• The positive momentum continues

• Bad news is good news

• AI spending continues

• Maybe AI is not helping everyday companies? (Helping their customers!)

• Earnings are surprising across the board

• The Labor market is softening

• Inflation is still cooling

• Quick Hits

• Where did all the crypto money go?

• Chart Crime of the week

• AI might help those working nine to five

The positive momentum at the beginning of August continued this week.  The one thing missing from the market turnaround (after a rough July) was an accommodative Federal Reserve.  Warsh’s tough rhetoric had spooked the bond market particularly the long end of the Treasury curve.  But bad economic news this week  was more good news for the equity market.  July’s Employment Report showed more job losses in addition to lower total employment.  At the same time, inflation continues to underwhelm (that’s good!) as things normalize after the energy shock earlier in the year.  Logically, the probability of a rate increase continues to drop.  September is now 65% on no change.  A month ago, the futures market had this pegged at 25%.  By the end of the year, the most likely outcome is for one rate hike.  A month ago, the market was expecting two to three hikes.  We maintain that it is unlikely for Warsh’s Fed to increase interest rates.  He wants to ease the burden on short-term borrowers (bottom of the K using credit card debt) while normalizing the use of the Fed balance sheet (stop buying bonds which will keep upward pressure on long-term rates).  A cool inflation and a softer labor market give him the cover to wait if nothing else.

In the Artificial Intelligence world, the buildout narrative stayed positive.  Some datacenter and networking stocks reported good revenue growth with increasing backlogs.  Mark Zuckerberg tried to disrupt the apple cart a bit by declaring open-sourced models and full transparency are good for the security and stability of the AI ecosystem.  He just so happened to make these seemingly altruistic comments right before Meta went on trial for (allegedly) hooking kids onto the Facebook doomscroll.  (We think a layering of models makes the most sense…use the open-sourced ones for routine queries while keeping the privacy-oriented and priority jobs running on custom models.)  Nvidia also threw the AI financial wheel for a loop.  It is going to be organizing a pool of liquidity to fund compute spending.  With the help of the giant alternative asset managers (Apollo, KKR, GS, etc), Nvidia was removing a slice of the circularity argument from much of the financing arrangements (ironically by adding another layer!).  The details are sparse, but we think this was a smart move.  It extends the timetable for the AI vision to become reality (companies making money with it).  Bank of America announced something similar.  It wants to help investors deploy $250b into datacenters, energy, and critical materials (this large number also includes advisory fees to BofA, ha!).  Of course, these set ups will, naturally, load more leverage into the financing.  Any future stumbles could be more violent.