Category: Investing

If attacking Iran is a disaster for the U.S., why is the stock market slightly up?

by philg

This is my last morning in Berkeley, California. Support for the Islamic Republic of Iran is almost universal here. Nearly everyone shares the New York Times perspective that Trump’s attack on the noble legitimate leaders of Iran was reckless and exposes the U.S. to risks almost as bad as climate change. Certainly there was no imminent threat from some guys chanting “Death to America” and working on nuclear bombs and ballistic missiles. At dinner last night I asked a local, “Have you checked the stock market? If we’re in serious trouble, the market should be down.” She replied that she hadn’t checked, but was sure that there had been a market crash.

The Google shows that the market is about where it was a week ago.

How about oil?

Anyone who loaded up on oil on Friday is up 10 percent, but with standard leverage of 10:1, the lucky (or well-informed) trader has doubled his/her/zir/their money.

Loosely related, a favorite tweet regarding the fighting in and around Iran:

What else are Bay Area lifelong Democrats excited about? One friend wasn’t interested in the Iran war because he’s working to stop the construction of roughly 180 units of affordable housing that would be 2 miles from his house. (I’m also against this, of course, but likely for different reasons. A limited supply of taxpayer-subsidized housing results in a violation of the 14th Amendment’s Equal Protection Clause. 180 people will enjoy low rents for brand new units. Perhaps 5,000 nearby people with exactly the same income will be forced to pay high market rents for crummy older apartments. In what world can this be considered “equal” treatment by the government?)

Another friend was passionate about not straying too far from the 4th Street restaurant where we’d dined. She believed that we would become victims of crime if we walked away from the brightly lit main blocks. I pointed out that it wasn’t a great advertisement for 70 years of lavishly funded progressive government if Berkeley, in fact, had dangerous neighborhoods. (My local friend says that she often sees broken glass in parking spaces, evidence of prior break-ins.)

Separately, check out the “Living Wage” bump of 6 percent over the menu prices for this kosher meal.

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If AI is useful why is gold gaining in value compared to the S&P 500?

by philg

One of my faith-based beliefs is that productive assets, such as a company that makes widgets, are more valuable than rocks or metal bars. This, of course, hasn’t been true lately. Here’s the price of gold over the period of Bidenflation (we’re still in the “Bidenflation” period even without Biden, since inflation is tough to tame once it gets going, e.g., because government is nearly half the economy and many government payments are automatically indexed to inflation):

On the other hand, the S&P 500 is also way up, especially the Big Tech/AI companies.

What does ChatGPT have to say? The S&P is worth 1.7X all of the above-ground gold:

How about 10 years ago when AI wasn’t functional and productivity gains from AI weren’t baked into investor expectations? The ratio was higher: 2.35X.

So the value of productive assets, which should be enhanced by AI, have actually fallen relative to an unproductive asset, whose value shouldn’t be directly affected by AI.

Does this mean that markets don’t think that AI is useful? Or perhaps they think that AI will make some companies more productive, but it will render so many humans useless that taxes on the productive to fund idle lifestyles for the useless will wipe out any economic gains? Or maybe there is a simpler explanation, e.g., people love gold.

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How’s everyone’s crypto wallet doing?

by philg

The news in the Bitcoin world isn’t all bad. The tensor processing units (proprietary Google LLM chips) behind Gemini 3.0 fixed our Bitcoin v. Medical School page just in time for the Big Slide:

(adjusted for Bidenflation, Bitcoin is now down substantially from the mid-March 2021 price when everyone was filled with hope regarding the Biden-Harris administration leading us forward and out of the bad times of the Trump dictatorship (v1.0))

I wonder what this means for the Cirrus waiting list and aircraft values in general. A crypto investor seems like a natural personal airplane customer: (a) independent personality, (b) not averse to irrational purchases, (3) maybe a need to go back and forth to Puerto Rico frequently.

Stake in the ground: I’m not going to sell any Bitcoin!

Separately: “This Bitcoin crash is worse than a divorce. I lost half of my money and my wife is still around.” (source)

Readers: who has favorite X posts to share? I’ll start:

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Stocks for the long run and money illusion

by philg

“Bank of America Shares Finally Recover From 2008 Financial Crisis” (Wall Street Journal, December 12, 2025):

Bank of America notched a symbolic win Friday when its stock traded higher than $55.08, a level not seen for America’s second biggest bank since before the 2008 financial crisis.

Like other banks that were damaged during the crisis, Bank of America has struggled to get its stock price back to the highs seen when George W. Bush was still president. Citigroup shares also haven’t recovered to their past high of around $530 in 2007.

Bank of America’s previous closing high was $54.90 on Nov. 20, 2006.

