Weekly Good Reads: 5-1-1
Nvidia, Elevated Services Inflation, "Mesoeconomics" (Supply Chain), Time is wealth, Corporate Reputations
Welcome to Weekly Good Reads 5-1-1 by Marianne O, a 25-year investment practitioner and the author of
on investing, economy, wellness, and something new I learn in AI/productivity. All the Weeklies are here, and here is the index of charts and terms. You can easily subscribe to my newsletter by clicking below.Please also check out my conversations with Female Fund Managers, Investors, and more - new this year!
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Market and Data Comments
This week, the market pushed out further its rate cut expectations for the US and the U.K. While inflation rates have declined from their highs, driven by core goods and energy inflation reversal, services inflation in major developed markets, thanks to the tighter-than-expected labour market, is still too high for comfort (see chart below). At the same time, global manufacturing activity is likely at the highest level since May 2022 (Barclays).
Apart from the positive performance of the info tech sector, all other sectors were either flat or declined this week. 2-year yield surged 12bp albeit bond volatility declined almost 6 points this week.
Latest FOMC minutes show Fed officials supporting “higher for longer”, and some mentioned they were open to rate hikes should conditions warrant it and questioned if the US financial policy is restrictive enough to bring inflation to the 2% target.
The top chart plots the Chicago Fed National Financial Condition Index versus the US Fed Funds rate, with the red bands indicating periods of US recession. Since the 1980s, a rapid rise in the Fed Funds Rate usually tightened financial conditions, which often brought about US recession. However, since the beginning of the year, the US financial condition has loosened (falling black line) while rates remain elevated - thanks to the buoyant stock market and AI-led structural change euphoria.
The market has now fully priced in a December first interest rate cut in the US but only 30% for a September rate cut.
In the UK, April headline inflation declined to 2.3% yoy from 3.2% yoy prior, and core inflation at 3.9% (4.2% yoy prior) was much higher than expected. Coupled with the UK general election in July, the market now expects the first rate cut to be in August rather than June.
It seems every market participant (including yours truly) cannot stop discussing Nvidia’s latest (Q1 FY2025) blowout financial results. As Nvidia’s CEO Jensen Huang hailed, the fourth industrial revolution has begun, companies and countries are partnering with NVIDIA to shift the trillion-dollar traditional data centres to accelerated computing and build a new type of data centre — AI factories — to produce a new commodity: artificial intelligence.
Revenue was up 262% yoy and 18% qoq, and net income was up +628% and 21% qoq. Not just quarterly net sales and market cap percentage changes in the last 12 months were off the charts compared to other Big Tech, Nvidia is making a lot of money (net income boom) (next 2 charts) and beating all estimates, thanks to the meteoric rise in its datacentres revenue (87% of the total quarterly revenue).
What can slow this boom down, it’s Nvidia’s clients which are also his competitors (see Econ/Invest. no. 1).
Bloomberg’s macro strategist, Cameron Crise, disputed the similarity of Nvidia with the dot-com internet infrastructure wonder Cisco, as Nvidia’s sales dropped in 2020 but surged again.
Crise pointed out that Nvidia and other tech companies’ biggest asset is the intellectual property and software that runs on it; however, high-frequency economic data cannot capture well these trends in IP and software investment. This component is now a bigger share of fixed investment as a % of GDP than physical equipment (see chart below).
The graph below shows IP/software investment (red line) commands a bigger share of GDP than equipment (purple).
Crise further calculated IP/software is the third largest cumulative contributor in the past 10 years to real GDP growth, rising from 7.4% of real GDP growth during 1992-2000 to 12.9% during 2014-2024. Equipment’s contribution declined dramatically from 16.8% to 4.7% in the same two decades. The AI-fueled investment cycle likely has ample room to grow, buffering future economic growth and recent stagnation in industrial production.
This coming week, we will monitor the US Q1 real GDP (% qoq, saar) on Thursday, April personal spending and April core PCE price index on Friday, the Euro Area May preliminary inflation on Friday, Japan’s May CPI (Tokyo) and April industrial production on Friday as well as China’s May NBS manufacturing PMI on Friday.
🖐Before you leave this section, test your knowledge of the US economy before and after the Biden administration. Are you close to the trend or off the charts? You can immediately see the answers, and the explanations are at the bottom of this post.
Economy and Investments (Links):
Nvidia’s chip-making competitors are increasing their game, releasing their own AI chips that they have claimed are better, at least at some AI computing tasks. They are also aiming to displace Nvidia’s dominance in software used to access its GPUs, responding to demand from customers who want alternatives. Nvidia’s market share in AI chips is estimated at above 80%.
