Mad Hedge Technology Letter
June 10, 2024
Fiat Lux
Featured Trade:
(OIL, THE US DOLLAR, AND SILICON VALLEY)
($COMPQ)
Posts
The dollar, tech stocks, and Saudi Arabian investment are inextricably linked almost like a web of nodes that shouldn’t be messed with.
The Saudis are a financial heavyweight and I would never dismiss their capital flows as it relates to tech stocks.
It is definitely not a drop in a bucket and we should take notice when Saudi Arabia creates a $100 billion fund this year to invest in AI and other technology.
That is just pocket change for one year.
It is in talks with Andreessen Horowitz, the Silicon Valley venture capital firm, and other investors to put an additional $40 billion into A.I. companies.
In March, the government said it would invest $1 billion in a Silicon Valley-inspired start-up accelerator to lure A.I. entrepreneurs to the kingdom.
Saudi wants to invest in tech and to do that they need dollars. Tech and its value are almost always entirely priced using dollars and not any other currency.
So I will address the conspiracy theory that we are about to go completely off the dollar as the global reserve currency.
The behavior of foreign investors suggests that the dollar’s role in global currencies is increasing and not the other way around.
Some even suggest that the Chinese yuan is about to replace the dollar as the world’s most important currency.
I strongly disagree with that opinion.
A place still using capital controls for trillions worth in tech seems like lunacy.
It flat-out does not happen.
Middle East oil-producing nations have other reasons to stick to the dollar.
A crucial one is that most of their currencies are pegged to the greenback, requiring a constant influx of dollars to support the arrangement. Those savings are held in dollar accounts, so Middle East countries have an interest in keeping the dollar strong.
There is not much traction in practical terms of the much-hyped idea of using the yuan to price oil.
American investor Ray Dalio likes to describe America as a weakening power that is succumbing to China. I strongly disagree with that hot take from Dalio. China is in fact faltering at an accelerating pace and its internal problems are piling up like a stray dog locked in a strangers back yard.
If you believe in conspiracy theories, the introduction of a petroyuan, and the ensuing collapse of the petrodollar, would be a first domino, potentially weakening the whole US financial system.
Redraw the global economic map amid a backdrop of crisis and wars.
Astonishing as it is, the narrative is a mirage.
The appetite among OPEC producers to price oil in yuan using a Chinese exchange is basically zero.
Middle Eastern national oil companies closely watch how Beijing tries to manipulate local commodity prices such as iron ore, cotton, coal, or grains every time prices rise above its pain threshold. Having spent 60 years building a formidable cartel, why would Middle East nations cede pricing power to China using a whacked-out currency?
The Saudis need to put their money somewhere and the anointed place has been technology and many times Silicon Valley technology.
They have already invested in many of the most high-profile tech companies in the US and will continue to do that.
Saudi and other foreign money is another reason why this tech market can’t and won’t get sideswiped.
Any dip is viewed as a prime buying opportunity as other industries give way to the freight train that is the AI narrative.
Anyone would be crazy to short the AI trade with unlimited petro-dollars from the Middle East.
Pump the black gold from the ground and dump the profits into volatile tech stocks.
Wait for them to explode to the moon – rinse and repeat.
I am bullish on tech in the short term.
Mad Hedge Technology Letter
May 29, 2024
Fiat Lux
Featured Trade:
(THE GRIND HIGHER)
(FED FUNDS RATE), ($COMPQ)
Rates will stay higher for longer and the higher income bracket will carry the US economy through any conflict with short-term inflation.
What does that mean for tech stocks?
It will trend higher for longer.
Sure, US rates will stay elevated, but tech stocks have proven they are tough to keep down with elevated inflation.
Most who buy tech stocks have done very well financially in the past 18 months.
There is a high likelihood that higher rates won’t affect their purchasing power to buy more tech stocks.
I do admit a big chunk of Americans are missing out on buying tech stocks at these current prices – I don’t diminish that.
The big spenders have utilized their 3% fixed mortgage to hunker down and continue to spend on devices, software, EVs, and other tech.
This clearly means that 5% isn’t the real neutral rate that the Fed is looking for and I view this rate as a relatively loose fiscal policy that is allowing high-income Americans to splurge on more tech products.
Don’t forget that these are the same stockholders that are reaping increasing tech dividends, higher-tech stocks, and generous shareholder returns.
Further evidence is that the $2 trillion in quantitative tightening along with a 5% Fed Funds rate has resulted in the S&P index rising 37%.
That’s not supposed to happen if rates are high above the neutral rate.
What the Fed gets wrong is that the neutral rate has moved significantly higher when we consider the trillions that were printed for the pandemic programs and stimulus checks.
The additional amount of fiat paper floating around chasing a limited amount of goods results in the neutral rate being somewhere closer to 8-10% and that development gets missed by the Fed.
Therefore, 5% Fed Funds rates are “high” and a lot higher than 0%, but the wealthy have now used this rate as a tailwind to progress their financial goals.
