It’s time for another Milk Road Macro PRO report.
This is where we take a deep dive into the most important factors driving markets.
We’ll explore what’s happening right now and what might happen next.
We’re currently in the middle of a big melt-up across risk asset markets.
But there’s no need to be fearful.
Macro conditions are still looking great, overall.
However, there are a number of things to be wary of for potential shifts in markets.
We’ll look at:
- Why we’re not in a “late 1990s style” AI bubble
- Why the risk asset rally can still be considered “healthy”
- The latest liquidity data
- How financial conditions continue to loosen
- Where we are in the business cycle
- What’s going on with China and why this is important
- Why the US economy is still resilient
- And why we might see a huge “performance-chasing scramble” into year-end (bullish)
This is a birds-eye view of all the most important factors across the global economy and markets.
We’ve got 60+ charts to get through.
So, let’s get on with it…
ARE WE IN AN “AI BUBBLE”?
I am constantly hearing that we’re in a big “AI bubble” - which is going to cause a crash across stocks and wider risk assets like bitcoin and crypto.
It’s the latest reason to be scared and not to be involved in the market.
You can see this through Bank of America’s most recent Fund Manager Survey.
In October, “AI equity bubble” shot to the top of the list of “tail risks” for Fund Managers.
The first thing to say is, looking at this chart above, the previous two “biggest tail risk concerns” were “a second wave of inflation” and “a trade war triggering a global recession”.
Neither of those things have happened.
The second thing to say is that, just on a fundamental level, the AI boom is real.
It’s not “fake” - it’s an actual, real thing, growing at a rapid and exponential pace.
There is “crazy compute demand and the variables are moving at unbelievable speed” according to Jan van Eck, CEO of VanEck.
The “tokens consumed” within the AI world have increased 38x year-on-year.
(A token is essentially a “unit of compute” for AI processing)
Does this on its own mean we are not in an “AI bubble” from an asset price perspective?
No - but let’s look further.
Nvidia is the biggest and most important stock in the US (probably the world).
It’s currently worth roughly $5 trillion, and many people say it’s “overvalued”.
But Nvidia is reporting that the huge demand for its AI chips is well clear and visible into 2027.
Nvidia is not overvalued, it’s just an absolute beast of a company.
It has a current forward P/E (price to earnings) ratio of roughly 27x, which is pretty reasonable.
And this has been falling for years.
For context, this is lower than both Costco (34x) and Walmart (48x).
So, is there a “bubble” in the consumer staples sector as well?
I don’t know the answer to that - but it’s a question to pose to the “AI bubble narrative” enthusiasts.
Are there some “bubble-y” aspects to valuations in some parts of the wider AI and “AI adjacent” market?
Sure.
I’m thinking of some of the smaller names in sectors like energy, nuclear/uranium and semiconductors - some of these are definitely “bubble-y”.
Nuclear tech firm Oklo, backed by OpenAI’s boss Sam Altman, has been propelled to a valuation of more than $20bn - but has no revenue at all.
But honestly, from an overall “market-wide risk” perspective - I’m not really that worried about a spooky “AI bubble”.
The “it’s 1999 levels of bubble speculation” comments that I’m hearing are just ridiculous.
In 1998, Cisco (the dot-com boom equivalent to Nvidia) had a forward P/E of 58x, which rose to 210x at the peak of the dot-com bubble in 2000.
Just look at the Nasdaq price chart - it’s absolutely not in the same stratosphere as the dot-com bubble in terms of price trend.
Variants of the chart below have been flying around everywhere.
People say “this is circular vendor financing - just like the dot-com bubble”.
What I would say about this chart is - sure, it’s loads of interconnected companies giving each other money.
But so what?
All of the main tech giants have the revenue to pay for their compute - billions and billions of dollars of revenue.
This isn’t the 1990s when nobody was generating any real revenue.
There’s been very little borrowing among the huge cash-printing tech giants (although borrowing has now just started to begin at a very low level).
The only big revenue problem is OpenAI - it is only printing relatively “small” revenues ($20bn expected this year, 40bn expected next year).
That’s the one big cog that could break the machine.
But even if it does - I don’t think this would happen for a long time yet.
A note from Goldman Sachs analysts states:
“We don’t think the AI investment boom is too big. At just under 1% of GDP, the level of spending remains well below the 2-5% peaks of past general purpose technology buildouts so far.”
It’s very possible that we could reach “real bubble territory” at some point.
As I wrote in the previous PRO report, the Fed is “running it hot” - so this could very well push us into what could be considered an actual bubble.
But we’re not anywhere near that yet, in my opinion.
If we are in a “1990s-style bubble” - we’re still early.
Also, bubbles don’t pop with everybody shouting “bubble” and expecting a crash.
But we can look deeper into US markets to see that we are still in a somewhat “healthy” environment currently…
Uh, Oh… 😧 The rest of this report is exclusive to Macro PRO & PRO All Access members!
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WHAT’S LEFT INSIDE? 👀
- Finding clues of a positive economic outlook in markets
- Financial conditions are still incredibly loose – can they get looser?
- Should we be worried about China collapsing this economic house of cards?
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