Perhaps a cautionary tale for those who are buying into the AI bubble!

Nowhere in the article: any inflation adjustment. It thus becomes a good example of money illusion. The WSJ is supposed to be by and for people who are sophisticated about money. That a stock today trades higher in nominal dollars than it did in 2006 is meaningless given the reduction in value of the dollar. $54.90 in November 2006, adjusted for official CPI, is equivalent to $88.49 today. An investor who bought BofA stock in 2006, in other words, has lost nearly 40 percent of his/her/zir/their money.

(Adding insult to injury, if the stock keeps going up and the investor sells at only a 20 percent loss then the IRS will be there to collect 23.8 percent of an illusory “gain” (an increase in the nominal price) and a state such as California will collect an additional 13.3 percent (9 percent in Maskachusetts).)

Reporter biography: “Alexander Saeedy … is a graduate of Yale University, where he received a bachelor’s and master’s degree in History.”

Also in journalism, the New York Times displays a sampling of what it says are photos from Emmanuel Goldstein’s laptop (“Democrats Release Photos Showing Epstein Ties to Powerful Men”: “The 92 photos, selected by Democrats on the Oversight Committee from a trove of 95,000 images in Mr. Epstein’s email account and on one of his laptops”):

Three-fourths of the sample images include Donald Trump so a reasonable reader would infer that 75 percent of the images released (or maybe 75 percent of the 95,000 total?) included Donald Trump. Buried lower in the article: “The series of photos does include three images of Mr. Trump”. In other words, the representative 4-image sample of the 92 images chosen by the NYT contains 3 out of 3 Trump-related images.

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Current stock market valuations explained

by philg

From Pedro Domingos, a CS prof at University of Washington, the best current explanation for stratospheric stock market valuations:

Oracle’s main business these days is promising vast amounts of cloud computing it doesn’t have to AI companies who don’t know how they’ll pay for it.

WSJ, a month ago:

The S&P 500 currently trades at 22.5 times its projected earnings over the next 12 months, compared with the average of 16.8 times since 2000. … The 10 largest companies in the S&P 500 accounted for 39.5% of its total value at the end of July, the most ever…

How badly beaten up did investors who bought into stocks at a high P/E ratio get? I asked Grok “Consider an investor who purchased the S&P 500 in February 2000. What annual return on investment would he or she have received through August 2025 vs. an investor who bought in August 2002 and held through August 2025?” and learned that the “Peak P/E ratio” investor (bought before the dotcom bubble burst) would have earned a compound annual growth rate (CAGR) of about 6.3% vs 8.9% for an investor who bought at a more reasonable P/E ratio in August 2002. This difference is close to the difference between investing from 2002-2025 in wired U.S. (9%) vs. tired Europe (5.7%).

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Years until NVIDIA’s revenue exceeds U.S. GDP

by philg

Happy Labor Day to those not smart enough to refrain from working!

Soon all of our dreary poetry writing, creative image and video production, etc. will be accomplished by LLMs. Freed from this labor we will be able to spend all of our time cleaning the kitchen, unclogging drains, fixing roofs in 90-degree Florida heat/humidity, etc.

Let’s check in with the machines that will be doing all of our laboring going forward.

NVIDIA recently released some financials:

My question for NVIDIA chips, via ChatGPT:

Extrapolating from revenue trends of the last five years, how long will it be before Nvidia’s annual revenue exceeds the United States GDP?

The answer:

Short answer: about 2036—but only under a wildly unrealistic straight-line extrapolation.

Here’s the quick math I used:

  • Nvidia’s last five fiscal-year revenues (billions): 2021 $16.7, 2022 $26.9, 2023 $27.0, 2024 $60.9, 2025 $130.5. That implies a ~67% CAGR from FY2021→FY2025. Macrotrends
  • U.S. nominal GDP: about $29.2T for calendar year 2024 (BEA Table 1.1.5); latest quarterly SAAR (Q2 2025) is $30.35T. FRED+1

Assuming Nvidia keeps compounding revenue at ~65–70% annually and U.S. GDP grows ~4% nominal per year, Nvidia’s annual revenue would mathematically catch U.S. GDP in roughly 11.4 years—i.e., mid-2036. With GDP held flat at today’s level, the crossing is ~10.5 years. (This requires ~224× growth from FY2025 revenue.)

Sensitivity (still using simple exponential curves):

  • If Nvidia grows 40%/yr → cross in ~18 years (≈2043).
  • 30%/yr → ~24 years (≈2049).
  • 20%/yr → ~38 years (≈2063).

