**Date:** November 14th
**Markets Weekly Summary**
The speaker notes that markets have had another exciting week, driven by two main developments: the sudden ouster of Nvidia CEO and founder Jensen Huang (interpreted as an orchestrated hit) and hawkish Fed speak (notably Governor Waller being open to a supersized 50 basis point hike in December, pushing the 10-year yield back above 5.1).
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### **1. Rates and Fed Policy**
* **Market Drivers:** Over the past several months, rates have traded off of two main things:
* **Oil prices:** When oil prices rose, the 10-year yield rose due to higher energy prices signaling higher inflation and a more hawkish policy path.
* **The AI trade:** When the AI trade faltered, the 10-year yield declined because the AI data center build-out and wealth effect from rising AI stocks power the US economy. A faltering AI trade suggests potential rises in unemployment, less demand, downward pressure on inflation, and a more dovish policy path.
* **Two-Year Yield:** The two-year yield (a good proxy for the path of policy) steadily came down as oil prices and the AI trade faltered over the past few weeks, but it has surged again due to hawkish Fed speak.
* **Governor Waller's Speech:** Governor Waller gave a speech in the UK stating that if core CPI for the week came in on a month-over-month basis around 0.3% or higher, he would be open to a 50 basis point hike in december.
* *Analysis:* This is not forward guidance (setting policy independent of upcoming data), but a reaction function (setting an expected path of policy conditional on data).
* **CPI Data & Inflation Concerns:** Following Waller's statement, core CPI month-over-month came in hotter than expected at 0.3%, causing a mini-panic and raising odds of a 50 basis point hike in December.
* **Reasoning for Hawkishness:** There has been little progress on inflation. Furthermore, new Fed research suggests that post-pandemic, the pass-through from oil prices to core inflation is higher than in the past (meaning oil prices bleed more readily into sticky core inflation).
* **Refined Products vs. Crude:** When asked why he is hawkish despite crude oil prices coming down, Waller responded that refined products remain elevated due to the destruction of refinery capacity from the war in Ukraine and ongoing impacts on refined products flowing out of the Middle East (e.g., diesel prices remain elevated).
* **Current Market Pricing:** The market is now pricing in more than three more hikes in the next 12 months. Other officials (Logan, Hammack) seemed for 50 basis points more in hikes, but don't seem supportive of a supersized hike. The market currently expects 25 basis points in December, 25 in January, and potentially more later on. This is more hawkish than the September dot plot (which supported 3 hikes totaling 75 basis points of cuts undone).
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### **2. The AI Trade and Nvidia**
* **Nvidia Status:** Nvidia, described as the general of the AI trade and a cloud technological crown jewel, has seen its stock down 10% year-to-date and struggling even before recent events.
* **Ouster of Jensen Huang:**
* **Allegations:** Jensen Huang, founder and builder of Nvidia, was pushed out by the board following allegations. It began with an affair with a Chinese woman who was an executive at mega speed (a cloud computing provider in Southeast Asia)—initially alleged to be a chinese spy (though not well-supported)—followed by more allegations of affairs with subordinates.
* **Speaker’s Analysis on the Ouster:** The speaker views this as a coordinated hit job by the national security establishment and China hawks unhappy with Huang's openness to selling GPUs to China. While Nvidia cannot sell its most advanced GPUs directly to China, they sell GPUs to cloud providers in Southeast Asia (like mega speed in Malaysia or Singapore) where Chinese companies rent capacity. Some concern exists that mega speed physically trans-shipped GPUs to China illegally.
* **Trade Constraints Context:** Trade constraints rarely work effectively (comparable to EU restrictions on Russian crude via India, or US-China trade wars via Vietnam and Mexico). The White House was well aware of these cloud arrangements, and Nvidia had previously donated $25 million to the president's ballroom. However, the midterm elections happened, the king's entourage/king was weakened, and the knives came out.
* **Open AI Ecosystem Threat:** Another theory is that Jensen was supportive of an open AI ecosystem and was thinking about developing a frontier open-weight American AI model, posing a mortal threat to closed AI models like Anthropic and ChatGPT (which would like to go public).
* **Broader AI Ecosystem and Financing Impact:**
* Nvidia was recently a 5 trillion dollar company, and its implosion impacts the broader ecosystem largely through financing.
* Per the latest Fed financial stability report, big tech companies have provided substantial support to the AI ecosystem via commitments. For example, Nvidia provided guarantees for GPU values (so neoclouds buying Nvidia GPUs could pledge them for financing to an SPV with residual value guaranteed by Nvidia) and outright financing/equity investments to neoclouds.
* **New Leadership Direction:** The new CEO, Kress, seems less supportive of making these investments and commitments.
* **Combined Headwinds:** As interest rates rise, financing has shrunk for neoclouds and fringe parts of the AI ecosystem. The attack on the Nvidia financing avenue further chokes off financing to the AI ecosystem, suggesting more downside to come.
* **Market Outlook:** The Philadelphia Stock Exchange Index looks like it's falling off a cliff. The Nasdaq jumped above the 200-day moving average but fell back beneath it on Friday, keeping the trend lower. Despite approaching seasonally positive parts of the cycle (Thanksgiving and Christmas), further Fed hiking and Nvidia scaling back circular financing create more headwinds for the AI trade and the broader US economy (which has been powered by data center build-outs and the wealth effect). Deceleration might be priced in by 2027.
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### **Additional Notes**
* **Technical Outages:** Last week featured an extended outage in Microsoft Outlook preventing email sending, and a communications error on Friday that caused the FAA to ground many US flights (not deemed a cyber attack, though viewed by the host as a coincidence).
* **Host Advice:** As the AI age progresses, more actors will have access to stronger cyber attack capabilities, so listeners should bank or hold accounts with companies possessing very good cybersecurity.