A Nvidia Market, Shades of Cisco and Nortel Circa 1999

Peter's Market Rap For the Week Ending February 23, 2024

A Nvidia Market, Shades of Cisco and Nortel Circa 1999

Hi. Peter Navarro here with this week’s market wrap for the week ending February 24, 2024. This was indeed an historic week on Wall Street as it marked the single largest gain in market capitalization of a stock in history. I’m talking of course about Nvidia, which provides the lion’s share of the computer chips necessary to run the massive computers that in turn run all of the artificial intelligence engines around the world.

During the week, the S&P gained 1.7%, its sixth winning week in the last seven. Much of that gain was indeed driven by Nvidia directly and the exuberance over the AI boom indirectly.  On February Friday, following its earnings report, the company’s stock price gained 16.4%.  and its market cap touched the $2 trillion mark.

Frankly, the dominance of Nvidia, and, more broadly, the relatively small handful of stocks at the vanguard of the artificial intelligence insurrection – Microsoft and Meta at the top of that list –is both eerie and a little frightening.

In fact, the Nvidia bet is one of the biggest bets in financial market history and the essence of the bet is this:

AI will lead to massive increases in productivity that will in turn fuel higher profits and drive stock prices up more broadly across other companies as the benefits of AI diffuse across the corporate world.

Of course, if this happens, a disproportionate share of the gains will go to capital rather than labor.

Here, by definition, even as AI improves worker productivity, fewer workers will be needed. At the same time, entire companies may well be wiped out when those companies make their profits by providing services that simple AI algorithms will displace. Imagine here whole back offices disappearing.

Of course, we have seen this movie before. Once automobiles arrived, there was less need for horses and none for buggies. Once big textile looms emerged, there was far less need for weavers. And so the technological revolution story goes.

Having said all this, I am old enough to remember some things firsthand from the last tech boom, and as it would turn out tech bubble, that we witnessed back in the crash of 2000. Consider here the familiar names of Cisco, Intel, and Oracle. They would lose 80% of their value during the crash – it would take years for the companies to return to their pinnacles. 

Priceline, known for its “Name Your Own Price” model, also saw its stock price plummet by 94% during the bubble burst.

And of course there was Nortel Networks, the highflying Canadian telecommunications and data networking equipment manufacturer that, not unlike Nvidia and the S&P 500, accounted for more than one third of the total valuation of all companies listed on the Toronto Stock Exchange. It stock price fell from 125 bucks to about 25 bucks over the course of the crash in 2000. By 2009, it had to file for bankruptcy and that bankruptcy left Canadian pensioners, shareholders, and former employees with enormous losses.

I should tell you here as a cautionary tale that the longer-term demise of Nortel Networks was largely the work of the Communist Chinese company Huawei.  Chinese government cyber pirates managed to penetrate Nortel Networks and steal much of its intellectual property as well as marketing information. This theft by China Inc. allowed Huawei to step in and crush Nortel.

I mention this here because one of the geopolitical risks that Nvidia itself faces TODAY is from Communist China. For starters, China accounts for about 25% of Nvidia’s revenue for its data center business, which is the largest operation at the company. Anything from increased sanctions on China to a catastrophic war with Taiwan would obviously hit Nvidia hard.

Perhaps the biggest threat, however, is the US government – and rightly so. Right now, the Biden administration is trying to curb Communist China’s access to technology, and specifically AI which China intends to fully use for military uses. In thumbing its nose at those sanctions by running and runs around those sanctions, Nvidia risks a crackdown that, truth be told is long overdue.

As to why the Biden regime continues to allow the Chinese military and state researched institutes of artificial intelligence to continue to buy the coveted A100 and H 100 Nvidia chips is a mystery.

Stay tuned on this part of the story. Yet again, the United States government has turned a blind eye to the next essential threat posed by China. If it does crackdown, your Nvidia stock may take a tumble. In the meantime, it is clear world markets are enjoying this joyride.

Peter Navarro.  Out.