Global Market Comments
February 13, 2025
Fiat Lux
Featured Trade:
(REVISITING THE GREAT DEPRESSION),
(EXPLORING MY NEW YORK ROOTS)
When I first arrived on Wall Street during the early 1980s, some of the old veterans who worked through the 1929 stock market crash were just retiring and passed their stories on to me before they left.
One was my old friend, Sir John Templeton, founder of the Templeton funds, who often hosted me for dinner at his antebellum-style mansion at Lyford Cay in the Bahamas. John told me he was really excited when hired in ‘29 to handle the surge of brokerage business. After that, things got really boring for a decade.
The volatility we are experiencing now has many similarities to that epic event. In some ways, it's far worse. The 1929 downturn was spread over 34 months.
We all know about the Roaring Twenties, with flappers, bathtub gin, and a soaring stock market. Then, individuals could buy on ten to one margin. The high-flying tech stocks of the day, like RCA Radio, General Motors (GM), and Ford (F), soared. From 1921 to 1929, the Dow Average rocketed six-fold. The working class was sucked in.
Industry followed suit, taking the sign of rising stocks as proof of an economic boom. They massively boosted production in all sectors. That meant they went into the Great Depression loaded to the gills with inventory.
The Dow Average peaked on September 3, 1929, at 381. A slow burn of profit-taking ensued. Suddenly, a cascading waterfall of SELL orders hugely accelerated on “Black Monday” when the Dow plunged by 13%. It was followed by “Black Tuesday” when stocks lost another 13%.
Margin calls triggered a run on the banks as investors tried to withdraw cash to cover rampant cash calls. This spawned a financial crisis where eventually 4,000 banks went under.
By November, the Dow had fallen by 48% to 198. JP Morgan stepped in to stabilize the market, prompting a short-term rally. It was to no avail, with many retail investors seeing this as their last chance to sell. The market continued its slide, eventually hitting bottom at 41, or down an astonishing 89% from the top by July 8, 1932. The market then moved sideways in a wide 150-point range until the outbreak of WWII. It didn’t recover its 1929 peak until 1959.
A few years ago, I had lunch with the former governor of the Federal Reserve (click here), who did his PhD dissertation on the causes of the Great Depression. The big mistake the Fed made then was to raise interest rates to damp down stock speculation. They ended up destroying the economy, inadvertently making the depression far deeper and longer.
The world has learned a lot about central banking since those dark days. For a start, the theory of Keynesianism has been adopted whereby governments borrow and spend during economic downturns and run balanced budgets or surpluses during good times.
The modern Fed won’t be making the same mistake twice. During the last bear market, the Fed almost immediately took interest rates down to zero. Our central bank has also responded with monetary stimulus that is a large multiple of what we saw in 2008-09, essentially buying everything that was out there in fixed-income land.
My grandfather never participated in the stock boom of the 1920’s. He never found a broker he could trust. When the market crashed, he had to finish his basement in Brooklyn, New York, so that several relatives who had lost their homes could move in. We lost many equity investors for good in the 2008-09 crash. No doubt we will lose many more in this cycle.
What did Grandpa do with his money? He poured it all into real estate, including the land on which the Bellagio Hotel was eventually built, which he picked up for $500 an acre. His estate sold it in the 1970’s for $10 million.
Grandpa never bought a stock during his entire life.
Grandpa on Right
While in New York waiting to board Cunard’s Queen Mary 2 to sail for Southampton, England, a few years ago, I decided to check out the Bay Ridge address near the Verrazano Bridge where my father grew up. I took a limo over to Brooklyn and knocked on the front door.
I told the owner about my family history with the property, but I could see from the expression on his face that he didn’t believe a single word. Then I told him about the relatives moving into the basement during the Great Depression.
He immediately let me in and gave me a tour of the house. He told me that he had just purchased the home and had extensively refurbished it. When they tore out the walls in the basement, he discovered that the insulation was composed of crumpled-up newspapers from the 1930s, so he knew I was telling the truth.
I told him that grandpa would be glad that the house was still in Italian hands. Could I enquire what he had paid for the house that sold in 1923 for $3,000? He said he bought it as a broken-down fixer upper for a mere $775,000. After he put $500,000 into the property, it is now worth $2 million.
I’ll recite one story that took place at this address which has been passed down through the generations. By the end of 1945, the family had not seen my father for nearly four years, who was off fighting in the Pacific with the Marine Corps.
Then a telegram arrived informing the family of the date of my father’s return after a five-day train ride from Los Angeles. As only two daughters remained at home, he warned everyone not to cry.