Data from the Swing State Project published on Thursday showed 54 per cent of voters said the cost of living was the best way to measure the strength of the economy — and 59 per cent thought Biden could control inflation.
Don’t Believe the AI Hype (Project Syndicate)
Economic theory and the available data justify a more modest, realistic outlook for AI. There is little to support the argument that we should not worry about regulation, because AI will be the proverbial rising tide that lifts all boats.
Finance/Wealth (Link):
Time is Money - New Empower research unveils how Americans value their time in pursuit of financial goals and retirement (Empower)
Time is of the essence as people work toward streamlining their lives and focusing on what matters most to them, amid commitments across work and home that can affect their financial happiness. More than half of Millennials (52%) and 37% overall think saving time is more important than saving money.
Wellness/Idea (Link)
Chattering Classes - the Art of Conversation (The Economist or via Archive)
+ Good Suffering (
by )When sharing the secrets to his success in the Stanford interview, [Nividia’s founder Jensen] Huang noted that he had very high standards but low expectations. He elaborated: “People with very high expectations have very low resilience—and unfortunately, resilience matters in success. One of my great advantages is that I have very low expectations.”
One Chart You Should Not Miss: Axios Harris Poll 100 [brand] reputation rankings in 2024
The key message from the 2024 Axios Harris poll: Americans had it and knocked down corporate reputation scores related to their unethical handling of inflation, creating higher prices and poorer value for the stretched American consumer.
A different table focusing on Big Tech versus social media firms shows Tech’s reputation (Nvidia, Microsoft) is consistently higher than social media firms such as Meta and X (the latter two are in the very poor category).
Only Nvidia and 3M achieved excellent scores. Despite Nvidia not producing a consumer-facing product, the firm achieved the top rank and appeared for the first time in this poll, reflecting its glowing public image.
One Term To Know: “Mesoeconomics”, the middle domain between Macroeconomics and Microeconomics
Since the Pandemic followed by the Russia-Ukraine war has caused global supply shocks and inflation problems, the supply chain has been a hot topic of discussion with supply chain management at the top of the executives’ and governments’ minds.
A supply chain is the network of all the individuals, organizations, resources, activities and technology involved in creating and selling a product, from the production and delivery of source materials from the supplier to the manufacturer to its eventual delivery to the end user.
According to William Janeway, a Cambridge Economics professor, coming into focus is the study of “mesoeconomics”, the “meso” or middle domain between macroeconomics and microeconomics, where supply chain networks exist.
Mesoeconomics, which encompasses the economic networks, regions, and sectors that ultimately determine how economic policies play out in the real world, will be crucial for economic policymaking in a new age of geopolitical risk (Janeway).
One distinctive feature of mesoeconomics from other branches of economics is the focus on existing relationships between firms within and across markets, supply chains, and financial networks. Each of these relationships and their links to others can be mapped mathematically (graph theory) and weighted by the volume or value of transactions that use it.
Consider the role of semiconductors, the base of the technologies that shape our lives, or the critical minerals that form the backbone of our “clean-energy” future. For the US, access to lithium and cobalt minerals is just as important as access to advanced semiconductor processing technologies, currently mastered by TSMC in Taiwan, which in turn depends on the advanced lithography systems produced by ASML in the Netherlands.
By understanding how important each of these networks is, how they react to market forces, and how resilient they are to shocks, governments can play a more targeted role either in raising the resilience of the economic system on the supply side or effectively stimulating market demands, leading to a better chance of achieving economic and national security.
[🌻] One Thing I Learn About AI:
This past week Anthropic announced its major research into the inner workings of the “AI brain” of their Claude 3 (Sonnet) Large Language Model.
The researchers used techniques to identify patterns of neuron activations corresponding to millions of different concepts the AI has learned called “features”, like city names, people, elements, fields of study, and coding syntax.
These features interact in complex ways to produce the AI's behaviours and outputs. By amplifying or suppressing certain features, the researchers could alter how Claude responds, such as generating scam emails or acting overly flattering despite its usual truthful and straightforward behaviour.
This can make AI systems safer by monitoring for dangerous concepts, removing biases, or steering the model away from harmful outputs. However, the features identified so far represent only a small subset of all the concepts learned by the model, so there is still a lot to be learned about AI’s inner workings.
Answers and explanations to the Guardian/Harris Poll.
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I love these updates. So informative but also just fun, accessible reads. Really look forward to it every week