⚠️ Reality check: this comparison is apples-to-oranges (company revenue vs a country’s value-added), and no firm can sustain ~60–70% annual growth for a decade+ in a competitive, capacity-constrained industry. Treat the dates above as a fun extrapolation, not a forecast.

How did Grok do on this question? Terrible. Its initial interpretation of the question was that it was about this year’s U.S. GDP, i.e., that it should hold GDP constant. When corrected, it chose an absurd 8.5 annual growth rate for U.S. GDP (would make sense only if there is 6 percent inflation; we’re lucky if we can eke out 2 percent real GDP growth even after flooding the U.S. with migrants; per-capita real annual GDP growth in the U.S. has been about 1.3 percent per year during the past 25 years (FRED)).

Loosely related:

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NVIDIA will have to spend $1 trillion of its market cap on employee retention?

by philg

NVIDIA is worth over $3 trillion and has approximately 30,000 employees. The company could be quickly overtaken by the competition, though, if all of the employees quit. No problem, right? Just pay every employee $1 million per year for the next ten years and nobody will quit. That would cost only $300 billion. Most of NVIDIA’s employees are in California where the personal income tax rate on successful people is close to 50 percent (federal plus state). Each employee would realize only $500,000 in after-tax spending power if paid $1 million pre-tax. Suppose that the average NVIDIA employee is already worth $20 million. He/she/ze/they wouldn’t rationally keep coming to work every day for the next ten years unless spending power could be roughly doubled. That would require giving every employee about $40 million in pre-tax compensation over the next ten years (presumably most of this would be via stock grants that would dilute existing public investors). That’s a $1.2 trillion cost to prevent employees from “calling in rich”.

Does the fact that NVIDIA has already made nearly all of its employees so rich that they can afford to retire comfortably (for some, moving away from California might be necessary) impair NVIDIA’s likely long-term value to outside investors?

Who could conceivably overtake NVIDIA, you might ask? The Intel Gaudi line doesn’t seem to have caught on. Amazon (“Trainium”), Google (“TPU”), and some startups are all going after the H100 market that is responsible for most of NVIDIA’s revenue (the desktop gamers have been reduced to insignificance). Here’s a story on Google’s potential self-sufficiency:

Amazon and Google don’t sell chips, but instead sell time on their chips via their cloud services which is, presumably, what most customers want. So NVIDIA can’t be complacent and let its employees wander off to either pleasant retirements or startups where there is a realistic chance of making significant money.

Maybe this overhanging need to pay already-rich employees crazy high compensation is priced into NVIDIA stock, just as my Church of Efficient Markets pastor says. Yet I have doubts…

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Are America’s rich people betting on the rich becoming more concentrated and isolated?

by philg

“The Ultra Wealthy Are Riding Out the Market Chaos in Luxury Real Estate” (WSJ):

Despite a chill in the overall housing market, ultraluxury home sales in areas like New York, South Florida and Los Angeles are accelerating as the wealthy buyers bet on real estate’s long-term value. Since February, the number of homes sold for $10 million or more has surged in major markets nationwide, according to an exclusive analysis by The Wall Street Journal. Between Feb. 1 and May 1, sales at that price point in Palm Beach, Fla., surged 50% from the same period last year, while sales in Miami-Dade County jumped 48.5% year-over-year, according to public records and local multiple listing service data. In the luxury ski destination of Aspen, Colo., sales jumped 43.75% in that same period, followed by Los Angeles County at 29% and Manhattan at 21%.

When President Trump’s tariffs were first announced, some wealthy buyers tapped the brakes and backed out of deals. In recent weeks, however, real-estate observers have been surprised to see a wave of big-ticket sales across the country.

The largest was the $225 million sale of a residential compound in Naples, Fla., in late April, the country’s second-most expensive home sale ever recorded. The seller was tied to the DeGroote family of Canada, property records show. The same week, billionaire David Hoffmann paid $85 million for a waterfront property nearby.

Home buyers at lower price points, by contrast, are holding off on buying and selling amid the chaos, agents said. For Miami homes below $20 million, for example, listing prices have dropped 10% to 20% since the start of the trade war, said agent Danny Hertzberg of Coldwell Banker.

“The most bullish buyers seem to be the highest-net worth buyers,” said Hertzberg, who knows of at least three Miami homes in contract to sell for $40 million or more. “The rest of the market is soft—frozen in some aspects—whereas the top of the market is accelerating in the number of sales and prices.”

The estimates of construction costs don’t seem right:

Hoffmann, an activist investor, already owned a smaller home in Naples but was searching for a larger compound in the area for five years. “This wasn’t a spur of the moment thing,” he said. The $85 million house, which measures about 17,200 square feet with eight bedrooms, ticked all the boxes in terms of design, size, quality and location. He is also in contract to buy the adjacent property with a guesthouse, bringing the total purchase price to just over $100 million. The two properties had been listed for a combined $125 million.

