Warsh Dilemma, Bond Rally, Gold Support, Oil Leap

Inflation continues to raise its head. Result, Fed Chair Kevin Warsh is caught between a rock and a hard place going into the October 27-28 FOMC meeting. Odds have jumped for a rate hike but Warsh is trying to dampen expectations. Bonds reacted positively to this and rallied last week. Stocks wobbled and an AI sell-off may be underway. The MAG7 had a rocky week. But elsewhere other stocks held together as the S&P 500 Equal Weight Index was up this past week but the S&P 500 itself was down.

Given the high tech/AI sell-off we focused on Nvidia as the chart of the week below. Nvidia has been the big leader of the AI rally. But is it now showing signs of crumbling? The AI companies have an insatiable demand for money to build data centers. But they are facing opposition and their money demands threaten to crowd out others.

Gold continues to wobble but is holding up. We are seeing some positive signs that if correct could lead to the start of another upleg for the precious metals sector.  Central banks continue to add to their gold holdings while shunning U.S. treasuries.

But the big story may still be in the energy market as the wars—Russia/Ukraine, U.S./Iran, and Saudi Arabia/Houthis—take their toll. Oil leaped this past week with WTI oil ending the week over $100. This benefits, for example, Whitecap Resources Inc., that reported higher net income and greater funds flow, pays a dividend, and is held in the Enriched Capital Conservative Growth Strategy.*  The U.S. is creating tension with its seeming coziness toward Russia for diesel fuel (a mere pittance) and easing sanctions. At the other end Trump is trying to get Ukraine's Zelensky to cave in.

The U.S. elections are now fast approaching and we continue to see stories suggesting the results and the reaction to it may not be what everyone expects.

This week brings Canada's inflation numbers. 

There has been a bit of a chill in the air. Maybe its a sign of the times.

Have a great week.

DC

* Reference to the Enriched Capital Conservative Growth Strategy and its investments, celebrating an 8.67 - year history of 195% growth (annual 13.31%) to September 30, strong alpha and ranking amongst the top at www.emergingmanagers.ca, is added by Margaret Samuel, President, CEO and Portfolio Manager of Enriched Investing Incorporated, who can be reached at 416-203-3028 or msamuel@enrichedinvesting.com This information should not be construed as an offer, or a solicitation of an offer or sale of any security. Past performance does not guarantee future returns.

“When a nation is over-reliant on one or two commodities like oil or precious minerals, corrupt government ministers and their dodgy associates hoard profits and taxes instead of properly allocating them to schools and hospitals.”

—Bono, full-name Paul David Hewson, known by nickname Bono, Irish singer-songwriter and activist, founding member and lead vocalist of rock band U2; b. 1960

“Our dependence on oil and natural gas won't vanish overnight, but America's energy future will shine brighter if we continue to develop wind, solar, nuclear, geothermal, biofuel, hydropower and other clean alternatives and give ourselves time to transition.”

—Nancy Mace, American politician, member Republican Party, has represented South Carolina 1st District since 2021; b. 1977

“Today, we have our own concentrations of economic power. Instead of Standard Oil, U.S. Steel, the Union Pacific Railroad, and J. P. Morgan and Company, we have Amazon, Google, Apple, Facebook, and Microsoft.”

—George Packer, American journalist, novelist, playwright, writes about foreign policy in The New Yorker and The Atlantic, author of The Assassins’ Gate: America in Iraq (2005), plus others; b. 1960

The U.S. is in a pickle. The world is in a pickle. U.S. inflation has raised its head once again. And that’s troublesome. How troublesome? Well, the September Consumer Price Index (CPI) inflation came in at 3.7% year-over-year (y-o-y). Is that bad? Well, the long-term average for the past 100 years (1914–2026) is 3.3%. In June 1920, U.S. inflation hit its highest level over the past century at 23.7%. And talk about inflation. The German Weimar Republic peaked at 29,500% in October 1923. Peanuts. Zimbabwe peaked at – get this – 79.6 billion % in November 2008. Famously, Zimbabwe issued a 100-trillion dollar note. The Weimar Republic used wheelbarrows to deliver money, while Zimbabwe used dump trucks. It was cheaper to burn money than buy logs to stay warm.

