As the markets turn…
A marked turn has gotten under way in markets over the past couple of weeks. The teracap tech trade has been giving way to dividends, quality and value. We’ve been prepared and are enjoying the fruits.
This is an extension of the bursting bubble theme visited a couple weeks ago. Investors are increasingly questioning the valuations of the artificial intelligence darlings that have run up so far. Not only that, but the vast sums the so-called hyperscalers have been throwing into AI infrastructure, once sourced from corporate cash flows, have begun to be financed with debt. This is remarkable enough that even CNBC has been giving it considerable airtime.
As with any market trend, this won’t proceed in a straight line. Expect days or even weeks where the bubble attempts to reflate. But most of the time I expect the Dow and Russell to outperform the Nasdaq, XS to outperform US, and gold to outperform bitcoin as fantasy yields to reality. Real assets and assets founded in reality – commodities, stocks with tangible value and visible profitability – will outperform those based on hypothesis and hype.
Expect this to extend to energy. Oil, which has been in the dog house for many moons, is forming an extended bottom and will perk up, joining metals and agriculture in a commodity supercycle.
Debt and hype are passé, assets and reality are the new thing.
I sense things are coming to a head.
The “Machine” is starting the break down……cant have much further to go. I know its all been said before but something has changed, mood or animal sprints ……..i sense the invisible hand of the free market pushing down on them all………….
You felt that too? A subtle tectonic shift. October 29. A tilt in the zeitgeist.
Ahhh, maybe it was just a passing truck. But unless the rules of economics and the lessons of history have changed, it has to happen some time.
CNBC is funny. Interviewers regularly lay out a convincing case for a bubble. Then the interviewee denies it. It’s different than the dotcom bubble, it isn’t quite a bubble yet, yadda yadda. It’s as if it were an editorial policy. I have yet to hear a guest say something like, yeah, Mr Anchor, you bet. It’s a bubble, it’s a big one, and it’s every man for himself. Maybe I just missed the John Hussman appearance.
Well here at Financology we aren’t sponsored by Wall Street or Silicon Valley, we carry no advertising, not even any cookies. It doesn’t make us right, but we call it like we see it.
October 29 btw happened to be the day of the last FOMC announcement, after which Powell through cold water on December rate cut expectations. If that was all this was about, it may as well have just been a passing truck, because the Fed will change its tune if markets go south in any big way. Media may be obsessed with Fed talk, but the Fed has shown time and again its talk isn’t credible; at least its shelf life is matter of days.
Powell himself admitted as much. While the markets took it as a hawkish signal, the objective fact is that he merely said December isn’t a foregone conclusion. As it should be.
The more significant development would be widespread recognition that the stock market has a serious valuation problem. There’s only one way to fix that, and that’s lower prices. And no mere 5% trim will do it, so it has much more shelf life than any Fed talk.
So we will soon see … if it was just the Fed it will soon pass. If there’s more to it, it won’t.
Bloodbath in the markets today … another whiff of deflation. Valuation suddenly matters.
Again the Dow outperformed the Nasdaq, the rotation continuing. XS outperformed US. Gold outperformed bitcoin. Cash outperformed them all.
Now that the lights are back on in Washington, Republicans have a problem. They have to renew the Obamacare tax credits or face a massacre in next year’s mid-terms. They don’t want to do either but that’s their choice. They are floating alternatives but time is running out and any half baked plan is going to cost them anyway.
Meanwhile they’re not even taking about the most economically damaging ACA feature … the employer mandates. It’s time to get out of the 1900s and untangle the messy three-way state-sanctioned relationship between employee, employer and insurance company. It’s an expensive game of hot potato and has turned millions of good full time jobs into part time jobs. Let everybody have direct access to insurance even if it requires the tax credits. Fold Medicaid into it too. Then get to work on the Medicare mess.
Yikes!
The Government just pulled a bootleggers turn on tax rises as they been told they stall the economy stone dead. Everything is crashing as people are rushing to cash.