Hoffmann said he has diverse investments, including a “significant” amount of money in the stock market, but isn’t worried about short-term fluctuations. Moreover, he felt he got a good deal on the Naples home, since it would cost about $110 million to build today.

Even at $1,000 per square foot, a 17,200-square-foot-house would cost only $17 million to build.

Especially in higher-end neighborhoods of South Florida, a physical house is seen as a depreciating asset that will require a bulldozing or a gut rehab after 20 years. In my brain, the only ways that it could make sense to consider such an asset an “investment” are (1) interest rates are near 0 percent and it is easy to get a 90-95 percent mortgage, (2) an expectation that the land underneath will become much more valuable. Interest rates are not close to 0 percent anymore. The only reason that land would rise dramatically in price is if rich Americans decide that they need to cluster together even more tightly.

(See the classic 1997 “A Long Run House Price Index: The Herengracht Index, 1628–1973” in which real estate doubled in value… over 345 years; “The Amsterdam rent index: The housing market and the economy, 1550–1850” (2012) is similarly discouraging regarding appreciation potential beyond whatever is happening in the larger economy; a 2002 paper by Gregory Clark (of The Son Also Rises fame) found that constant-quality rents actually did rise substantially in England between 1550 and 1909.)

Why should we care? Rich Americans control our political parties, especially the Democrats (The Nation). If the rich are concentrated in just a handful of neighborhoods they have less reason to care about what happens to the rest of us. It might be rational to support filling the U.S. with Tren de Aragua members if you are assured that you will never encounter one.

Some porn from the WSJ (the $51 million Palm Beach, Florida house that Bren Simon, widow of the real estate tycoon Mel Simon, recently bought):

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My 10:12 am call today with a professional investor

by philg

I was chatting this morning with a friend who is a retired professional investor, having been previously involved in the management of $billions (not as the ultimate fund manager, but in a pretty senior role). A staunch Democrat and an active trader of his own portfolio (using exotic techniques such as “selling premium”, shorting a leveraged ETF while being long the unleveraged index, etc.), he was predicting doom and gloom for the U.S. economy due to Republican incompetence and stupidity. The stock market would continue to go down and we would suffer a depression. He cited the example of George W. Bush ladling out $700 billion to Wall Street in 2008 because “it was the right thing for the American People” and contrasted to Donald Trump, who wasn’t even trying to do anything right for Americans. I disputed that “Americans” was a meaningful term because the owner of an apartment building has different interests than the renter of an apartment. More substantially, I took the position that someone, maybe us, would blink first and mostly everything would return to the previous status quo. Therefore, I argued there was no need to do anything other than perhaps invest any available cash into the S&P 500.

The call in which my friend implicitly advised me to sell everything began at 10:12 am. What happened later in the day? NBC:

President Donald Trump said Wednesday he was pausing higher targeted tariffs for 90 days for most countries, a stunning reversal in his trade war that has sent markets reeling.

Trump wrote on social media just before 1:30 p.m. that he came to the decision because more than 75 trading partners didn’t retaliate and have reached out to the United States to “discuss” some of the issues he had raised.

(The S&P 500 was up 9.52 percent today.)

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Market is tanking or merely mean-reverting?

by philg

A Ukrainian immigrant friend has been (understandably) expressing rage at Donald Trump for wanting to shut down U.S. support of Ukraine’s military. He also recently texted us that he was enraged with Trump’s tariffs (that never actually happen? I can’t keep track) tanking the stock market. As an index investor who worships at the Church of the Efficient Market Hypothesis I don’t trade and, therefore, don’t check the market.

Not having previously checked, I proposed the following:

Compare to June 1, 2024 so that we filter out some of the noise (back in June the market thought that we’d have continuity with Genocide Joe)

I don’t think we can count the market’s optimistic run-up when it looked like Trump was going to win

Then I looked at a one-year chart:

The Google says that we’re up

adjusted for inflation, perhaps not

5643/5283 [the March 10 price divided by the June 3, 2024 price] compared to around June 1 that’s up 7%

actual inflation (not the government’s fake number) is 4%/year (3% in 9 months)? so we’re up about 4% real in 3/4s of a year, which means the market is on track to deliver a 5% real return (more like 6% if we accept the government 3% annual inflation stat)

that’s not too different from normal (7.5 percent real annual return over the past 20 years using the government’s understated inflation figures, so probably closer to 6 percent if we adjust for inflation by looking at the stuff that an investor might want to buy (houses in decent neighborhoods and upscale vacations, not DVD players at Walmart))

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