For those of you who would prefer to listen:
The Market has a bit of a love-hate relationship with the American government. It always has and probably always will. The Market definitely relishes the stability and safety our government provides but gets easily agitated with overreach and a lack of discipline. There’s definitely been a lot of the latter of late.
Change has been a theme for decades. Very few, outside of Washington, are satisfied with the status quo. The creation of the Department of Government Efficiency, led by entrepreneurs Elon Musk and Vivek Ramaswamy, is designed to attack Washington waste. There have been attempts before with debatable success. There appears to be a great deal of energy and support on this topic from the new White House administration. They wrote an op-ed in the Wall Street Journal this week, outlining their plan. Here’s the link: https://www.wsj.com/opinion/musk-and-ramaswamy-the-doge-plan-to-reform-government-supreme-court-guidance-end-executive-power-grab-fa51c020
Excessive spending in Washington over the years has sent the Federal debt ballooning to $36 Trillion. It’s definitely been a bipartisan problem. America has not balanced its budget since Y2K, when we last had a surplus. Interest rates have recently risen with inflation and the Bond Market’s disapproval of these chronic deficits. We now pay more in interest payments to service the debt than we spend on our military and defense. It costs over $1 Trillion per year to pay our debt. Our military budget is $850 Billion. The Defense Department just failed its 7th consecutive audit, unable to account for all its budgeted Dollars. That’s not the way it’s supposed to be.
The United States has by far the largest and most powerful military on the planet. It’s not even close. But, global entanglements have certainly put some stress on the system. The Market has largely ignored wars and geopolitics, but certain episodes have caused some shocks. The war in Ukraine is escalating quickly and unpredictably again. This week, Ukraine launched its first attack against Russia using US-made long-range missiles. This was new. In response, Russia raised the threat of nuclear weapons in its doctrine. That put a dent in the Market on Monday. Bonds, Oil and Gold rallied. Stocks sold off. That didn’t last.
Our sources, as well as most military experts, believe there is a very remote chance of nuclear weapon use, and adjustments to policy are seen as more of a posturing move rather than signal of intent. But it’s not zero. It is true that the US authorized its missile use in response to North Korea sending troops into Ukraine. Importantly, Germany declined to send Ukraine long-range missiles while Chancellor Scholz spoke with Putin last week for the first time in 2 years. Europe is in a tough spot now with Trump heading back to the White House. It’s been reported that European defense spending would have to double to counter the Russian threat. Some leaders are hoping appeasement, will work, as it comes with a lower initial price. However, the ultimate price of failed appeasement is immeasurable.
It has been said that Vladimir Putin is open to ceasefire talks with President Trump, though he reportedly won’t make any territorial concessions. It is far from clear what discussions between Putin and Trump would lead to. Putin continues to insist that Ukraine immediately end its efforts to join NATO. The war in Ukraine has brought in multiple players on both sides. Russia has received supplies and support from North Korea and Iran. Russia also has friendly ties with Israel, the archenemy of Iran. And of course, Donald Trump is no fan of Iran.
The Trump administration has already said it will leverage Oil sanctions to revive its “maximum pressure” campaign against Iran. Russia has asserted time and again that it doesn’t take sides in conflicts between Israel and its Middle East neighbors. However, this week the Israelis found a surplus of new Russian artillery and supplies in Southern Lebanon. This evidence suggests Russia is deepening its ties with Hezbollah and other Iranian proxies. Russia has expanded its role in the region since it invaded Ukraine. The message seems clear: Russia is doing what it can to threaten American and Western resolve. Importantly, Israel has provided little assistance to Ukraine in its war with Russia. That won’t likely change as it defends itself. The price of Oil is the ultimate barometer for geopolitical risk in the Middle East. Crude prices have remained stable around $70. A move back towards $80 would be a tell.
Threats have increased both on land and under the sea. Russia is suspected of orchestrating another sabotage in Europe when two key fiber-optic data cables running below the Baltic Sea were cut off. A 135-mile internet link connecting Sweden’s Gotland Island and Lithuania stopped working on Sunday while a 700-mile-long cable linking Finland and Germany ceased to operate the following night. Since invading Ukraine, the Kremlin has been accused by Western officials of waging a shadow war on European soil. It’s been active in cyber warfare all along. The Market has ignored geopolitics for quite some time, as the risks haven’t led to any lasting economic impact. That could clearly change at any moment.
The new administration has been filling out the Presidential cabinet. Many nominees have come with acceptance and praise. Others, not so much. Of all the Presidential Cabinet roles, the Market cares most about the Treasury Secretary. It wasn’t thrilled about the prospects of Howard Lutnick, the CEO of Cantor Fitzgerald, as he is perceived to be a chief tariff Hawk. Both stocks and bonds rallied when he was named Commerce Secretary, a role less consequential to the Market. Private Equity leader Marc Rowan, of Apollo Group, emerged as a top contender for Treasury Secretary and met with President Trump this week. That followed previous reports that former Fed governor Kevin Warsh was the frontrunner for the job. Hedge Fund manager Scott Bessent is also believed to be under consideration. It’s also been reported that Trump is still not completely sold on any of the leading candidates.
