Month: November 2024

November 25, 2024

Lord of the microprocessors

Dear Reader,

These days it feels like nobody can shut up about NVIDIA.

Especially this past week, when the current stock market darling announced its Q3 earnings — $30.8 billion in revenue, beating analysts’ expected $29 billion, and up 112% on Q3 2023.

The company’s winning streak, according to CEO Jensen Huang, comes amid ‘the age of AI’.

But let’s step back from the quarter timeframe, and consider the bigger picture.

Before the AI hype of the past few years, there was another wave of (possibly irrational) optimism that propelled NVIDIA towards its current towering heights.

And before that, yet another source of opportunity, capitalization and greed.

Here’s what came before, and what might come after, the hype that surrounds, drives and threatens the lord of the microprocessors, NVIDIA.

1990s: Birth of a GPU empire

NVIDIA started life in the Denny’s restaurant pictured above in San Jose, California, where three engineers agreed to form a new startup.

It was 1993, and the three co-founders — Jensen Huang, Chris Malachowsky and Curtis Priem — could see computing hitting the mainstream.

Specifically, they reasoned that graphics-based processing would become a huge market.

Thus began the first age of NVIDIA; a company that won business and renown for building the best graphics processing units for computer games.

They won contracts with companies like Sega and Microsoft, and replaced the outgoing Enron in the S&P 500 in 2001, as most other tech companies faded in the fallout of the dot-com bubble.

This, of course, was only the beginning.

2009-18: Shovels for the crypto gold rush

In 2009, Bitcoin launched.

While most people focus on crypto as an asset class or a financial story, it also represented a deep shift for the microprocessor market.

A new era of ‘digital prospecting’ began.

Bitcoin miners needed powerful computers to solve complex mathematical puzzles to earn their digital gold.

Suddenly, NVIDIA’s GPUs weren’t just useful for computer games — but for making money.

These graphics cards, with their ability to perform multiple calculations simultaneously, were perfect for the task.

So many crypto miners began buying up NVIDIA’s GPUs, that demand soared and even created supply shortages.

At the peak of the crypto mining boom in 2017-2018, NVIDIA’s GTX 1080 Ti was the crown jewel for miners.

NVIDIA’s stock price more than doubled in 2017, riding the wave of crypto enthusiasm, while GPU prices rose so much that this single component became worth more than what you used to pay for an entire computer.

Like in all gold rushes, though, the mines eventually ran dry.

By 2022, several factors had conspired to end NVIDIA’s crypto mining dominance:

Bitcoin mining shifted to specialized ASIC hardware, leaving GPUs behind.

Ethereum, the last bastion of GPU mining, moved to a Proof-of-Stake model, eliminating the need for energy-intensive mining.

China, once a crypto mining powerhouse, banned the practice outright.

It seemed the party was over for NVIDIA.

As you know, though, and can see from the chart above, the company was far from finished.

The age of AI = the age of NVIDIA

With crypto mining no longer the way forward for NVIDIA’s GPU development and sales, artificial intelligence appeared as if on cue.

The same parallel processing power that made NVIDIA’s chips great for crypto mining also made them ideal for training AI models.

In 2018, NVIDIA began integrating Tensor Cores with ‘custom matrix multiplication’ units into its GPUs, enhancing their AI capabilities.

The result? NVIDIA’s data center revenue, driven largely by AI applications, grew from $3 billion in fiscal year 2019 to $15 billion in fiscal year 2023.

And that was just the beginning.

In 2023, as generative AI tools like ChatGPT captured the world’s imagination, demand for NVIDIA’s AI chips went parabolic.

NVIDIA’s H100 GPU became the gold standard for AI training, with some calling it ‘the most valuable chip in the world’.

Companies scrambled to get their hands on these chips, leading to waitlists and supply shortages.

You can see how much this demand now accounts for the company’s revenue (see ‘data center’):
​

The company’s stock price is up 1,146% since its October, 2022 low, and is now the world’s largest publicly-traded company by market cap.