Mike
There’s definitely a deflationary squall going on out there. The upside for cash could dominate for a while but it’s unlikely to develop into anything like a 2008. The Fed is on hair trigger alert and will put the pedal through the metal long before that happens. Its job is inflation and it knows how to do that.
Meanwhile this serves as a reminder of the value of diversification. It’s been increasingly tempting to completely abandon cash and bonds given their poor long term outlook, but occasions can nevertheless arise where they provide some comforting ballast and can even boost returns by serving as a source of dry power to take advantage of markdowns in other asset classes.
These developments, by the way, can be good for the overall economy. Bubbles misdirect resources towards less productive and unproductive pursuits – what the Austrian school calls malinvestment – as capital begins to chase past returns and its purpose becomes mainly to game the financial system and escape inflation.
Bitcoin is a perfect example. Countless hours of human time and massive amounts of energy have been sunk into digital bits of nothing, mostly for the purpose of providing an escape from the depredations of fiat currencies. These are resources unavailable for producing affordable housing, wholesome and affordable food, curing disease, and otherwise improving living standards.
The destructive effects of inflation are if anything widely underappreciated. Media bias notwithstanding, even the most ill-conceived tariffs pale in comparison.
University of Michigan, University of Michigan: Consumer Sentiment [UMCSENT], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/UMCSENT, November 14, 2025.
Mega’s Weekend dispatch from England:- The Zeitgeist stirs……
Something has shifted, it not Death star blowing up Alderaan scale but for those of us with some mitochondria in our blood streams we can all feel it.
Trump Presidency is in ruins, the “Peace Prezident” working hard on his Nobel prize via Gaza/Ukraine/South America/Iran etc………he even turned on GOPs that will not tow the line with Bibi. MAGA is a busted flush i the midterms will be a bloodbath……clueless DNC a distant memory.
Is it a “Monroe doctrine” or are we looking at an attempt of all out power?
Worse still is the US economy appears to be contracting fast at the grass rootes level. I see lots of business closes EVERYwhere. There is a real sense of recession or worse coming.
China has given Trump/Europe a Bloody nose, they tried to take their Chip plant in Holland & China hit back HARD…….Trump looks weak. Like a wounded animal the “Empire” has just become very dangerous, they looking for a “Win” but where?
South America?……………Vietnam 2.0! …………Iran?….tried that!……..China?……total fail………India?
Here in dear old Blighty its even WORSE.
The government as “U” turned again & again…………suddenly they “found” some cash which means they will not increase direct taxes. you can sure bet they increase just about everything else.
The Ukraine war rubbles on, very little is hear on the TV news or papers. They sort of not mentioned that Russia is in the late stages of over running Ukraine positions everywhere on the line of contact. UK tax payers money that should have been spent on defences was spent….er Elsewhere………….the more i look at Ukraine the more i see South Vietnam.
WE not quite there yet, the edge of something…….but the Plebs are beginning to sniff the air & are looking worried.
Trump has lost the plot. He got elected because of out of control immigration and inflation. He’s been masterful on the first but then turned his attention overseas. If you aren’t going end a war, at least get the US out of it.
He was not elected to make the US the bitcoin capital of the world. Nor the AI capital. Where does this notion come from that America has to win races with China? Would that improve the lives of American families? Plenty of countries enjoy high living standards without dominating the world.
Trump was elected because voters were tired of neocons of both parties who are more interested in ruling the world than fixing the problems at home. The above picture is worth a thousand words.
He took a good idea – tariffs – and executed badly; herky-jerky policy makes business planning almost impossible. All he needed to do was roll back aggressive globalism, not tick off trading partners and hurl rocks in the gears of global trade. His economics of lower interest rates and higher inflation may work for a real estate tycoon, but voters have already had more than their fill of that. He would do better to exercise his leadership to simplify and reform the tax code, Social Security, Medicaid and Medicare.
And instead of hectoring the Fed for easier money, point out how its years of easy money have been crushing the people that elected him and lead sound money reform. Shoot self in foot … lobby for easy money, crank up inflation, then watch your tariffs falsely get blamed. Instead of opening with stimulus, he should take a page from the Reagan playbook and get the bad stuff out of the way first. It’s all connected too. Printing money is the main means of financing war. If voters were billed directly in taxes for wars, they would be much less common.
