants in the family hurts the fertility rate as well, as they are unable, or unwilling, to bear the large families of yore. The share of families where women are the primary breadwinners has leapt from 11% to 40% since 1960.
When couples do marry, they are sometimes of the same sex, now that gay marriage is legal, further muddying traditional data sources.
Some 2 million children are now being raised by gay parents. In fact, there is a gay baby boom underway, which those in the community call the “gayby” boom.”
All female couples have produced 1 million children over the past 30 years, 95% of whom select for blond-haired, blue eyed, Aryan sperm donors who are over six feet tall ($40 a shot for donors if you guys are interested and live walking distance from UC Berkeley).
I’m told by the sources that know that water polo players are particularly favored.
The numbers are so large that it is impacting the makeup of the U.S. population.
There was a time when I could usually identify the people standing next to me on San Francisco cable cars. That time has long passed. Now I don’t have a clue.
Whenever we go to war, we become our enemy to a modest degree, both as a people and a culture.
After WWII, 50,000 German and 50,000 Japanese wives were brought home as war prizes. Sushi, hot tubs, Toyotas, and Volkswagens quickly followed.
The problem is that the U.S. has invaded another 20 countries since 1945 and is now maintaining a military presence in 140. That generates a hell of a lot of green cards.
This has spawned sizeable Korean, and later, Iranian communities in Los Angeles, a Vietnamese one in Louisiana, a Somali enclave in Minneapolis, and large minority of Afghans in San Jose.
The fall of the Soviet Union in 1992 unleashed another dozen Eastern European ethnic groups and languages on the U.S. Haven’t you noticed the proliferation of Arab fast food restaurants in your neighborhood since we sent 20 divisions to the Middle East?
What all this means is that the grand experiment called the United States is entering a new phase.
Different ethnic, racial, religious, and even political groups are blending with each other to create a population unseen in the history of the world, with untold economic consequences.
It is also setting up an example for other countries to follow.
Get your investment portfolio out in front of it, and you could prosper mightily.
“Honesty was never a profit center on Wall Street,” said James Grant of Grant’s Interest Rate Observer.
Now is not a good time to put new money to work in the semiconductor space.
American chip companies are some of the major exporters of domestic technology in a world that has been taken over by a contentious global trade war.
The administration shows no signs of backing down digging into the trenches and not giving up an inch.
Damocles' sword is hanging over chip revenues waiting for the final verdict giving investors a great short-term reason to avoid semiconductor companies.
It’s not the time to be cute in the market, but there is still one must-buy name in the chip space that is best in show and that is Nvidia (NVDA).
"Turing is NVIDIA's most important innovation in computer graphics in more than a decade," said Nvidia CEO and founder Jensen Huang.
Huang made this announcement of the eighth-generation Turing graphics architecture at a conference in Vancouver last week.
There have been recent leaks in the press that Nvidia will roll out two new GPU products shortly, the RTX 2080 and RTX 2080 Ti adding to its already stellar lineup of gaming hardware.
The quality shines through with the real-time ray-tracing offering gamers newly enhanced lighting effects.
Nvidia’s new GeForce RTX 2080 series of graphics cards is derived from the company’s Turing architecture.
To check out a demo that shows off production-quality rendering and cinematic frame rates then click here.
Innovation has been a hallmark of Nvidia’s approach for quite some time and the high quality of products has always attracted a diverse set of customers.
Enhancing its GPU products is a boon because a myriad of gamers, professional and casual, will end up upgrading to these chips that vie to stay ahead of the fierce gaming competition.
Gaming is Nvidia’s core revenue stream comprising more than 58% of sales.
Global exports revenue projects to surge 30% higher in 2018, eclipsing $906 million and could swell to $1.65 billion by 2021.
The new Turing GPU is poised to elevate margins because of its $2,500-$10,000 price point.
The Turing architecture incorporates enhanced Tensor Cores offering six times the performance of the previous generation architecture.
The steep price will entice content creators and developers to drop a wad of cash on state-of-the-art GPUs improving their own products.
The step up in price reflects the addition of modern AI and ray-tracing acceleration into the design that previous generations lacked.
Ray tracing is the act of simulating how light bounces in the physical world smoothly transferring it to a virtual image.
The new Turing architecture will produce 25 times the performance of the previous generation.
Content creators are drooling over these new possibilities.
Profit margins will increase starting from the fourth quarter when shipping commences.
Nvidia has chimed in before describing that the GPU addressable market will rake in 50 million potential customers and will be a $250 billion industry.
Innovation is Nvidia’s bread and butter and instead of resting on its laurels, it has gone out and pushed the limits further with these new GPU technologies.
Advanced Micro Devices (AMD) will have a hard time replicating Nvidia’s success after Nvidia’s second generation of products with integrated AI acceleration is lapping up praises by industry specialists.
Nvidia has adopted the playbook that so many tech companies have found useful. It has a mix of businesses that complement its core business.
The gaming division is by far its main driver. However, the rest of the 42% of revenue is made up of a collection of mainly the data center comprising 23.8% of sales, and its automotive segment bringing up the rear with 5.2% of revenue.
The total addressable market for artificial intelligence will be in the ballpark of $50 billion by 2023 offering a huge pipeline of potential deals in its data center and autonomous driving divisions.
Nvidia rings in just 5.2% of revenue from autonomous driving segment and the mass rollout of robot-taxis will ignite this segment into a meaningful part of its portfolio.
The first hurdle is the mass adoption of Waymo vehicles because they are first in line to make this futuristic industry into modern day reality.