Our Washington sources sense that President Trump is quite concerned about the effects of his Treasury Secretary choice on the Stock Market. Trump likes the Market rally and does not want to interrupt the post-election momentum. Many Wall Streeters believe Trump’s preoccupation with the Stock Market will override any economically dangerous idea. The latest rumor on Friday has Warsh taking the Treasury post with the understanding he would then take over the Fed when Chair Powell’s term expires. That rumor has Bessent replacing Warsh at Treasury after starting off running the National Economic Council. The most important takeaway is this short list of candidates are all seen as Market friendly.
Why does the Market care so much about the Treasury Secretary? Well, simply put, the Treasury Department is the executive agency responsible for promoting economic prosperity and ensuring the financial security of the United States. It originated in 1789 when George Washington first took office. He appointed Alexander Hamilton the first Secretary of the Treasury. Hamilton became the architect of the structure of the Treasury Department for our new nation. Hamilton wanted a strong central government, often battling with then Secretary of State Thomas Jefferson who largely promoted state’s rights. Jefferson did not want a big central government. The United States had a lot of debt at birth. Paying the bills for the Revolutionary War was amongst Hamilton’s first goals. Hamilton said, “The debt of the United States … was the price of liberty”. But he knew that paying off the debt was critical in order to expand commerce with foreign nations. Good credit breeds confidence. It did back then. It still does today. Our government sure seems to be taking this notion for granted. The Bond Market is not.
The Department of Justice (DOJ) is pushing for a breakup of Google with a sale of its Chrome to address its monopolization of the online search market. The proposals are part of a landmark case aimed at reshaping how users find information. The change at the White House could change that effort and legal proceedings could last years. Google has maintained a 90+% share of search. But that was then. AI is disrupting the function as people are using systems like ChatGPT, Bard, Meta AI and Claude for quick and substantive information and answers. Innovation and competition make it happen.
You may recall, the Department of Justice tried to break up Microsoft in the early 2000s after alleging it illegally monopolized the web browser market. They initially succeeded, but the ruling was overturned by an appeals court. Microsoft and the DOJ eventually settled. It took many years for Microsoft to regain leadership status in the Tech industry. Younger startups like Google, Amazon and Facebook embraced the cloud and mobility. And of course, Apple changed the world with the iPhone, leaving PCs in the dust.
America runs the risk of forfeiting its lead in the AI revolution if the government squeezes its innovative leaders rather than provide support. The Market would prefer the government stay out of it. But rules and regulations are essential for any active system. It’s the too many rules issue that the Market hates. According to sources with knowledge of the DOJ, they ask for everything possible, not necessarily with an eye towards what would be probable. In other words, they generally don’t expect to get everything they want. The new Attorney General nominee has been a lobbyist for corporations, including Amazon, who is also under the DOJ microscope. She is expected to be less scrutinizing of Silicon Valley.
Perhaps the biggest news this week the Market anticipated was the earnings report from Nvidia; The most valuable company in America. The AI leader doubled its revenue again, beating Street expectations. Demand continues to be strong and exceeds supply. Nvidia simply can’t make products fast enough. Like Apple, Nvidia is changing the world too.
Nvidia’s Data Center business, which makes up the vast majority of its revenue, brought in $30.8 Billion in the quarter. The Street expected $29 Billion. This was a 112% increase from the $14.5 Billion generated in Q3 last year. Nvidia has built a track record of doubling its revenue every year. That trend can’t continue forever. But it sure is happening far longer than most believed. The stock has been like nothing I’ve ever seen in my career. It sure has been an incredible ride. Valued at $3.5 Trillion, Nvidia overtook Apple as the top stock in the Stock Market, despite its sell-the-news event. The growth and the numbers are just staggering.
These numbers that are being thrown around these days are so hard to comprehend. $30 Billion per quarter in revenue. $3.5 Trillion in value. $36 Trillion in debt. These are just massive numbers which are so hard to relate. But here’s my attempt:
1 Billion inches is 16,000 miles. For perspective, the Earth’s circumference is 25,000 miles. How about this: 1 Billion seconds is 32 years. 1 Trillion seconds is 32,000 years! And for more perspective, 1 Billion minutes ago, Roman Emperor Marcus Aurelius was born and the Temple of Venus and Roma were built. That was 121 A.D. 1 Trillion minutes ago was 2 Million B.C. That saw the emergence of Homo Erectus. Tell me that doesn’t blow your mind. There’s been quite a bit of innovation since then. It’s all very investable.
Have a nice weekend. We’ll be back, dark and early on Monday. And will send out the TGI-Thanksgiving on Wednesday.
Mike
