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  • Charts of the Month - February '24

Charts of the Month - February '24

The Nvidia Bubble, The Economics of War, The German Industrial Complex, Mexico Trading Places


  1. The Nvidia Bubble

  2. The Economics of War

  3. The German Industrial Complex is Heading West

  4. Mexico Trading Places

The Nvidia Bubble

Nvidia released earnings last week and what a show it was.

Depending on which media outlet you get your information from, the results would either 1) signal the end of capitalism as we know it, or 2) a FOMO induced rally was on.

How hyped was it? CNBC (known for their gimmicks) did a Super Bowl style countdown:

Thankfully, and to their credit, they beat estimates on both the top and bottom line and what ensued was nothing short of remarkable:

  • A global stock rally that saw the S&P500, Dow, STOXX 600, and MSCI ACWI all hit all-time highs.

  • Japan’s Nikkei reaching a new high not seen since 1989.

  • A rally in global bond yields, signaling investors now believe central bank interest rate cuts will be pushed out even further.

As expectations for rate cuts continue to get pushed out, our December Macro piece becomes all the more plausible – What if the Fed Doesn’t Cut Rates in 2024?

By most fundamental indicators (P/E, P/FCF, etc.), Tesla is still more overvalued than Nvidia, and during its 2021 heyday, it was the greatest bubble of all time (or at least in my lifetime), but the speed with which the GPUs designer is rallying is something we’ve never seen before.

  • Nvidia went public in 1999.

  • In March 2023, it surpassed Tesla’s market cap as it moved above $600 billion.

  • Since then, Tesla, finally realizing it’s a car company and not a high-margin cash cow AI tech company, has gone nowhere.

  • On the other side, Nvidia surpassed the $1 trillion market cap by June 2023 – a feat that took Apple 42 years to achieve.

  • Even more impressive is that, since it broke that $1 trillion mark, it has taken only 8 months for Nvidia to move within a few dollars of $2 trillion… that’s +$1 trillion in 8 months.

That’s adding more than TWO ExxonMobil’s or the entire GDP of Saudi Arabia… in 8 MONTHS!

Think about that for a second.

Nvidia is now larger than the entire United States Energy ETF (a collection of the 23 largest and most profitable Oil & Gas companies in the U.S.).

For relative comparison, in the last twelve months, Nvidia created $28 billion in Cash from Operations vs. the XLE index creating $241 billion.

In plain English, Nvidia made $19 billion of cash and is valued at $2 trillion. The U.S. Energy Index made almost 10x that ($241 billion) and is valued 25% less than Nvidia.

A few more points:

  • On the day it released earnings, Nvidia’s market cap jumped ~$250 billion, the largest single day in dollar terms ever… that’s about one whole Bank of America… in a day.

  • Today’s P/FCF (Price / Free Cash Flow) is now 71x.

    • For the layperson, that means if you bought a share of Nvidia today, you’d be paying 71 years’ worth of Free Cash Flow to own it. That means a 71-year payback period to get you to cash flow breakeven, assuming cash flow stays flat, which in all fairness it likely won’t, but this is still an insane multiple to pay for anything (and if you’re building a 71-year DCF to value an investment, we need to talk).

  • The average for the S&P is 27x (still extremely high vs. its average). For XLE it’s 12x, and for the overall tech sector, it’s 36x.

  • QoQ Revenue Growth was strong but declining, and certainly not ‘worth 71 years of free cash flow’ strong:

Bubbles can last a long time, longer than most people care to admit, which is why they’re so dangerous. They can crush you if you try to go short and they’ll frustrate the hell out of every value investor you know as they can’t get comfortable owning a stock at such valuation, no matter how good a business is (and Nvidia is a great business selling an incredibly important, highly differentiated product - it’s just overpriced).

Sometimes it’s best to just sit on the sidelines, grab some popcorn, and watch the madness unfold.

The Economics of War

In last month’s Charts, we looked at the significant increase in construction spending in the U.S. manufacturing sector:

Key to this massive increase in spending are the three large-scale legislative acts signed into law over the last three years: the Infrastructure Investment and Jobs Act (IIJA) (November 2021), the CHIPS and Science Act (August 2022), and the Inflation Reduction Act (August 2022).”

Today, we look at another surging sector within industrials that’s benefiting from geopolitical events around the world - Aerospace & Defense.

“Proponents of support for Ukraine usually invoke U.S. strategic interests or moral obligations. Lately, they are making a more calculating case: It is good for the economy.” – Wall Street Journal

U.S. industrial production on defense is up nearly 20% since Russia invaded Ukraine almost exactly two years ago, and much of that spending, unbeknownst to most, is getting recycled back into the U.S. economy. More from the WSJ:

“Biden administration officials say that of the $60.7 billion earmarked for Ukraine in a $95 billion supplemental defense bill, 64% will actually flow back to the U.S. defense industrial base.

  • Poland has placed orders worth about $30 billion for Apache helicopters, High Mobility Artillery Rocket Systems, or Himars, M1A1 Abrams tanks and other hardware, the department said.

  • Germany spent $8.5 billion on Chinook helicopters and related equipment.