Too big to fail succeed?

One problem with being on top, writes Dan Gallagher in the Wall Street Journal, is there is often nowhere to go but down.

NVIDIA’s exceptional growth over the past couple of years has created optimism and pessimism in equal measure.

The bulls feel this is the company to own in the still-nascent age of AI.

The bears feel that the stock’s run up is too much, too fast, and must come with a corresponding downside.

Because with growth comes complexity, and complexity can create risk.

Hence headlines like these:

One of the red flags bears see with NVIDIA is the hype which now surrounds the company.

Jensen Huang now commands a comparable level of attention and anticipation as Steve Jobs did when Apple was launching its early iPhones.

Surely, the reasoning goes, this signals the kind of irrational exuberance that precedes a plummeting stock price.

I try not to be biased in The Benchmark.

My mission here is simply to introduce you to interesting, and hopefully useful, ideas about investing and wealth creation.

And maybe this is a biased note on which to end this email.

But, here’s Apple’s stock price chart, on which you can see the day they launched the first iPhone:
​

There were those who doubted the iPhone would make an impact.

Even those who thought it signalled a wrong turn, and the beginning of a decline, for Apple.

NVIDIA has its doubters, absolutely. And the past is never a guide to future performance.

Still, PwC forecasts the technology could contribute up to $15.7 trillion to the global economy in 2030, up from $757 billion in 2025.

This would be a nearly 2,000% increase.

Quote of the Week

‘Software is eating the world, but AI is going to eat software.’

— Jensen Huang, NVIDIA CEO

That’s it for The Benchmark this week.

Forward this to someone you know who’d enjoy reading.

And if one of our dear readers forwarded this to you, welcome.

Invest in knowledge,

Thom
Editor, The Benchmark
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All information contained in The Benchmark and on navexa.io is for education and informational purposes only. It is not intended as a substitute for professional financial or tax advice. The Benchmark and any contributors to The Benchmark are not financial professionals, and are not aware of your personal financial circumstances.

November 18, 2024

America goes red, markets go green

Dear Reader,

I wrote to you recently about an oft-overlooked Austrian economist who believed that every stock purchase was not just a bid for personal profit, but a vote cast in the economic democracy of the free market.

If that is so, then the days since Donald Trump won the United States presidential election have shown us very clearly what the market wants.

This is how the biggest financial markets in the world are looking as of this morning (performance for year to date):

S&P 500: +23.7%

NASDAQ: +26.5%

Bitcoin: +145%

Say what you want about Trump and the incoming administration; you simply cannot argue his victory has not been good for stocks.

This week, The Benchmark takes a look not just at what’s happened in the weeks since this latest election, but at what happened after Trump’s previous win — and what some of the market’s most influential voices are calling for in 2025 and beyond.

The ‘Trump Bump’ 2.0

History doesn’t repeat, yet it often rhymes.

In 2016, Trump won the U.S. election for the first time.

Fewer people expected it then than this time.

But the stock market conditions were similar.

The S&P 500 was making new all-time highs. As you can see in the chart below, it took off to even higher ones post-election.

The 2016 Trump Bump

This time, it’s a similar setup.

Stocks had made new all-time highs in the run-up to this election, and now appear to be off to the races — and making the late-2016 rally look trivial by comparison given the stock market’s performance since 2016.

The S&P 500 crossed 6,000 points for the first time.

The NASDAQ crossed 19,000 for the first time.

And, love it or hate it, Bitcoin has gone ballistic, up 32% in the past month alone.

‘Larger than 2016’ — JP Morgan

JP Morgan Chase & Co.’s head of US market intelligence wrote in a note to clients last week ‘I expect 2024 returns to be larger than 2016’.

The bank expected the big tech stocks to push the markets even higher, with financial stocks outperforming the rest of the S&P 500 for the remainder of 2024.

This post-election rally, they said, would be even stronger than in 2016, due to three main factors:

✅ Corporate tax cut promises

✅ Expectations around deregulation

✅ Increased infrastructure spending

Investors seem to feel more confident about a Trump presidency than they did in 2016. The market will tell us, in time, how these bets play out.