Then the doorbell rang and there was Dad, 40 pounds lighter with a yellowish tinge to his skin from malaria but smiling. My grandfather burst into tears and wouldn’t stop bawling for an hour.
As I passed under the Verrazano Bridge on the Queen Mary II later that day, I contemplated how much smarter grandpa became the older I got.
I hope the same is true with my kids.
Queen Mary II Passing Under the Verrazano Bridge
“Lower yields, for longer, and lingering. I don’t think we’re going to get to an end for some period of time. The money that has been pumped into the system is going to keep equities high,” said Mark Grant, managing director of Hilltop Securities.
(SONY), (MSFT), (NVDA), (GOOGL), (AMZN), (TSM), (IBM), (AMD), (BIDU), (TM), (NTDOY), (INTC), (LLNXF)
During my years covering the Japanese financial markets in the 1970s, I witnessed firsthand how technological breakthroughs could reshape entire economies.
Back then, it was the revolution in consumer electronics that turned companies like Sony (SONY) from small radio makers into global powerhouses.
Today, we're seeing something far more dramatic with artificial intelligence.
OpenAI is reportedly closing in on a $40 billion funding round led by SoftBank (SFTBY) at a mind-bending $300 billion valuation.
Having interviewed countless Asian tech pioneers over the decades, I've developed a nose for spotting the difference between genuine innovation and market hype. This one has elements of both.
To understand the scale, let’s put the numbers in perspective. Since October 2024, OpenAI has been adding about $1.1 billion in value every single day.
When I was covering the early days of Japan's tech boom, we thought NEC's $100 million monthly valuation growth was astronomical. OpenAI is doing that before lunch.
The company projects $3.7 billion in revenue for 2024, climbing to $11.6 billion by the end of 2025—a 213% growth rate that would make even the most aggressive Japanese keiretsu blush.
At a 25.8x forward revenue multiple, they're pricing this thing like it’s the next Toyota (TM), Sony, and Nintendo (NTDOY) combined.
Speaking of Japan, SoftBank’s involvement is worth noting. As the lead investor in this round, SoftBank is betting big yet again.
Masayoshi Son has built his empire on moonshot investments, but his track record is mixed. I remember when he was just starting out in software distribution—his ambition hasn’t wavered, though the scale of his bets has certainly grown.
A substantial portion of this funding will go toward Project Stargate, OpenAI’s massive initiative to build AI-optimized data centers across the US.
Controlling your own hardware destiny is critical, as I saw during Japan’s infrastructure boom in the ’70s, but it’s also fraught with risk. Stargate could give OpenAI a crucial edge, but it will burn through cash at an unprecedented rate.
The competitive landscape feels eerily familiar. An open-source competitor called DeepSeek has launched its r1 model, reportedly matching OpenAI’s capabilities at a fraction of the cost.
Watching this unfold is like reliving the rise of Linux (LLNXF) during the early PC wars. The key question is whether OpenAI can sustain its edge as the technology becomes more commoditized.
For those looking to play the AI boom through public markets, there are clear winners emerging alongside OpenAI.
Microsoft (MSFT), trading at roughly $412.22, remains OpenAI’s sugar daddy. It has poured over $13 billion into the company, securing first dibs on technology while monetizing infrastructure through Azure. It’s a dream setup, and I’ve been long on MSFT since the partnership was announced. I see no reason to change that position.
NVIDIA (NVDA), sitting at $133.57, has become the Intel (INTC) of the AI age. They’re selling the picks and shovels for this gold rush, and demand for their chips is so fierce that companies are reportedly paying premiums to secure supply. NVIDIA has been one of my favorite long-term holdings for years, and it keeps proving its worth.
Alphabet (GOOGL), trading at $186.47, is playing catch-up in the AI race. While they have the talent and the data to compete, their cloud business still lags behind Microsoft. Watching their quarterly cloud revenue growth will be key to assessing their progress.
Amazon (AMZN) at $233.14 is the sleeping giant. They’ve been quietly building AI infrastructure and leveraging their retail operation as a testing ground for AI applications. This dual strategy could make them the dark horse in this race.
Then there’s Taiwan Semiconductor (TSM) at $207.95. Having covered Asian tech markets for decades, I know TSMC’s manufacturing prowess is nearly impossible to replicate. They’re supplying the chips that power this revolution, making them one of the industry's kingmakers.
IBM (IBM) might seem old school at $249.27, but they’ve got deep enterprise relationships and a solid AI strategy. Sometimes the tortoise does beat the hare, especially when enterprise clients value reliability over hype.