It all feels like the 1970’s…………………Energy crisis next?
Inflation is very much like in the 1970s. The difference is the CPI is much lower now…
Markets continue to bleed red in what may soon be known as the Crash of 2025. Cash is the about only thing going up … definitely deflationary. If it continues it means relief in consumer prices is in the pipeline, but pain for asset prices comes first.
Will it continue is the $64T question. Cash is getting a bit overbought and other assets a bit oversold, and therefore this trend is due for a sharp reversal almost any time, but just when that any time would be eludes my crystal ball. More significant yet is what happens next … it’s far from clear that it doesn’t promptly resume. Our suspicion that the bubble is bursting may well be validated.
Bitcoin has been leading the way lower for asset prices … having just dipped below $90,000. Down nearly 30% from its October 6 peak of $126,198 in just six weeks, already a full-on crash.
Bitcoin has regained the $90,000 mark, and there are some potential catalysts for a stock rally on the news calendar this week, for instance an Nvidia earnings announcement and some previously deferred government economic data. I would be skeptical of the staying power of any such rally though, given that neither could cure what ails stock prices … that they’re just too damn high. The only cure for too high prices is lower prices.
Warren Buffett is holding a ton of cash. There’s little to nothing out there attractively priced.
It’s a bare market.
The Dow Jones Industrial Average closed down 498.50 points today, and the Nasdaq down 275.23.
Some quick stats for readers following our Model Portfolios. They’re for just one day (today) but illustrate how substituting some market cap weighting for merit (dividends, quality, value), can affect performance in a “bare market”.
The broad US stock market (VTI): -0.68%
DGRO: -0.13%
SCHD: +0.59%
VYM: -0.02%
VFQY: +0.16%
VFVA: +0.53%
The broad XS stock market (VXUS): -0.88%
IGRO: -0.46%
SCHY: +0.03%
VYMI: -0.61%
VWO: -0.33%
VSS: -0.84%
The 20:20:30:30 Portfolio is 60% in a broadly diversified balance of every tradable stock in the world, yet is light on the most overvalued. As a whole, including treasuries and commodities, it was +0.02% on the day.
Saudi & Trump meeting……………..They are going to invest £1 Trillion in USA………hmmmm
1970’s energy shock….attack Iran & watch the OIL prices rocket?
Markets are warming up for the aforesaid rally this morning as they await the Word of Nvidia after the close. I am watching for how far the rally takes the global market. If VT reverses short of its last high of $141.49 on November 12, it will confirm a bear market. If it exceeds that level, it will confirm the end of the correction. If it nails it, buy a lotto ticket.
On the Geo-political front it looks like the Ukraine is about to fold. Like the fall of South Vietnam. US & Russia have agreed to a 28 point peace plan…………..lets see wot happens.
Mike
Trump and Putin have reached a deal on Ukraine behind closed doors, mainly on Russian conditions – Axios reports
According to the new plan the US and other countries will recognize Crimea and Donbas as legitimate Russian territory.
Reducing Ukraine’s armed forces by 50% and no missiles on Ukrainian territory.
Other conditions include recognizing Russian as the official state language in Ukraine and granting official status to the Russian Orthodox Church, the Financial Times reports.
Tout TV today featured a Wall Street guest who responded to a question about the AI bubble by reminding viewers about how “transformative” AI will be. Of course that dodges the question. Bubble watchers aren’t questioning the “transformative” potential of artificial intelligence. The questions revolve around valuation, financial incest, and cost.
For example it has been pointed out that for all the gee-whiz capabilities of AI chips and software, they just won’t work without copious amounts of mechanical infrastructure. That’s the hard part. Microsoft CEO has flatly stated that they have a lot of stuff that they just don’t have anywhere to plug in. Ironic isn’t it? Throwing trillions at all this high tech stuff while ignoring all the low tech stuff that’s needed to make it work.