Crypto storms the senate & house

As I write this, Bitcoin has just hit $90,000 for the first time.

The last time the original cryptocurrency went this crazy, it topped out at about $70,000 in late 2021.

The crypto world has made its Trump vote very clear.

The industry reportedly spent more than $100 million on backing crypto-friendly candidates this election — a sign the once fringe financial-tech movement is maturing and finding more traditional ways to establish itself in the mainstream.

Not only has Trump promised to put America at the centre of the digital asset industry, to appoint more crypto-friendly regulators, and indicated he wants to create a national strategic Bitcoin reserve…

But the senate and house representatives the crypto world backed will shortly be displacing less favourable counterparts in the country’s halls of power.

But, there’s two sides to every story – especially when things get extreme.

Buffett keeping (lots of) powder dry

Warren Buffett’s Berkshire Hathaway is one of the biggest investors in the world.

But it’s worth noting that the company has never kept so much cash out of the market as it’s currently holding back.

They have about $325 billion in cash and treasury bills on their balance sheet — money they believe is wiser kept out of the stock market, even as it melts faces with new high after new high in the wake of the election result.

The Wall Street Journal notes that this amount of money could buy all but the most valuable 25 or so listed companies in the U.S.

While stocks have been climbing since late 2022, Berkshire Hathaway has been growing its cash stash:

Long-term investors know there’s few better veteran investors to pay attention to when markets get extreme.

Dawn of a golden era? Or unsustainable rally?

Tom Lee from independent financial research firm, Fundstrat, thinks there’s more to this market rally than a short-lived post-election party.

He’s raised his S&P 500 target to 7,000 for 2025 — about another 16% higher from current levels.

Lee points to several factors:

✅ Resilient corporate earnings

✅ Expectations of further Fed rate cuts

✅ The potential for increased fiscal stimulus under Trump

The kicker here, is that the market is doing something it’s only done twice in the last 80 years:

It’s up over 20% year-to-date and sitting at all-time highs in November.

The last two times this happened? 1954 and 1958.

The market finished the year higher both times.

Quote of the Week

‘As a bull market continues, almost anything you buy goes up. It makes you feel that investing in stocks is a very easy and safe and that you’re a financial genius.’

— Ron Chernow

That’s it for The Benchmark this week.

Forward this to someone who’d enjoy it.

If one of our dear readers forwarded this to you, welcome.

Invest in knowledge,

Thom
Editor, The Benchmark
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All information contained in The Benchmark and on navexa.io is for education and informational purposes only. It is not intended as a substitute for professional financial or tax advice. The Benchmark and any contributors to The Benchmark are not financial professionals, and are not aware of your personal financial circumstances.

November 11, 2024

The man who sold the Arabian peninsula

Dear Reader,

The U.S. election has been and gone.

Given that, by my estimate, probably 75% of the emails in your inbox over the past week have been trying to get your attention by piggybacking on the biggest political moment of the year — and the next four, for that matter — The Benchmark will not be jumping on that bandwagon.

At least not right now.

Today, I want to talk war, oil and gargantuan national wealth.

The kind of that shapes regions, geopolitics and economies for decades and centuries at a time.

Let’s start with the war that changed war forever.

Have oil, will win

One hundred and six years ago today, on November 11, 1918, this was the front-page news pretty much everywhere on the planet:

World War I was over. About 40 million people were dead, the world order forever changed.

While most modern history focuses on the treaties, the borders, the colossal repercussions resulting from the so-called ‘Great War’, there was another huge consequence — one we very much still live with to this day.

One of the reasons the Allied Powers were able to defeat the Central Powers was that they had access to more oil, courtesy of companies like the Anglo-Persian Oil Company (now BP).

This taught the victors that controlling oil was now a key factor in military might and geopolitical strength.

Add to this the fact that the Great War spurred the once-great Ottoman Empire’s breakup.