Wealthy households right now can earn upwards of 4.5% in a high-yield savings account, see their tech portfolios go up 20% in a year, and are watching the value of their real estate holdings surge higher.
Given the amount of wealth concentrated among a handful of US households and the skew on the income distribution in the US, just about any change in monetary policy will be regressive, advantaging those with more at the expense of those with less.
Tuesday's consumer confidence reading — while registering a three-month high — was far from a clear-cut judgment from Americans that things are looking up, economically speaking.
If the Fed holds at 5% and fails to erect rates closer to 8%, tech stocks will grind higher.
Rates would need to be at a nominal number that would give pain to higher-income buyers.
My personal view is that the Fed will stand pat at 5% interest rates and the Nasdaq should perform well in this scenario.
If we get talk of 6 or 7%, tech stocks will produce a minor pullback delivering another fabulous opportunity to buy.
The other piece here is Nvidia delivering stellar earnings and that should keep the shine on high-quality tech stocks when the market sets up to make the next move.
My bet is any dip will be bought ferociously and any “dip” could turn out to be more of a sideways time correction before we rip higher.
This is also why Nvidia is close to 81% above its 200-day moving average and boasts a current $2.7T valuation.
Mad Hedge Technology Letter
May 24, 2024
Fiat Lux
Featured Trade:
(CBDC BANNED BY THE HOUSE)
(CBDC), ($COMPQ)
The US House of Representatives passed a bill effectively banning the Federal Reserve from creating a digital version of the dollar.
Even though this action doesn’t specifically target the tech sector, the tech sector ($COMPQ) has a lot at stake in this bill.
First, the irony here is how polarized the US Central Bank has become in Washington to the point the Federal government wants to ban something from them.
It’s like taking away a dangerous toy from a baby.
It signals there has been a massive failure at the Fed with its blown “transitory inflation” call that has lasted over 4 years.
The Fed could equally screw up the onboarding of the digital dollar, if it ever happens, the U.S. financial system might never recover.
The vote passed but it still would need approval from the Senate and then signed by the President for it to become US law.
Still, as one of the chief opponents of the Bill, Rep. Maxine Waters, put it, "In fact, if this bill becomes law, we would be the only country in the world to ban a CBDC." Prohibiting "innovation" on the central bank digital currency front seems like a policy miss at first sight.
Waters has this backward.
The U.S. adopting a digital dollar would stifle tech innovation.
Money earmarked for innovation would likely go into capital that isn’t tightly controlled and tracked.
Innovation usually happens when big risk-takers deliver big ideas and the implementation of CBDCs would mean that tracking technology could shut down any “big idea” from the top.
China has tried the e-Yuan which has been a massive disaster with little uptake in the project.
Innovation thrives in an environment that offers freedom for the big picture thinkers, and a 3rd party tracking and monitoring apparatus isn’t good enough.
In fact, if CBDC were implemented, it would be the end of US-led tech innovation in modern history.
Few would take risks because it wouldn’t be worth innovating in this type of currency when there are others that would step over the line of privacy.
Scamming would be off the charts as well in this scenario.
Inserting unparalleled surveillance and individualized control would choke off free business and ideas become sterilized.
Anything new laid out would face a gauntlet of obstacles before getting anywhere near a consumer.
Think about all the middlemen on the way nickel and diming you the death as well. We already have that with the blown transitory inflation call by the Fed.
I am a believer that the less government, the better for tech business.
Europe is the poster boy for government-led innovation stifling.
There are no competitive tech companies in Europe that can compete with Silicon Valley because a tech innovator would be crazy to start and grow a company in Europe.
Europe is hostile to free business and tech innovation. They know how to tax and do it highly.
I could easily see how an integration of digital currency could end up in a dystopian situation if carried out by the wrong government.
Of course, the banning of CBDCs at the House level is a good sign that America is open for business, but it will need to become enshrined in law to have some bite.
If CBDCs are implemented by the Fed in the future, 90% of the Nasdaq market would fail leaving just 7 tech stocks.
It would in fact amplify the lack of competition that we are facing these days in the US tech sector.
I am bullish on the tech sector if integration of CBDCs by the Fed and Congress are banned.
Mad Hedge Technology Letter
May 17, 2024
Fiat Lux
Featured Trade:
(AI MOVES THE NEEDLE)
(TSLA), (AI), ($COMPQ), (SORA)
Compassion for humanity – that’s all we need – this is the only trait corporate Americans need for bosses like him to employ humans over AI filmmaker Tyler Perry.
That’s all a tall order for corporate tech ($COMPQ) in Silicon Valley which usually prefers not to prioritize compassion for humanity over profits.
That’s bad news for tech workers and we got more confirmation of this trend with Tesla (TSLA) CEO Elon Musk cutting 600 white-collar corporate jobs from the Fremont, California office.
Elon is usually one to be on the forefront of the curve and he isn’t late with the firing means we are just in the first innings of it.
An interview with Tyler Perry led him down the rabbit hole of the future of AI and it wasn’t pretty if you are a W2 worker.
