Crocodile Rock Star
Jensen Huang, frontman for the artificially intelligent band at Nvidia, performed last night for a breathless crowd of adoring fans. He was dressed in a black crocodile jacket like a true rock star. He has the stage presence once exhibited by Steve Jobs and is now being aped by Bezos, Zuckerberg, and Musk in their public performances. He has joined this AI CEO supergroup and is on tour, aiming for world domination backed by a huge band of players. As the stock prices show, ticket sales are doing a brisk business. Stock analyst fanboys like Dan Ives and Tom Lee are lavishing unvarnished reviews on these AI lead singers. And having Donald Trump as your promoter doesn't hurt either.
Apparently, there aren't enough stocks to go around for investors to choose from if the narrowness of the early 2025 bounce is any indication. Investors have once again started the year buying the same winners that got us to a level of overvaluation rarely seen in markets in the past. They still must like the song list of AI winners from last year as they push up prices of these pricy growth stocks in the early going. The case for a broadening out is fleeting, given the threats of rising rates and punitive immigration and tariff policies.
Excuse me if I make up my playlist that doesn't include any of these over-hyped bands. I prefer an undiscovered singer-songwriter vibe for my listening pleasure. But that's just contrarian me being old, too. I'm more focused on what happens after the hyped-up rock show ends. That should come sometime this year as the valuation expansion reverses on the back of a bond market rate back-up and slowing earnings momentum.
The equity risk premium risks going negative if current trends continue. Although I have argued for a regime change concerning the relative attractiveness of bonds and stocks, it won't come about without a bout of financial instability. I still believe that the prices of bonds and stocks are positively correlated after years of financial repression by central banks. The 100 basis point back-up in the 10-Yr in the face of a 100 basis point Fed easing, while rare, is the logical consequence of the end of that era.
Last month, I posited the possibility of a 10%+ correction in equities should bond yields rise above 4.65% to 5%. That could be what is shaping up this week, with the backup stalling just south of 4.70% today after the Jolts data. The Treasury's issuance of fresh 10s tomorrow is a critical test of this, as is the employment data on Friday. But this is the hand we are now dealt - increased uncertainty.
The renewed Trump rally should broaden next week if we can get past these speed bumps without a crunching sound. If not - hold your ears for a bout of financial feedback.
Recently, I said that week-to-week volatility is now a feature of the post-RNC election sweep, not a bug. The inflation expectation surge that roils bond markets today will likely be with us for some time, but there are offsets to the bear case, like low gasoline prices and a recent decline in the Atlanta Fed GDP Now. AAII Sentiment measures now reflect caution after the post-Fed decision sell-off in December. The lack of breadth is logical in that context. Only the sure-bet AI stocks are being bought in this period of uncertainty.
Treasury Bond auctions are usually pivot points, and this one is no exception. I'm hoping for a bounce here, but the all-clear has hardly been sounded yet. The only sound we hear today is Crocodile Rock's fading strains. I think the curtain is coming down on that act this week.
Risk Model: 3/5 -Risk On
Risk on, but just barely.
The comforting elements of the model are price and volatility-related, offset by the poor sentiment and notionally negative Cu/Au ratio. Volatility is rising off the year-end lows - an ominous sign.
That could change here depending on the sustainability of the bounce in copper and a sell-off in gold last week. Definitive confirmation awaits.
Cash is a good place to be today.
Cu/Au Ratio