The Ottomans had controlled much of the Middle East.

In their place, new states formed in the region; Iraq, Kuwait, Yemen, Lebanon, and others — most importantly for our story today, Saudi Arabia.

The Father of Oil

During World War I, a British Army quartermaster, Major Frank Holmes, was tasked with securing food and supplies for the army’s forces in Mesopotamia (Iraq).

Before the war, Frank, had worked as a mining engineer in southern Africa.

(Coincidentally, he also attended the same high school as I did in New Zealand.)

So when he heard rumours of oil seeping up through the desert sands down on the Arabian peninsula, he made it his mission to return after the war to confirm what he suspected might be ‘an immense oil field running from Kuwait right down the mainland coast‘.

Return he did.

Frank Holmes spent the following couple of decades obtaining oil concessions and working out where the Arabian peninsula’s oilfields lay — using his straight-talking manner to sell the impoverished sheikhs on the idea of the vast wealth hiding deep beneath their feet.

While most established opinion at the time was pretty negative about the prospects of finding oil there, Frank proved the doubters wrong.

While there might be a common, if ignorant, assumption that those in the Middle East resent western meddling in their resources, the reality is that Frank Holmes’ self-described ‘nose for oil‘ led to a colossal, sustained boom in both wealth and influence for these countries.

The Arabs even have an affectionate sobriquet for Frank; ‘Abu Naft‘ or the Father of Oil.

From no country, to rich country,
to major global tech investor

Spanning an area of more than 2 million sq km, Saudi Arabia is the largest country in the Middle East, and the 12th largest state in the world.

Of all the oil states that Frank Holmes helped create, Saudi Arabia is the one to have cashed in its oil wealth to the greatest effect.

The Saudis possess the second-largest oil reserves on Earth — more than Russia and the U.S. combined, going by Opec’s estimates.

They are the third-largest producer of oil. And current estimates indicate they have nearly 80 years’ production in reserve.

When you talk about Saudi oil, you’re really talking about Saudi Aramco — the national oil company of Saudi Arabia, formerly Arabian-American Oil Company.

Saudi Aramco is the fourth-largest company in the world. It is also the highest-producing oil company — at about 12.8 million barrels a day.
​

Today, despite not currently being the biggest company in the world, Aramco turns over about half a trillion dollars a year. The Saudi government owns most of the business.

The company’s origin story is stacked with intrigue, intertwined with 20th Century history, and well worth digging into.

For now though, I want to draw your attention to what Saudi Arabia has done with its vast oil wealth.

Fluctuating oil prices, and turbulent regional and international geopolitical developments, make depending solely on oil a volatile strategy.

Eggs in baskets, right?

The government created the Saudi Arabian Public Investment Fund in 1971, right around the time Norway did the same to diversify, distribute and compound its vast — but ultimately finite — oil wealth.

Based on the latest available information, here are the PIF’s top 10 U.S. stock holdings as of Q2 2024:

• Uber Technologies, Inc. (UBER) — $5.29 billion, 25.62% of portfolio.
  ​
• Lucid Group, Inc. (LCID) — $3.59 billion, 17.37% of portfolio.
  ​
• Electronic Arts Inc. (EA) — $3.46 billion, 16.73% of portfolio.
  ​
• Take-Two Interactive Software, Inc. (TTWO) — $1.77 billion, 8.59% of portfolio.
  ​
• Arm Holdings plc (ARM) — $593 million, 2.87% of portfolio.
  ​
• Linde plc (LIN) — $530 million, 2.57% of portfolio.
  ​
• Cummins Inc. (CMI) — $454 million, 2.20% of portfolio.
  ​
• Advanced Micro Devices, Inc. (AMD) — $374 million, 1.81% of portfolio.
  ​
• Meta Platforms, Inc. (META) — $373 million, 1.81% of portfolio.
  ​
• Amazon.com, Inc. (AMZN) — $296 million, 1.43% of portfolio.

