“The AI Stack”
The Last Word (for Now) About NVDA
With the “unofficial” start to autumn this week, we have one item of unfinished business from the summer.
As we mentioned on Thursday, Nvidia — the poster child for all things AI — delivered standout quarterly numbers, while also announcing a $50 billion share buyback. But the reaction was a 6.4% sell-off in NVDA shares.
“Big deal,” says Paradigm’s AI authority James Altucher.
As a reminder, James recommended NVDA shares in Altucher’s Investment Network last September. In June, he recommended selling half the position for a 183% gain, and letting the rest ride.
So what does he say now?
“Here's what everyone needs to remember,” James wrote his readers on Friday.
“Every division of every S&P 500 company has a budget to spend on AI in ways that will increase profits.”
James furnishes examples: “John Deere is using AI to make self-driving tractors. Perfume companies are using AI to make better synthetic perfumes. And someone out there is using AI to listen to all of my conversations so I see YouTube videos about whatever I just spoke about.
“AI is going to add $15 trillion to the economy in the next few years.”
Meanwhile, “there is a waiting list for Nvidia chips. You have to know someone who knows someone if you want to be at the front of the line for Nvidia chips.”
James’ conclusion: “Nvidia is doing great and will continue hitting all-time highs for years to come.”
That said, the biggest gains are undoubtedly in the rear-view. Five years ago, you could have invested $100 in NVDA and it would be worth $3,000 now. You won’t replicate that performance between now and 2029.
A lot of virtual ink is spilled across the interwebz on the question of who will be “the next Nvidia.”
From James’ point of view, that’s not the right way to think about it. The right way has to do with something he calls “the AI stack.”
It’s a whole series of downstream effects from Nvidia’s famous chips. He describes it like so…
- First the broad chip/GPU makers like Nvidia
- Then the data center plays
- Then the data center hardware
- Then the data center communications
- Then AI application-specific chip companies
- Then companies that provide data
- Then enterprise software in AI
- Then, finally, consumer plays.
“Every layer of this AI stack will have its own ‘Nvidia’ and we want to be in all those stocks before they zoom higher,” James says.
“A stock that will fly so close to the sun we won't be able to see it because of the light. Until it finally falls and we realize it was just a mortal company like everyone else.
“But right now we are still at the top of the stack. Nvidia still dominates.”
Goodbye, 5% T-Bills and CDs. Now What?
If you haven’t figured it out already… the days of 5% Treasury bills, money market funds and CDs are numbered.
It’s been nice as long as it lasted — about 18 months when all’s said and done — but the Federal Reserve will embark on a new cycle of interest-rate cuts later this month. Those cuts will have a domino effect on cash instruments like T-bills and CDs.
No, we’re not going back to the days when cash yielded next to nothing… but income-focused investors are about to face “an obvious challenge,” says Paradigm’s income investing pro Zach Scheidt.
The solution? High-quality dividend stocks.
“Unlike the roller coaster ride of interest rates, dividends from strong companies tend to be remarkably stable,” Zach says — “and often grow over time.
“Many quality dividend stocks have solid track records of steady, growing payouts. It's like having a raise built into your investment. These stocks tend to hold their long-term value in any interest rate environment, assuming their underlying business remains healthy.”
What’s more, “lower interest rates can act as an additional tailwind for these companies,” Zach adds. “For one thing, falling rates will lower borrowing costs, which should help stabilize profit margins and free up more cash flow for dividends. Management teams that prudently hoarded cash during uncertain times may decide to reward shareholders with higher payouts once the coast is clear.
“Better yet, as interest rates fall and yields on ‘safe’ investments like bonds and money market funds shrink, yield-hungry investors start looking elsewhere. Where do they turn? You guessed it — dividend stocks.
“This influx of investors can drive up the prices of dividend-paying stocks, leading to significant capital gains on top of your dividend income.”
No, it’s not a way to get rich quick. “The true power of dividend investing is revealed over years and decades, not weeks or months,” says Zach.
But it does offer what he calls a perfect combination — “steady income, potential growth and a hedge against falling interest rates.”
Both the U.S. stock market and precious metals are off to a rough start in September.
All the major U.S. indexes are down at least 1% on the day. At last check, the S&P 500 is down 1.5% and the Nasdaq well over 2%. No, there’s no obvious news catalyst.
As Paradigm’s recovering investment banker Sean Ring sees it, it’s short-term noise after the S&P 500 notched a record monthly close on Friday at 5,648.
“I just don’t know how anyone can want to get short right now,” Sean writes in his Monthly Asset Class Report at the Rude Awakening.
“The problem with brilliant people is they see far into the future. Too far, by half. Sure, there will be a day to sell, but it’s not today, and I don’t think it’ll be anytime soon.” Sean sees the S&P on its way to 6,000.