But rather than belabor it here, let me cite an excellent analysis on Daily Reckoning:
The NVIDIA Reckoning
And this Financial Sense writer focuses in on just how much high tech content is old fashioned industry:
The High Cost of Our Digital Lives: Unveiling the “Dark Cloud” with Guillaume Pitron
This is digging stuff out of the ground, moving water, generating electricity … which no mere chips and software can do no matter how clever.
So we’re supposed to just focus on how wonderful AI will be and forget about what it would take to actually get there. Desperately trying to pump a little more air into a deflating bubble.
What AI bubble? As expected, worries about valuations and costs and circular financial incest are all a distant memory in the media … although it came after the close, the Word of Nvidia eclipses all else. But though still stratospherically overvalued, stocks were oversold, and all that was needed was a spark. Everything that was a valid concern before the Word is still such after the Word, so we are still looking for more substantive evidence to tell us whether this is the much needed bear market or whether that will be put off for another day. Watch that VT $141.49 level.
Nvidia’s report also overlooks the most plausible path whereby AI overspend corrects. The plunge in Meta stock provides the insight. Shareholders start to punish companies for spending without a visible path to returns. Spending moderates, and along with it the revenues of companies that make the AI hardware and software.
When it does not deliver…………then watch it fall.
An inherent problem with lack of yield. Conventional economics has it exactly backwards … high asset prices and low yields represent instability. The only way you can realize a return is to sell, so if it’s not going up…
The Crash of ’25 resumes apace as the emotional response to the Word of Nvidia fades. I didn’t necessarily expect it to happen this soon, but as I pointed out only yesterday, it changed nothing in terms of reasons for prices to fall.
What we’re seeing has nothing to do with bad news … it’s merely the convergence of assets towards their intrinsic values. Ultimately the reason for virtually all major market declines is that prices went too high to begin with.
Bitcoin the poster child for the Crash of ’25. The disembodied tech stock is now down over 30% from its October 6 peak of $126198, bringing it over 30% closer to its intrinsic value.
Never trusted Bitcoin……….
Mike
You could justify a small position based on the Global Market Portfolio … an index of all the world’s investable assets. I’ve dabbled with it via a couple bitcoin ETFs … a few trades netted me maybe enough to buy lunch. But it’s not a serious investment, if it’s an investment at all.
The main argument for it is fixed supply. But it’s skating on thin ice … there’s nothing preventing any skilled network engineer from creating a clone … or an unlimited number of clones. Which makes it clear the only thing supporting the original is marketing. Although I’m not aware of any exact duplicates. there are already thousands of other cryptos.
And the marketing as “digital gold”? It is no such thing. There are cryptos that are actually backed by gold, but bitcoin isn’t backed by anything.
As a practical matter, there’s little point in owning it. It acts like a tech stock, so provides little to nothing in the way of diversification. And it is ultimately destined to go to zero, like virtually every other unbacked form of man made money.
Bitcoin now $82,500
What will be will be
Markets are rallying again this morning, supposedly on news that the Fed’s Williams weighed in favor of a December rate cut. Financology readers weren’t faked out though … we are repeatedly on record as warning against trading on Fed speak, last only a few days ago. Even if the Fed’s messaging were perfectly transparent and honest, it doesn’t even know for sure itself what it’s going to do. Among other things, it’s influenced by markets themselves, which it can’t predict. To the extent interest rates factor into your trading and investment decisions, avoid the media chatter; follow the bond market.
What’s more, whether the Fed cuts rates far from assures stock prices will rise. In the last two major bear markets, in 2000-2002 & 2007-2009, the Fed cut rates. In fact, in 2007, the first rate cut came in September, stocks peaked in October, and then lost half their value over the next year and a half while the Fed cut rates all the way down.
I have a hunch that the dweebs at the Federal Reserve believe that if they cut interest rates aggressively and pre-emptively if a somewhat significant market price decline occurs, maybe coupled with yet another round of quantitative easing, they can goose asset prices back up. That most certainly seemed to work in the wake of the COVID “crash.” [It was a mere correction, IMO, because it didn’t fall enough and its only notable feature was that it fell relatively quickly.] That is, they are almost certainly aware that dropping rates to 0% after a crash has occurred won’t help.