That’s about $17 billion invested across these 10 stocks alone — and that’s just scratching the surface of what the PIF has invested Saudi Arabia’s gargantuan oil wealth into.

You might be wondering how we got here.

From the armistice that ended World War I…

To one of my high school alumni (well before my time, mind you) wandering in the desert looking for army supplies…

To the birth of a group of Middle East nations out of the ashes of a vanquished empire…

To one of the most influential, powerful and wealthy states on Earth…

And the way it’s taking the enormous wealth it pumps from the ground and deploys it in some of the world’s most profitable and fast-growing companies.

Well, for me, it came from seeing this headline:

Aramco announced last week that its quarterly net profit had fallen to $27.56 billion — slightly higher than the $26.89 billion analysts had expected, but still, remarkably, warranting the negative tone of the headlines broadcasting the result.

While everybody spent the past quarter obsessing over polls and predictions, and now votes and results, from the U.S. election…

This one company was raking in nearly $30 billion in profit, when the state that owns it didn’t even exist 100 years ago.

This got me thinking, which got me writing.

And now here we are.

Quote of the Week

‘Formula for success: rise early, work hard, strike oil.’

— J. Paul Getty

That’s it for The Benchmark this week.

Forward this to someone who’d enjoy it.

If one of our dear readers forwarded this to you, welcome.

Invest in knowledge,

Thom
Editor, The Benchmark
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All information contained in The Benchmark and on navexa.io is for education and informational purposes only. It is not intended as a substitute for professional financial or tax advice. The Benchmark and any contributors to The Benchmark are not financial professionals, and are not aware of your personal financial circumstances.

November 4, 2024

​

Anti-Taxers on the run in Europe

Dear Reader,

The Cayman Islands. Bermuda. The British Virgin Islands.

You’ve probably heard about such jurisdictions on account of their favourable tax laws, and attractiveness for those looking to protect as much of their wealth as possible.

Tax havens, they call them.

Well, today we’re not looking at a tax haven so much as a tax hell — at least for the very wealthy.

I wrote about this country recently on account of its remarkable sovereign wealth fund, and the lengths it goes to to enrich its citizens by owning a piece of nearly every listed company on earth.

But, this is about the other side of that coin.

Tens of billions taking flight

Norway is not a tax haven.

The land of fjords and oil wealth is experiencing a peculiar phenomenon — its richest citizens are taking their money and escaping south, to Switzerland.

Why?

Because the government recently started demanding a bigger slice of their wealth.

Here are the headlines:

​Source​

​Source​

In 2022, more than 30 Norwegian billionaires and multimillionaires bid ‘farvel’ to their homeland.

For context, that’s more than left the country in the previous 13 years combined.

But why the sudden flight?

A double whammy is why.

Prime Minister Jonas Gahr Store has introduced higher wealth and dividend taxes.

Norway is one of the few remaining countries in Europe with a wealth tax.

In 2022, the government decided to increase the wealth tax from 0.85% to 1.1% on the largest fortunes.

On $1 billion, that takes your annual wealth tax from $8.5 million to $11 million.

On top of that, you’ll pay more on any dividends you earn from that wealth.

🇨🇭Going where they’re treated best🇨🇭

Switzerland

Wealthy Norwegians are choosing Switzerland as their escape plan.

The rich, exclusive nation nestled in the heart of central Europe promises much for many, particularly for the exceptionally rich.

While Switzerland also has a wealth tax, the country offers deals for foreigners that can bring the rate down to as low as 0.1% in some cantons.

So that $11 million you’d pay on $1 billion in Norway?

You’d potentially pay just $100,000 on that same amount in Switzerland.

According to Bloomberg:
​

‘Store’s tax-the-rich push has pitted traditional Nordic concepts of equality and social justice against claims that the measures penalize success and hurt the economy.
​
‘The 63-year-old prime minister has called the emigration of wealthy people “a breach of a social contract”.’

Forcing their wealthiest to flee is hitting Norway’s finances.

Kjell Inge Røkke, Norway’s third-richest man, is among the wealth tax refugees.