Either way, Nvidia is advancing its technology to be in pole position to capitalize on the shift to automotive driving by developing a driverless car supercomputer named Drive PX Pegasus aimed at helping automakers create Level 5 self-driving vehicles.
Even though this industry is still in its incubation stage, a projected 33 million autonomous vehicles will be cruising around streets by 2040 ballooning from the 51,000 cars forecasted by 2021.
Nvidia’s have struggled as of late.
The post-earnings sell-off happened even though it beat the current quarter’s projections, but the all-important guidance was light.
Guidance fell short because of bitcoin’s fall from grace cratering from $20,000 to $6,000.
Low cryptocurrency prices suck the air out of the demand for GPUs required to mine cryptocurrency.
The softness in demand was reflected in last quarter’s crypto-based revenue coming in at a paltry $18 million.
The previous quarter was a different story with crypto-based revenue boosting top-line revenue substantially with quarterly revenue registering $289 million, which was 9% of total quarterly revenue.
Huang has confided that crypto-based revenue is not the main driver for Nvidia going forward. And latching itself to an unstable digital currency with governments out to drown out the fad is not sustainable.
The guidance, even though less than expected, is still healthy representing 23% YOY growth.
The sell-off offers a prime entry point in a stock that is the best publicly traded chip company in America right now.
No doubt the enhanced GPU chips will kick-start another round of increasing revenue. The lighter-than-expected revenue guidance sets the stage for Nvidia to resoundingly beat next quarter’s earnings estimate.
Crypto-based revenue was never an assumed part of Nvidia’s revenue engine and was at best a one-off boost to the bottom line.
Nvidia is still a great company producing hardware with duopoly playmate AMD, which has seen a double in its share price in the past four months.
As Nvidia retraces from its all-time high, $225 is the next level of support that would provide a timely entry point into a company that leads its industry.
These types of companies do not grow on trees and if you choose to buy into any chip stock, Nvidia would be the favorite because of its dominant position grabbing 66% of market share in the GPU market leaving runner-up AMD with the scraps.
________________________________________________________________________________________________
Quote of the Day
"It's OK to have your eggs in one basket as long as you control what happens to that basket," – said Tesla founder and CEO Elon Musk.
Mad Hedge Hot Tips
August 20, 2018
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) Trade is Still the Driver, as news of a China delegation visiting the U.S. pushes stock indexes toward new all-time highs. Click here.
2) However, the Technology Correction Continues, with defensive consumer staples, REITs, and utilities leading the charge. Don’t expect this to last. Click here.
3) The Tesla Meltdown Continues, with the stock down $100 in two weeks and JP Morgan joining the lynch mob. (TSLA) now has the largest short position in the market at 26%. For more jeering click here.
4) High-End Real Estate is in Free Fall Everywhere, especially in San Francisco and New York. The Chinese and Russian flight capital that has buoyed this market for a decade is drying up. Click here.
5) The Chip Mini-Recession is On, with even front-runner NVIDIA (NVDA) down $25 in a week. Click here for what to buy on the dip.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or
IS THE TRADE WAR ON OR OFF?),
(AAPL), (UUP), (EEM), (NFLX), (TSLA), (GOOGL), (SOYB),
(SOME SAGE ADVICE ON ASSET ALLOCATION),
(IS WALMART THE NEXT AMAZON?),
(AMZN), (WMT)
Global Market Comments
August 20, 2018
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or
IS THE TRADE WAR ON OR OFF?),
(AAPL), (UUP), (EEM), (NFLX), (TSLA), (GOOGL), (SOYB),
(SOME SAGE ADVICE ABOUT ASSET ALLOCATION)
"Getting information off the Internet is akin to trying to sweep back the ocean with a broom," said Ray Kurzweil, director of engineering at Google.
Global Market Comments
August 17, 2018
Fiat Lux
Featured Trade:
(DON'T MISS THE AUGUST 22 GLOBAL STRATEGY WEBINAR),
(HAS THE VALUE OF YOUR HOME JUST PEAKED?),
(ITB), (PHM), (KBH), (LEN), (DHI), (NVR), (TOL),
(JOIN US AT THE MAD HEDGE LAKE TAHOE, NEVADA CONFERENCE, OCTOBER 26-27, 2018)
"It's not always the troops that storm the beaches who are the right ones to set up the government," said Steve Vassallo from Foundation Capital about the resignation of founder Travis Kalanick from Uber.
Mad Hedge Hot Tips
August 16, 2018
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) China Trade Talks are Back On, triggering a monster stock rally. How long will it last this time? Click here.
2) Trade Talks Taking a Bite Out of the Chinese Economy, with GDP growth falling to the 5% handle. The last time this happened, in 2015, the Dow plunged 1,100 points in one day. And it happened in August! Click here.
3) Walmart (WMT) Blows Out Earnings, taking the stock up 10%. Have they finally figured out online commerce after two decades of trying? Click here.
4) It's Off to the Races at Cisco Systems (CSCO) as Well, on strong software sales. Legacy tech is still playing catch-up. Buy the next dip. Click here.
5) Has Housing Peaked? The stock market certainly thinks so. The onslaught of negative data continues, with August Homebuilder Sentiment hitting a one-year low. Click here.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
SPECIAL ARTIFICIAL INTELLIGENCE ISSUE:
(NEW PLAYS IN ARTIFICIAL INTELLIGENCE),
(NVDA), (AMD), (ADI), (AMAT), (AVGO), (CRUS),
(CY), (INTC), (LRCX), (MU), (TSM),
(WILL AMAZON EAT GOOGLE'S LUNCH),
(AMZN), (FB), (GOOGL)
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