That said, I don’t know if their current rate cutting nonsense will work or not. Over the past 16 years, the Fed has shown that it is willing to engage in behavior that is forbidden by the Federal Reserve Act to continue its stupid games and it’s gotten a very large amount of money, retail and institutional, to aggressive buy, Pavlovian style, every time the Fed performs one of its market-distorting actions. I’m fairly certain that this trick is getting old and cannot work forever. However, I don’t know that time is now or even close to now.
In the past, oil price spikes typically led to recessions. Crude oil prices at the moment are rather low so that doesn’t seem like a risk element. However, I am wondering if all this ridiculous AI datacenter buildout won’t serve as a substitution for high crude oil prices as it raises electricity costs for everyone.
May be that financial media keep flogging the notion that Fed rate cuts will float asset prices to encourage that Pavlovian response. It seems to work sometimes anyway. There’s no free lunch though because asset price inflation feeds into consumer price inflation, and bubbles inevitably burst regardless. The pricing chain is always different but at least part of it could turn out to be that massive amounts of cheap money flow into data centers and data centers kite energy prices. The K shaped economy becomes even more K-shaped, as American families sit at home in the dark so that trillion dollar corporations can burn bright.
Mega’s Dispatch from England:- Peace?
Well they say 7 days is a long time in politics, so it seems.
Could it be that we are seeing the end of the Ukraine war?..UKraine is exhausted & so is much of NATO. Western weapons have proved to be something of a disappointment, true a lot of it was old kit but never the less it failed in many ways.
Russian hypersonics have proved to be a game changer, a area where the West lacked much of anything. Western air defences both in Ukraine & Israel failed even against Iran let alone Russia.
Trump wants out………..or so he sez.
The MIC will want this to stop, their “Star war” weapons failing to make much impact raises question on their costs & performance…..not good for business. Trump & the US want/need to do business with Russia……..not so much with Europe.
So it comes as no surprize that the “usual suspects” are screaming the house down by DEMANDING that Ukraine fight to the man!
Germany is very low on Gas, Russian contracts run out in 2026/2028 & talk is Russia will NOT renew them……….Nein new Gas Friz! They end up buying it via a third party at vastly more cost.
France is in the same boat their Nuclear plants are ageing fast & they needed cheap gas as part of the plan………..Non now Froggy
…………………..& as for those Limey bastards?
Trotting out the same talking points, rather pissed off that those Bloody Americans are making the decisions & still smarting that their plan to force Bosnia to sell it Lithium was torpedoed by the US who walked in a offered much better terms!
Indeed it rather difficult to see how the UK will extract all that good stuff in Ukraine when most of it is under russian boots?
No amount of false flags or any other sh1t will help them now.
If Trump is being honest, its over.
Mike
Beginning to look like a “Nothing burger”…………..Trump fully aware that Russia will black out Ukraine this winter……
Representative Marjorie Taylor Greene is resigning from the House as of the first of the year on the heels of a rift with President Donald Trump. Though she was an avid supporter of Trump she took the other side on a few issues, including the extension of the Obamacare tax credits, the release of Epstein files, and Trump’s increased neocon leanings. It’s unfortunate for his party that Trump chose to counterattack instead of heeding her advice or handling disagreement diplomatically. If there aren’t some course corrections along the way. the Republicans will be facing a shellacking in next year’s mid-terms.
At last check, Nvidia was king of the teracap mountain at 4.54% of the world stock market (VT) stock market capitalization. Alphabet’s two share classes combined made up 3.84%.
In another you-heard-it-here-first, recent developments at Alphabet make it seem likely that within the next year it will overtake Nvidia. Some technical details.
Not that Nvidia is about to fade into irrelevance. But OpenAI may be incredibly overrated … it has no publicly traded stock but I’m glad I’m not SoftBank.