His move to Switzerland has cost the Norwegian government roughly $16 million annually in lost tax revenue — more than a million dollars a month.

At the time of writing, it looks like nearly 100 wealthy Norwegians have hit the eject button, and taken their money south to Switzerland.

Wealth creation vs. wealth distribution

Louis XIV: Taxed the people so hard they revolted

As you can imagine, the situation has inflamed an already heated debate.

Erlend Grimstad, secretary of state at the Norway Ministry of Finance, states:
​

‘People benefit from free education, national infrastructure, free health care, subsidized preschool child care, generous leave rules, and corporate tax in line with other countries. This means that successful people with this social model should contribute more than others.’

On the other side, the wealth creators argue that the wealth tax forces them to withdraw capital from their companies to pay it, which is bad for growth, business development, and employment.

Tord Kolstad, one of richest 400 Norwegians, says the government’s policy represents a misunderstanding of the nature of his wealth:
​

‘My value is not in owning money, it’s in factories, houses, buildings… I still have to pay 2% or 3% a year to the government just to own it. And I believe that this taxation is the reason there will be fewer jobs, and less investment — and then less welfare.’

Now here’s the kicker.

The wealth tax, intended to generate more revenue for the state, might end up doing the opposite.

Norwegian Business School professor emeritus, Ole Gjems-Onstad, estimates that the wealthy Norwegians who’ve left took with them a total fortune of $54 billion.

This exodus could result in about 40% less revenue than the wealth tax currently generates.

Take a look at this:

​Source​

What this shows you, is that by trying to generate national wealth by taxing private wealth, a country can, in fact, end up making itself poorer.

Which brings us to a nifty little chart.

Who’s Laffering now?

This is the Laffer Curve:

​Source​

This ‘mound-shaped’ indicator is a method for determining — if such a thing were to exist — the ideal tax rate.

By ideal, I mean one that helps both the government, and the people that government serves, prosper in equal measure.

It takes its name from economist Dr. Arthur Laffer — although the idea first appears in Muslim philosopher Ibn Khaldun’s 14th-Century work The Muqaddimah.

You can dig into the theory behind the indicator here.

But for now, let these excerpts from Laffer’s theories serve to illustrate, at least in part, what’s happening with Norway’s wealthiest right now (my emphasis added):
​

‘Higher taxes discourage business activity and drive down tax revenues.
​
‘For example, high taxes encourage the creation of tax shelters and encourage business activity that generates paper losses from depreciable assets rather than business activity that creates jobs and generates revenue.
​
‘Money spent on plush office suites, the purchase of private jets, and the leasing of luxury cars becomes more advantageous (because of the ability to lower marginal tax rates) than business activity designed to generate a profit.
​
‘Businesses may tend to choose to be less productive to be more profitable.’

Benjamin Franklin, the man whose wisdom about investing in knowledge we’ve based this email on, said that nothing could be said to be certain, except death and taxes.

I would add to that by saying that the former, in many ways, is more simple than the latter.

The Norwegians appear to have pushed a little too far along the Laffer Curve.

With capital and wealth more mobile than ever before, the way in which governments treat their highest taxpayers looks like it needs to evolve.

Speaking of evolution…

Brand new Navexa review

Irene Zhu just published her honest comparison of the Navexa portfolio tracker against another popular tool.

This is by far the most detailed, in-depth such video review you’ll see of our platform and everything it helps investors with — including tax calculation and optimization.

Click the player to watch it now:

​

Quote of the Week

‘The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.’

— Jean-Baptiste Colbert, finance minister to France’s Louis XIV

That’s it for The Benchmark this week.

Forward this to someone who’d enjoy it.

If one of our dear readers forwarded this to you, welcome.

Invest in knowledge,

Thom
Editor, The Benchmark
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All information contained in The Benchmark and on navexa.io is for education and informational purposes only. It is not intended as a substitute for professional financial or tax advice. The Benchmark and any contributors to The Benchmark are not financial professionals, and are not aware of your personal financial circumstances.