The Fed target is 2%. So, oops! We’re not there yet. At 3.7%, that’s a mere 18 bp below the effective Fed funds rate. The Fed target range is 3.75%–4.00%. The U.S. 10-year note was last at 5.09%, 139 bp higher, the 2-year note at 4.76%, 106 bp higher, and the 30-year at 5.43%, 173 bp higher. Even the 3-month Treasury bill at 4.20% remains 70 bp higher. We have a positive real interest rate. Not negative real interest rates as we experienced for much of the time after the 2008 financial crisis through to the 2020 pandemic. The sharp rise in inflation following the pandemic changed that metric.

But today’s inflation puts the Fed in a pickle. The market expected the September inflation to come in at 3.6% and the August rate was 3.4%. The Producer Price Index (PPI) inflation also disappointed, coming in at 6.3%, above the expected 5.3% and August’s 5.6%. The PPI tends to be a predictor of future inflation. Does the U.S. have an inflation problem? The Fed meets on October 27–28. The odds of the Fed hiking another 25 bp have  jumped to 50%. Of course, any hike in interest rates would incur the wrath of Trump who wants lower interest rates. Trump believes they can inflate the debt problem away.

CPI Inflation, PPI Inflation, Fed Rate 2016–2026

Source: www.tradingeconomics.com, www.bls.gov, www.federalreserve.gov

What has probably surprised many is that, despite the higher than expected inflation rate, bonds actually rallied. Why? Bonds tend to rally when the stock market falls. But the question was asked by The Economist: “Will bonds blow up?” (The Economist, October 10–16, 2026). The premise is that rising debts driven by rising spending for an ageing population, plus the ongoing wars (never-ending?) push deficits higher with no corresponding cuts in spending. The U.S. leads the pack with the highest budget deficit to GDP of any G7 country at 6.5%. Looking at the economic and financial indicators provided by The Economist each week, only Brazil at 7.3%, Colombia also at 7.3%, and Saudi Arabia at 7.2% are higher. However, as we have previously noted, all the G7 countries have high-budget deficits to GDP with Japan the lowest at 1.8%.

US 10-Year, 2-Year, 30-Year, Fed Rate 2021–2026

Source: www.tradingeconomics.com, www.federalreserve.gov

With interest rates at least easing as the stock market wobbles, where is the selling occurring? AI stocks led the market up. Will they lead the market down? Amazon, Google, and Nvidia are already in correction territory. Tesla is in a bear market. The others, including MAGS (the MAG7 ETF), are barely off their highs. AI stocks remain the talk of the town. Banks, the rock of the financial system, are struggling. Bank of America (BAC), Goldman Sacs (GS), and Morgan Stanley (MS) are in bear markets. Yet the S&P 500 holds up, down just over 1% from its all-time high. Two sectors performing better are Consumer Staples and Health Care. We look elsewhere and we see EU exchanges coming off their highs as well as the major Asian stock indices. In Canada, the TSX Venture Exchange (CDNX) is in a bear market. As to gold? Meh.

As to the economy, job creation is struggling as noted by the recent nonfarm payrolls and consumer confidence is sinking, but other areas such as the manufacturing indices and profits remain firm. The weekly jobless claims remain low.

But as they say, it’s the debt and the U.S. is insatiable in adding to the debt. But so is everyone else to different degrees. Could the U.S. have a debt crisis? The U.S. dollar is the world’s reserve currency and that gives the U.S. an advantage no other country has. If there is a danger zone, it’s the EU led by France and followed by the U.K. Both have budget deficits to GDP over 5%, and both have debt to GDP levels over 100%. Both have ageing populations and neither the pound sterling nor the euro are the world’s reserve currency. The U.K. has the highest interest rate levels while French interest rates have been rising as the spread between France and Germany (which has the best credit) widens. France is gripped in riots potentially sparking an economic crisis.

US Debt to GDP, US Budget Deficit to GDP 1940–2026

Source: www.tradingeconomics.com, www.home.treasury.gov, www.whitehouse.gov

Continuing to be a problem, particularly in the U.S., is the growing wealth disparity. The 1% in the U.S. hold some 32.5% of assets. The 90–99th percentile hold 36.4%, so the top 10% hold an astounding 68.9% of all wealth. The bottom 50% hold a paltry 2.3%. In the U.S., the wealth of the 1% surpasses the peak of the Gilded Age of the late 19th–early 20th century. According to the latest at Forbes World’s Billionaires list, one man, Elon Musk, has a net worth of $920 billion, making Musk the 23rd largest economy in the world. That’s also about 3% of the U.S. GDP. Five other U.S. billionaires have a net worth over $200 billion.