Gold also set a record monthly close on Friday — just a hair over $2,500. But the Midas metal is down over $22 at $2,477. As usual, silver’s getting clobbered worse — down over 2.5% to $27.78.
Crude is getting destroyed — a barrel of West Texas Intermediate down nearly $3 to $70.60. Thus it’s plunged beneath all the lows that it tested in August. Indeed it’s now testing lows that were last seen at the start of this year.
Bitcoin’s run past $60,000 didn’t last; checking our screens it’s back below $58,000.
➢ The one economic number of note today is the ISM Manufacturing Index — registering more or less as expected at 47.2. Any number below 50 suggests a shrinking factory sector — and the number has been mired beneath 50 almost nonstop since late 2022. File this one under, “So what else is new?”
The Office Space Debacle
More than four years after “work from home” became a thing, the impact of empty office space is about to hit the banking sector — hard.
Last month, UBS announced plans to liquidate a $2 billion real estate fund — a fund whose assets consist overwhelmingly of office space. Too many investors were asking for their money back at a time when those assets are valued at fire-sale prices. UBS decided it was better to wind down the fund altogether.
“Financing for office buildings and industrial park construction typically has two stages,” says Paradigm’s Jim Rickards — drawing on his experiences at Citibank and elsewhere.
“The first stage is a construction loan, which typically has a two- or three-year maturity depending on how long it takes to finish the structure. Credit at this stage is based on the developer’s equity, reputation, location and leasing prospects.
“The second stage is a take-out loan, which is a long-term mortgage (20 or 30 years) used to repay the construction loan. The long-term mortgage is paid with rentals from the property or sales to third parties. Credit is based on the extent to which the building is pre-leased.
“So far, so good. Difficulties arise when one or more of the assumptions behind the credit decision do not play out as expected” — as in the case of that UBS real estate fund.
“A construction loan may not be taken out by a long-term mortgage if tenants or buyers of the property get cold feet. A long-term mortgage may not be amortized if tenants do not renew leases or go into default themselves.”
And so it’s been ever since the work-from-home trend took hold during the COVID pandemic.
“Banks can work with distressed borrowers by extending maturities, lowering interest rates and hoping for a turnaround — a process known as ‘extend and pretend.’ That works as long as the original valuations can be maintained through the absence of mark-to-market accounting.
“The collapse begins when some lenders are forced to foreclose, or some borrowers go into bankruptcy. Then the fire sales begin, and true values are revealed. Accountants quickly force other lenders to write down their own valuations. Then the fire sales turn into an out-of-control wildfire.
“We’re at that stage right now.”
Word to the Wise
Even someone with experience in IT security can fall victim to scammers…
For Chester Frilich of Concord, California, the trouble began when he got a call one day from someone claiming to represent his internet provider, Comcast Xfinity.
“According to a police report he later filed,” reports San Francisco’s KGO-TV, “Frilich told investigators Xfinity told him someone used his personal information to upload videos to a pornographic website and that they were generating a report to the Federal Trade Commission.”
Sure enough, an hour later someone named Brown claiming to represent the FTC calls and tells him he’s under investigation for wire fraud.
“Frilich says Agent Brown also told him someone rented an apartment in Texas in his name and that the FTC didn't believe he'd made those transactions. To help him, they would move all his money to a secure account…
“He put large amounts of cash and gold in boxes, picked up by couriers who supplied a password he'd been given. Concord PD believes the couriers may have been rideshare drivers.”
The ruse was finally exposed when one day he was told there was no courier in his area; he’d have to send $8,500 cash in a box via UPS to a CVS drugstore in the Los Angeles area. Someone at the CVS got suspicious when the two people who showed up to collect the package had photos of an ID and not an actual ID.
The case remains under investigation. All told, Frilich is out nearly $200,000.
Should he have become suspicious earlier? Shipping cash and gold in boxes, picked up by Uber/Lyft drivers? We won’t judge here — we simply pass along a cautionary tale.
Bonus points: As part of “moving his money to secure accounts,” Frilich cashed out his CDs and an IRA. He owes the IRS over $30,000 he doesn’t have. The agency is already threatening to put a lien on his house.
Mailbag: A Wannabe Assassin’s Motive
“Good read, but not necessarily relevant,” a reader writes after yesterday’s edition.
“Perhaps you may have missed the memo that this particular would-be assassin wasn't even partisan. He researched how to assassinate the easiest, most convenient, close-to-home target whether it was Trump or Biden. No apparent ties to any political party, just the deranged attempt to kill someone with his skills.
“This puts all the theoretical political conjecture in your article to rest, at least for now.”
Dave responds: I take it you’re referring to the FBI’s findings released last week?
You’ll have to forgive me for being unwilling to take those findings at face value when the CIA still won’t come clean about why the agency opened a file on Lee Harvey Oswald in 1959 — four years before the JFK killing.
