Weekend Reading #256
This is the two-hundred-and-fifty-sixth weekly edition of our newsletter, Weekend Reading, sent out on Saturday 24th February 2024
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What we're thinking.
Against all odds Nvidia once again managed to beat and raise on results, this time supplying much more detail on the potential size of the inference market and putting more meat on a concept that is still looked upon with great scepticism. Is it in bubble territory now? It's certainly gone vertical, but even at around $800/share, it's trading at around 35x 2025 earnings, with the lower end of consensus expectations playing catch-up. And while it is hard to believe that after all of this move there is still great scepticism, the numbers don't lie. Here's a snippet from GS that came in late on Thursday: “Despite holding record portfolio weights in the Magnificent 7, mutual funds remain substantially underweight the group.” Yes, you read that right: NVDA is in the list of the largest underweights vs the index. Sure, the index is a market cap weighted index so the relentless charge of the Magnificent 7 in putting on market cap means their weightings are accelerating faster than mutual funds can keep up. But investors only care about the benchmark, and the longer this runs presumably the more catch-up needs to be done. A final bit of context: NVDA's growth in market cap yesterday is almost equal to the entire market cap of AMD. For a comparison with something outside the sector, it's the entire market cap of Chevron. How's that for the benchmark running away from the benchmarked.
Our own base case has been a continued melt up and then a spectacular bust as we have seen many times before. The thing about bubbles is that one can never tell for sure if a price is justified or not. 35x earnings is possibly expensive but its justifiable if you want it to be. The real bubble is when its 50x or 100x. Judging by the potential for AI and its impact on the world, this has the potential to be the biggest bubble we’ve ever seen. Remember we are dealing with human imagination. But once again bubbles don't go in a straight line and they often rhyme but are not the same. It could all end tomorrow! Incidentally this week saw JP Morgan CEO, Jamie Dimon, sell his first chunk of stock ever ($150m) and Jeff Bezos continued his selling spree of Amazon stock (up to $8.5bn now). Add that to Zuckerberg’s selling ($428m) in recent weeks and make of that what you will. So, after all that contradictory commentary good luck. Not for the faint of heart and please don’t try this at home.
Elsewhere there have been further signs of stabilisation in Chinese equities and some commodity stocks in the past week – mainly copper and oil. Are we going to see the mythical broadening out of the rally as everyone hopes for? Or do we crash and burn with recessions everywhere? The beauty of this game is that all scenarios are on the table.
What we're doing.
On the way back to London this week, we spent a couple more days in Buenos Aires, this time in the San Telmo area of the city - the oldest part of Buenos Aires. To put it in context, San Telmo is about 20 mins drive away from Palermo, where we were when we first got here, and while we now look upon the whole city as "Buenos Aires", a look at old maps in museums shows how much the city has expanded over the past 2 centuries, at least 5-6x in all directions away from the port where the city's history began. Recoleta cemetery, for example, now a part of urban Buenos Aires, was in its early days "in the countryside". And Palermo, now the city's edgy cultural district didn't even exist in some of the old maps from the early 20th century.
Upon further reflection, Buenos Aires is indeed a cautionary tale of how one of the greatest cities in the world - a city which is home to a theatre with one of the best acoustics in the world, Teatro Colon, adorned by sculptures, monuments and art brought over from Europe at the demands of the local elite - can find itself in such dire decline. Locals on the streets calling out "cambio, cambio", offering pesos for USD to tourists at rates that are 20-40% away from the official rates, come as an attempt to circumvent capital controls - even controls on drawing out ARS cash from an ATM (with a maximum single withdrawal of 35,000 ARS + 8,450 ARS fee). It's a beautiful city, but hearing the tales of its former greatness is saddening. One can only hope that with a new approach from a new government, Buenos Aires may in the near future have a shot at reclaiming its former greatness to some extent. EL
What we're reading.
Remember Three Arrows Capital? The poster children of the previous crypto bull market, Su Zhu and Kyle Davies leveraged to the hilt it turned out and had a spectacular blow up, leaving investors deep in the lurch. Since then, they’ve tried to reinvent themselves through their usual savvy twitter commentary with varying degrees of success. Zhu went to jail for a few months in Singapore, came out supposedly renewed and spiritually revitalised whereas Davies didn't because no one can find him. Zhu says his jail time was a transformative experience, likening it to a Nelson Mandela-like enlightenment. He speaks about improved mental clarity, physical fitness, and a newfound appreciation for living simply. Many people in life deserve a second chance but running around like a celebrity after causing so much pain to so many people is a bit difficult to tolerate. Then again what else are they supposed to do. They must rebuild their own lives. Tricky one. This article sums it up well. DC
What we're watching.
OpenAI wowed the world with their latest product release this week. Sora is a text-to-video product that is quite simply astounding. Its not available for public use yet but the videos released so far are mind boggling. In our research over the past year or so its become clear that this level of quality was going to happen but to see it is to believe it. What does it mean for the entire video production industry? It’s frightening for them for sure, but its potential is incredibly exciting for everybody else. Check out some samples here. The “historical footage of California during the Gold Rush” is particularly mind blowing. So are the woolly mammoths. DC
BBC One’s The Apprentice is a show I’ve watched for more than a decade now. Having started in the US starring Donald Trump, our version has used Sir Alan Sugar since it’s jump across the pond in 2005. It has been a couple of years since I’ve properly watched the show, but when I noticed it had returned, I thought it was certainly worth a watch. Although disappointed is perhaps an understatement. Undoubtably it is an incredible challenge for a show to run for so many seasons whilst still seeming fresh to returning audiences, however, the episode I watched seemed repetitive and the candidates themselves seemed far from the fledgling business talent you’d expect on such a program...not to mention, the second half of the show from the boardroom seemed rather dull and extensive. The premise of the show is that there are approximately 20 candidates, and they compete down to the final remaining individual in weekly episodes for the chance to receive a quarter of a million pounds of investment into a business plan of their choosing for 50% of the equity. In showing how long it has been since I’ve properly watched the show, this differs from the earlier seasons in which they would compete for the chance to work for Lord Sugar, being given a key role in one of his portfolios of companies. The challenges they were given seemed largely the same as before making it once again more repetitive and I don’t think I’ll be watching the coming episodes. Whilst the quality of talent the show has attracted seems to have declined, perhaps higher interest rates will mean that availability of capital will continue to slump, and next season will see some better candidates. We’ll have to wait and see! HS
What we're listening to.
I continued listening to the Empire podcast with William Dalrymple and Anita Anand this week and there were 3 cracker episodes. The first is on the rivalry between Iran and Saudi and its history. The second on Hezbollah and the 3rd a bit of a celebrity death match between Saddam and The Ayatollah. The latter was the highlight of the series for me. Two nutcases competing for the mantle of unifier of their people (and the rest) but from completely different angles. These episodes are packed with so much it's difficult to keep up. But it's all there and there is no way I’m not more clued up on the history in the region, much of which drives today’s storylines. Dalrymple recently aggressively tweeted out at a Jewish woman who tweeted she felt unsafe in central london on weekends due to the continued incidences of public antisemitsm. There is nothing at all wrong with debating or criticising Israeli actions in good faith but hollering in anger at someone in England who is being targeted for their religion is odd for someone of this profile and stature. This issue makes everyone clearly emotional but you’d expect more from someone with such a public stage. The Empire podcast however is brilliant, so each time this week I bit down and listened in the name of the education, which in this case is prodigiously good. I would love to hear a debate between him and his friend, Simon Sebag Montefiore, on the current war in Gaza and its real historical context. DC