Notably it is not just wealth that divides it is also income. The share of income for the 1% has been steadily rising since the early 1980’s. It’s now at levels last see during the “Roaring Twenties”. At the other end labour’s share has been falling. See article from Paul Krugman titled - AI, Rising Inequality and Rising Oligarchy https://paulkrugman.substack.com/p/ai-rising-inequality-and-rising-oligarchy.

Share of Net Worth Held By – 1990–2026

Source: www.stlouisfed.org

The U.S.’s Gini coefficient, a measurement of income inequality (100 is absolute inequality, while 0 is absolute equality) had the U.S. last reported at 41.8 (2023). It could well be higher today. That put the U.S. ranking in the top 20% in the world, along with Latin American countries and African dictatorships. No G7 country is close to the U.S., with the next one being Italy at 34.3. Both China (26) and Russia (33) have a lower Gini coefficient than the U.S.

Inflation is most likely headed higher. Tariffs and war will do that to you. The rich get richer. As for everyone else? Meh! Kevin Warsh is in a pickle. What does he do at the October 27–28 FOMC? According to the market, the odds are rising that the Fed will hike. Warsh is indicating “hold.” Trump will claim inflation is falling.

Chart of the week

Source: www.stockcharts.com

We thought we’d have another look at Nvidia (NVDA). It’s the key bellwether stock for AI (Artificial Intelligence) stock, the broader technology-driven market, and for the stock market itself. Like an old saying, “If it’s good for Nvidia, it’s good for everyone.” Quite simply, since the start of 2020 and the pandemic, Nvidia has outperformed anybody in its way. Yes, Nvidia has outperformed its MAG7 brethren. We didn’t include the other six in the performance chart that follows, but, given the performance of MAGS, the ETF that represents the MAG7, a return of 3,588% vs. a return of 195% for MAGS outpaces the pack.

Nvidia has outperformed everyone – the NASDAQ, the S&P 500, gold, Bitcoin, you name it. It drags everyone up with it. Okay, not gold or Bitcoin. Nvidia and Bitcoin stand out on the chart, given Nvidia is the best performer by far, but a distant second is Bitcoin (+1,006%). Then there are the rest, all bunched together. MAGS is up 195%, the NASDAQ +192%, the S&P 500 +138%, and gold up 170%. The question, of course, is where everyone else would be without Nvidia. Nvidia makes up over 20% of the MAG7 by market cap. Nvidia’s market cap is $5.4 trillion. If they were a country, they’d rank fourth, barely behind Germany. They are so big in their industry they have upwards of 90% of the data centre AI chip market.

Source: www.stockcharts.com

They are also hugely profitable. Based on net profit margin, Nvidia ranks as number one. They are number two behind Google for earnings. They are ranked anywhere from hold, to buy, to strong buy by many analysts. They pay a small dividend of $1, equal to a yield of 0.45%. So, what’s the issue? From a technical perspective, we look at things differently. What we see is that Nvidia spiked to a new all-time high in October but was only 3% above the May high. We notice that the recent run-up to new highs was on reduced volume. Not a positive sign. That suggests falling momentum. We also see what appears to be the formation of a wedge triangle. Wedge triangles are normally bearish. If that’s correct, then we are now breaking down from the triangle. Targets could be down to at least $190. No, it doesn’t tell us when it will break, but under $210 would most likely break things further.

We can see that for the most part Nvidia has been rising with regard to its ratio with the MAG7 ETF MAGS into that October high. But now MAGS is outperforming. The ratio is breaking down under the 200-day MA. Also, we see a divergence between rising highs for Nvidia and falling peaks for the NVDA/MAGS ratio. The MACD (Moving Average Convergence Divergence) average is giving a sell signal. Again, as Nvidia made new highs, the MACD indicator highs were lower. Another divergence. 

The next support level is close at $210. A break of $210 would be a sell signal. Then under $208 things get dicier. Nvidia has been the leader on the way up. Will it still lead on the way down? Nvidia is now down 11% from its all-time high. Correction territory. The bigger they are, the harder they fall!

Markets and Trends

Source: www.stockcharts.com

* New All-Time Highs

Note: for an explanation of the trends, refer to the glossary at the end of this article.

New highs/lows refer to new 52-week highs/lows and, in some cases, all-time highs.