Tomorrow will be a HUGE DAY for interest rates – possibly the most momentous in over a year – and I will explain why below.
Buyers Got Crushed!
We had several buyers who refused to lock in their rates in mid-May, right before rates bottomed – because they were certain rates would continue to fall.
All of them ended up getting crushed, as rates shot higher after May 15th and all of the borrowers ended up with higher rates than what we originally quoted.
Yes, rates could have gone lower, but our advice, as always, was “get while the gettin’ is good” because nobody can time the market.” More on that below too.
The AI Bubble Will Pop & Nvidia’s Stock Will Crash
NYU Professor Scott Galloway wrote an excellent column about the inevitable AI and Nvidia corrections: Bubble.ai
I recommend reading the entire column because it is so good, but I will share some key points along with a side point he made about timing the markets – which is a primary point of this blog.
A few years ago, the chip maker Nvidia’s shares were under $100, as the company mostly supplied cool chips for video games. The share price is now around $1,200; the company is posting monstrous quarterly earnings; and the company has increased in value by several TRILLION dollars since the recent advent of the AI boom.
It is THE success story for the ages, but Galloway says that both the Nvidia and AI bubbles will pop. The stock valuation multiples (150x revenue) are so high that they can’t help but crash.
Galloway compares the AI boom to the dot-com boom, when companies reached similar lofty valuations – only to crash all the way to the ground (the crash included one of Galloway’s own companies, and he berates himself for over-hiring – only to end up having to lay off people; that stung a bit, as we went through the same thing in the mortgage industry).
Galloway reminds us though that there were some gems buried in the dot-com boom that not only rose from the ashes, but that also went on to soar, e.g. Amazon. Cisco, eBay, Qualcomm, and others have also survived, but not like Amazon. Pets.com? Not so much.
Mr. Galloway focuses on Cisco in particular, as it was the ultimate “picks and shovels” play – analogous to the gold mining suppliers who got richer than the gold miners. While Cisco did emerge from dot-com mania, it never hit the heights people expected, as it had ridden a Y2K/dot-com revenue boom that did not return. Nvidia is truly different than most dot-coms and Cisco, as it is seeing higher margins and more profits already than any of those companies.
But – those same margins and revenues will attract competitors too, and they will succeed sooner or later – and likely bring Nvidia back down to earth.
There is also the liquidity factor that drives most bubbles, as there are still trillions of dollars of investment funds gushing from one market segment to another, looking for higher returns or the next big thing – and such movements always over-inflate assets of some sort.
Long story short: The Nvidia and AI bubbles will pop – but NOBODY knows when – and that is my favorite point of Galloway’s column.
Galloway himself is a brilliant market analyst, and he would never try to time Nvidia’s bubble pop. He also reminds us of all the billionaires who tried and failed to time markets, including Michael Burry (the Big Short guy) who shorted Tesla in 2020; George Soros who shorted the dot-com market in 1999; and Julian Robertson who shorted the dot-com bubble but gave up 1 month before it popped. Robertson also mis-timed the recent tech stock boom and lost $60 billion in 2022.
My point is this: If billionaire fund managers can’t time the market, I always wonder why our borrowers think they can? 😊
My other point is this… when the AI bubble does pop (and it will), it will bring the stock market down with it – and rates will fall. So, yes, I still think rates will fall.
I would just never venture to guess when.
Huge Day Tomorrow?
Tomorrow is “huge” because a jobs report will be released and if it comes out softer than expected, we could see rates fall as much as 1/2% for a variety of reasons. So, maybe now is a good time to time the market? Naaaaahhhh. It could go the other way too. See above.