As it relates to implanting AI, the one irrefutable conclusion he could make was that human workers would lose out at the expense of the bosses who would gain.
Over the past four years, Tyler Perry had been planning an $800 million expansion of his studio in Atlanta, which would have added 12 soundstages to the 330-acre property.
Now, however, those ambitions are on hold — thanks to the rapid developments he’s seeing in the realm of artificial intelligence, including OpenAI’s text-to-video model Sora, which debuted on Feb. 15 and stunned observers with its cinematic video outputs.
His productions might not have to travel to locations or build sets with the assistance of technology.
His expansions are currently and indefinitely on hold because of the quick developments of AI.
He might not need to invest in anything at all except some AI additive technology.
Perry said the job losses in his industry could range from writers, actors, sound specialists, builders, designers, architects, and so on.
Human actors are on the chopping block and the only digestible content that will be saved from the bloodbath is live sports which is why premium content like the NFL, soccer World Cup, and Alabama college football fetch astronomical numbers to license these games.
None of that will be replaced by AI, but much of the best of the rest will and the hundreds and thousands of jobs will sink with them.
Perry also described a situation in which he used AI which kept him out of makeup for hours.
In post and on set, he was able to use this AI technology to avoid ever having to sit through hours of aging makeup.
The movie industry won’t need to negotiate with the actor's or writers' unions again, because they are dispensable.
What will happen in tech?
Google and Apple will build products but with much less staff involved.
Compensation expense is about to drop precipitously without warning.
Remember that the dive into AI won’t be a drip, but a waterfall because once one figures out a way to optimize the technology, everyone else follows suit.
The copycats come out of the woodwork and reverse engineering takes hold.
If you thought that Congress is responsible to save the workers then you’ll be waiting for a long time.
Tech executives have been lobbying Washington for a generation, and I believe they will take the side of management.
And in any case, if the government does get involved, they usually make regulations too onerous to hire humans making the situation worse.
What does this mean for tech stocks?
They go higher.
Expenses will take a meaningful dive, dividends and buybacks go up with more cash on hand, and tech stocks comprise an even larger percentage of the overall market.
We have sunny days ahead for the tech sector.
AI WILL HAVE A BIG IMPACT IN THE MOVIE INDUSTRY
Mad Hedge Technology Letter
April 26, 2024
Fiat Lux
Featured Trade:
(WHAT STAGFLATION MEANS FOR THE FUTURE OF TECH STOCKS)
(GDP), (PCE), ($COMPQ)
Stagflation has reared its ugly head and yes it’s not here yet, but the risk it will hit us can’t be ignored at this point.
I’ll tell you what this means for tech stocks as well.
I won’t say that I told you so but this could have been seen from a thousand miles away.
The persistent increase in federal debt spent like a drunken sailor doesn’t mean anything until it means a lot this time around.
Remember that all that “job growth” came in the form of mostly government jobs and part-time workers adding more part-time jobs to pay for the cost of life.
Now the numbers finally prove this as inflation stays sticky and growth has curtailed with the U.S. Real gross domestic product (GDP) rising just 1.6% from a year ago in the first quarter, which is a sizeable miss from 3.4% growth seen in the fourth quarter of last year.
Meanwhile, the Federal Reserve’s favorite inflation gauge—the core personal consumption expenditures (PCE) price index, which excludes more volatile food and energy prices—surged from 2% in the fourth quarter of 2023 to 3.7% in the first three months of this year.
I believe we are in the early throes that will usher us down a path of increasing inflation and lower growth which is the summation of stagflation.
Even with stagflation, certain tech companies will still grow, and do well.
Drowning in federal debt - now in the many trillions and skyrocketing each day.
It now also has a landing spot besides Ukraine and that’s in the form of more American inflation.
Prices will go up and adding more government jobs won’t bring down inflation.
Then the big question becomes, does the Fed save the dollar or save the US economy?
When the rubber hits the road, I do believe the Fed will choose to save the economy over the purchasing power of the Americans.
This means that the price of a loaf of bread will give you sticker shock because a dollar in 2024 will be worth a lot less in 2025 and beyond.
But the important thing is to save the economy and the biggest growth element to the US economy is, you guessed it right, tech stocks.
Tech stocks will outperform during a time of stagflation because even if most of the rest of the economy is doing poorly, tech will still navigate around these tougher times.
The Fed has essentially crippled purchasing power with its “transitory inflation” blunder, and I don’t think they have the guts to take down the stock market in an election year.
Therefore, I do expect interest rate cuts to take place later this year, and that will put a floor under tech stocks and marry up that with the AI narrative one must love the end-of-year prospects for Nvidia, Microsoft, Google, and Amazon.
Get ready for the medium term because it’s most likely to involve the “bet on the Fed pivot” rally which will take us to the next up leg in the Nasdaq.
Readers should take solace in the fact that tech stocks will go up in stagflationary environment, but of course, tech stocks have that extra mojo when rates and inflation are low.
