Is the Bubble Bursting With a Credit Crisis?
Dear Traders,
What a strange world we live in. Bond yields are surging, with 10-year US Treasury rates hitting a sixteen-year high! The reopening of the US economy post-Covid-19 resulted in substantial cash reserves for many, yet supply chains remained distorted, and staffing shortages persisted in sectors like travel. This scenario led to a inflation surge as demand outpaced supply. I vividly recall the air travel frenzy in 2021 and 2022. Although much of this was temporary, the persistent and widespread inflation wave compelled central banks to increase interest rates to moderate the economy.
As rates climb, banks see fewer clients and potential borrowers due to soaring interest rates. Even good businesses are scaling back funding, and layoffs are occurring as companies trim operations or shutter. This process is already underway. But to everyone’s astonishment, 2023 has witnessed remarkable American consumer resilience and minimal credit distress. People don’t appear overly concerned about elevated mortgage and credit card interest rates. The US economy seems to be thriving despite tighter access to capital from higher rates. To the extent that predictions of a recession are going away, and investors are buying riskier assets.
Companies now trade at elevated P/E ratios, with tech giants like Microsoft and Apple boasting forward earnings multiples of 30 and Alphabet, Google’s parent company, trading at 25 times. While these P/Es are lower than the dotcom bubble figures, they’re still in the expensive side.
“Companies of the future,” like Nvidia, the artificial intelligence frontrunner, and Tesla, the EV leader, have multiples reminiscent of the dotcom bubble era. Nvidia is trading at over 225 times trailing earnings and 57 times forward earnings. Tesla’s figures stand at over 65 times trailing and forward earnings. This mirrors Microsoft’s scenario in the 1999 internet bubble, trading at 65 times earnings. Considering the size of these companies, such multiples are hard to justify. They are priced for perfection in a landscape where both real and nominal rates are rising, and the credit cycle is shifting.
Macro uncertainty is poised to dominate the narrative for the next several years.
Are we on the verge of a bubble burst? How long must we wait?
The dotcom bubble burst in 2000 when real interest rates stood at 4% (Fed’s rate minus inflation). That’s double the current level. Going by this, it might be a while.
This week, NVDA earnings are scheduled for Wednesday, and I am eagerly awaiting what the results will reveal. Expect significant volatility in trading on that day.
Today, I traded TSLA based on a previous day’s close bounce, a level that Jarad has deemed the “King of Levels.” I was trading on my phone from the gym. Check out my recap to explore my thought process behind this trade.
This week, Ardi and I are conducting an interview with one of the most vocal proponents of “The NVDA is FUCKED,” indicating a looming credit event. He’s an outspoken figure on X and is claiming that we’re all in trouble. According to him, a credit event is imminent, signaling a market correction. Stay tuned to our YouTube channel to learn about his perspective and views.
Our Peak Capital bootcamp for September is fully booked, with 10 traders already on the waitlist for the January 2024 bootcamp. It seems the January bootcamp will fill up as well. Secure your spot now, and remember, you can always request a refund if you change your mind before the bootcamp.
To your success,
Andrew