AMD (AMD), trading at $110.48, is NVIDIA’s closest competitor in AI chips. My sources at AMD are bullish on their next-generation processors, and while they’ve yet to dethrone NVIDIA, they remain a strong contender.
Finally, there’s Baidu (BIDU) at $93.85, China’s AI leader. With geopolitical tensions mounting, however, I’m hesitant to bet heavily on Chinese tech right now. I’d rather stick with US and Taiwan-based players for more stability.
OpenAI’s $300 billion valuation might seem insane, but as I often say, the market can stay irrational longer than you can stay solvent. I’ve seen bubbles in Japanese real estate during the ’80s and the dot-com boom in the ’90s. The key is finding the companies that will survive when the music stops.
We can all agree that the AI revolution is real, but at these valuations, selectivity is crucial.
So, I’m holding my positions in Microsoft and NVIDIA while keeping some dry powder for better entry points in speculative names. When the market gives you a chance to buy these leaders at a discount, you need to be ready.
As for OpenAI’s valuation? Let’s just say I’ve seen this movie before in different languages. The technology is revolutionary, but the market’s enthusiasm feels like it’s running a few quarters ahead of reality.
And if history has taught me anything, it’s that selling shovels—like NVIDIA—tends to be a safer bet than digging for gold. Jensen Huang figured that out a long time ago.
I’ll be watching closely, hoping this doesn’t end like some of the high-flying Japanese tech stocks of the late ’80s. Those stories didn’t end well. But maybe, just maybe, this time it’s different.
Might be.
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
Mad Hedge Technology Letter
February 12, 2025
Fiat Lux
Featured Trade:
(WHEN THE RUBBER MEETS THE ROAD)
(PHD), (FED), (AI), (MAG 7)
It’s funny that the Fed ever thought they could initiate an interest rate cut cycle with gold bullion at $3,000 per ounce and bitcoin at $100,000 per coin.
Whatever they are smoking – please pass some of it over here.
These indicators show that there is too much paper out there following too few good and services.
This is why eggs are about to become 4 bucks per dozen.
The Federal Reserve employs 100,000 PhDs to botch the only job they have (decide what to do with interest rates) by refusing to deploy common sense.
Apparently, PhDs don’t deliver much these days either, which is why nobody goes to college anymore.
The consequence is that the bond market has dictated to the Fed what to do, and we have seen that over the past few years.
The US 10-year interest rate lurching closer to 5% means that tech stocks will have a tough grind and small tech companies get disproportionally penalized in this whipsaw environment.
On cue, Magnificent 7 are going strong because it put to use a strong balance sheet that many other tech firms don’t have.
It is funny to think about that once upon a time, these Mag 7 tech companies were the scrappy upstarts.
They have turned into total corporate monoliths like a titanic unable to steer.
New inflation data out Wednesday showed headline consumer prices rose more than forecast in January as core prices reversed last month's easing with the Federal Reserve's path forward in focus.
Seasonal factors contribute to higher inflation, like higher fuel costs and continued stickiness in food inflation, which kept the headline figures elevated. Notably, the index for eggs increased 15.2%, the largest increase since June 2015. It accounted for about two-thirds of the total monthly food at home increase.
Core inflation has remained stubbornly elevated due to sticky costs for shelter and services like insurance and medical care. Shelter did, however, show some signs of easing last month, rising 4.4% on an annual basis, the smallest 12-month increase in three years.
On Monday, President Trump announced global 25% tariffs on steel and aluminum imports, which will take effect on March 12. 25% tariffs on Mexico and Canada are set to come next month, while 10% duties on China have already been implemented.
The unpredictable volatility of interest rates will mean a choppy trading environment for tech stocks.
The Deepseek AI fiasco for OpenAI will also mean that tech companies will need to show investors soon if AI will profit or not.
This sets the stage for a polarizing short-term trading environment.
I will issue tech trade alert on big dips and ride them for defined time frames.
This is the best way to go about tech equities.
Readers need to understand that the time of just sitting and holding tech stocks to infinity is over.
This is when the rubber meets the road, and big drawdowns are susceptible when prices are this high and the system is creaky with institutions of centuries destined to bite dust.
At the very best, institutions like the Fed are ineffective.
Tech stocks will need to prove their worth in 2025 or else expect discounts across the board.
“Organizations are no longer going to receive vast amounts of taxpayer money for nothing. The people deserve good value for money.” – Said Elon Musk
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more