  • Czech Republic bought $5.6 billion of F-35 jets and munitions.

  • The State Department recently said the U.S. made more than $80 billion in major arms deals in the year through September of which about $50 billion went to European allies—more than five times the historical norm.

  • Recent spending by European governments on U.S. jet fighters and other military hardware represents “a generational-type investment. The past few years are equal to the prior 20 years” said Myles Walton, a military industry analyst at Wolfe Research.”

Lael Brainard, director of the White House National Economic Council, went on to say, “That’s one of the things that is misunderstood… how important that funding is for employment and production around the country”.

Remember, this most recent GDP print (a surprise to the upside) included historically high levels of government deficit spending, much of which was allocated to both construction on manufacturing as well as defense spending.

Additionally, as Lael alluded to, even in the face of massive layoffs in the banking and tech sectors, unemployment numbers are still very strong (i.e. low). Presumably, industrials and manufacturing are doing the heavy lifting to buoy employment, which, if the U.S. is serious about bringing manufacturing back onshore, is a step in the right direction, if not a costly one (in both $ terms and human lives).

Note, please don’t consider this support for the war or any opinion on our part. This is simply a statement of facts, pointing out the way things are, not how we’d prefer them to be.

The German Industrial Complex is Heading West

There seems to be an inverse correlation between the rise of the Renewable Industrial Complex and the demise of the German Industrial Complex.

Not to be satirical or glib, watching the trainwreck of one of the world’s great industrial nations in real-time is becoming increasingly disturbing to watch, especially when the root cause of this downfall is the mind virus infecting many Western leaders today: blind ‘environmental’ policy with seemingly zero concern for the wellbeing of the citizens of the countries they lead. (Environmental is in quotes because for the most part, their policies are less ‘green’ and more NIMBY than anything else – but Virtue Signaling Optics > Reality I suppose).

Unfortunately for the Germans, their domestic economy, which is heavily industrialized, requires a LOT of natural gas to build the things they build. Even less fortunate for them, industrial production much prefers piped gas over LNG, as piped gas is on-demand, cheaper, and more reliable (or at least, it used to be).

Fortunately for the Americans, they possess a LOT of natural gas that is incredibly cheap and reliable, an economy that doesn’t seem to want to slow down, and an administration that is actively trying to recruit new investment from abroad.

The above paradigm, coupled with the world’s desire to decouple from China, has led to the U.S. taking the lead on incoming investment from around the world…

And in particular, capital expenditures of firms from Germany:

Martin Brudermueller, CEO of Germany-based BASF, the world’s largest chemical producer (and producer of some of the most important products humanity relies on today across agriculture, automotive, energy, electronics, textiles, and pharmaceuticals, to only name a select few), had this to say last year, "We will see changes in our industrial structure in the medium term… energy-intensive industries will shrink rather than grow in Europe.”

Also of note on the downsizing:

  • Brudermueller criticized European “overregulation, slow and bureaucratic permitting processes”.

  • BASF aimed to save €500 million ($530 million) a year in non-production areas by the end of 2024, including a loss of around 2,600 positions.

  • A further €200 million would be shaved off by the end of 2026 with the closure of production facilities at its site in Ludwigshafen, in southwest Germany.

  • This would include the shutting of an energy-intensive ammonia plant and related facilities for the production of fertilizers. The measures will also lead to a loss of around 700 production jobs in Ludwigshafen.

Brudermueller wasn’t exaggerating. From BASF’s latest earnings release, profits are being squeezed across geographies, but in Germany, they are now a net negative to the business:

The bright side? Germany may not need to replace as much natural gas coming from Russia as initially thought, because at this rate, they’re not going to be building much of anything for the foreseeable future. (Ok that was a bit glib).

Mexico Trading Places

Mexico’s elections are coming up in June and while a lot of attention (rightfully so) is being paid to the southern border’s Swiss cheese level of security, last year was a watershed moment for relations between Mexico and the U.S., as Mexico supplanted China as the U.S.’s largest trading partner.

This trading of places comes in large part due to Trump’s trade war with China (which began in 2018) and the continuation and additional tariffs applied by the Biden administration (2022).

According to taxfoundation.org, “The United States is currently imposing a 25% tariff on approximately $250 billion of imports from China and a 7.5% tariff on approximately $112 billion worth of imports from China.”

Tariffs are being applied to everything from steel and aluminum to renewables equipment and electronics.

And while these tariffs have slowed U.S. imports of Chinese goods, there’s been plenty of speculation that at least some of the decrease in imports from China have simply been diverted to Mexico (as imports from China) and then exported to the U.S. to sidestep the tariffs. *Mexican imports from China have increased over the last few years, but not enough to make up the entire difference.

This is a similar game India played as the middleman for Russian oil exports to Europe, (when Russia invaded Ukraine, the West slapped sanctions on Russian oil), importing more oil from Russia (that was previously imported by Europe), and then increasing their oil exports to Europe.

Either way, the U.S. and Mexico are closer than ever, and assuming this border situation can get resolved, look for the tie-up to get even more cozy as the U.S. continues to divert assets away from China, and closer to home.

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