What Nvidia investors and central bankers can both learn from Keynes

John Maynard Keynes, without a doubt one of the most important economists and one whose work influences our daily lives like that of few others, was not the smartest of investors as he blew most of the family fortune at the time of the Crash of ’29. So, along with many a bon mot which finds itself quoted with great regularity – such as “When the facts change, I change my mind. What do you do, sir?” – there is a lesser known one which also strays from strict academic discipline, and which remains pertinent in the real world. Keynes concluded that one should not necessarily look for stocks that are cheap but stocks that will become popular. On that basis he would surely have been an enthusiastic investor in Nvidia, the home of AI. Apple co-founder Steve Wozniak is a fan of AI although he likes to apply the acronym to actual intelligence.

A tech entrepreneur, friend, and neighbour of mine this morning wrote to me in that context: “Yes before we start worrying about AI we need to worry about the total lack of BI, basic intelligence. Let’s not forget all AI starts with a human, the issue being potential bias if most AI development is spun out of left-leaning universities. We are all going to hell on that handcart being pushed by the proverbial robot!”. Strong words indeed but ones offered up by someone in the white heat of the industry and not by a stock jockey.

Either way, Nvidia has been an incredible story although headlines at the moment are covering the precipitous fall in the stock price from its all-time high of US$ 140.76 which it touched on as recently as last Thursday, 20 June, to its closing in the aftermarket last night, 24 June, at US$ 116.57 for a fall of roughly 17 percent. That is truly a big dump although in the greater scheme of things it’s a drop in the ocean as even after that reversal the stock remains 24 percent to the good over a month and nearly double where it had been a year ago. Anyone who has owned the stock since any time before 9 June is still in the money so the schadenfreude of those who don’t own a piece of Nvidia would best remain constrained.

As of yesterday, of 55 analysts polled, 42 still had it as a strong buy, 9 as a buy, 4 as a hold and nobody as a sell or strong sell. At the time of writing, the price earnings ratio remains north of 70 times as opposed to 39 times for Microsoft and 32 times for Apple Inc and even the once bulletproof Tesla that, at the peak of popularity, was trading above 1,400 times has pulled back to a more realistic but still pretty rich 47 times. Is it too late to jump on Nvidia’s moving train? Is the pullback of the past few days the buying opportunity everybody has been waiting for or has the bubble finally burst? It’s not a train I’d feel comfortable chasing although maybe Keynes remains right. As the saying goes, “Pays yer money, takes yer choice.”

There is much else emanating from Keynes’s learning that would do well to be read by our current crop of politicians and to some extent also by our central bankers and monetary policy makers, not least of all with respect to the role of central banks in helping to manage the amplitudes of the economic cycle. In our modern world, in which nothing bad is supposed to be allowed to happen, it might sound out of place but, to Keynes, the sequence of economic growth and contraction, or boom and bust if you prefer and with my apologies to Sammy Cahn and Jimmy van Heusen, go together like love and marriage or like a horse and carriage. Monetary policy is not here to prevent recessions but to manage them and to limit the depth to which they might otherwise fall.

In that context, I was a little surprised to find an article written by Mohamed El Erian, formerly chief economic foil to the dethroned bond king and co-founder of PIMCO Bill Gross, subsequently to its owner Allianz and lately columnist at Bloomberg in which he holds up the Bank of England as a contender for best of breed. I have myself for some time been pretty critical of the Old Lady so I could not but read the piece with interest. Under the title of “Five Key Ways the Bank of England Outperformed Its Peers”, El Erian gives the Bank good albeit far from perfect marks.

His first tick goes to the Bank’s recognition that the surge in inflation in 2021-2022 was not as the Fed had labelled it “transitory” and he pats it on the back for having been early to express that opinion when most of the rest of the world was still hanging on the words of Fed Chairman Jay Powell. Secondly, he likes the way in which it acted during the storm that followed Liz Truss and Kwasi Kwarteng’s legendary mini-budget. He points to the hedge funds that were trying to hang onto overleveraged positions and who wanted help in riding out the volatility. Governor Bailey drew a line in the sand where support for the markets would end and he stuck by it. If losses were to be taken, it would be the hedgies and not the taxpayers who would have to bear the burden.  

His third thumbs up comes from his agreement with me that the Fed’s much-vaunted dot plot is a load of rubbish and he congratulates the boys and girls in Threadneedle Street for not falling victim to attempting to be too accurate in their predictions and for effectively admitting that forecasting monetary policy is anything but a precise science. I suppose the MPC learnt its lesson during the reign of the preening Canadian Mark Carney – if I had the courage I’d happily refer to him as a pompous idiot, but I don’t, so I won’t – with his famous penchant for forward guidance which caused unimaginable damage, not least of all by revealing that the Bank didn’t know anything we didn’t know and that its own ivory tower economists were in many respects less credible than their City counterparts. He is also congratulatory of the MPC for its frankness in admitting to non-unanimity in votes on rate decisions.

As a fourth point, he raises the recent announcement of an external review into its forecasting models, not that its misses have been any more egregious than those of its peers. The results of the review, as unflattering as they emerged, were not hidden away and left to catch dust but were presented and discussed at a press conference. And finally, El Erian points to the composition of the MPC, the Monetary Policy Committee, which has within its numbers a strong presence of external non-central bankers which he holds up as important cognitive diversity and the counterweight to dangerous groupthink that pervaded many if not most of its friends and relations.

He concludes his piece with: “Please don’t get me wrong. I am not suggesting that the Bank of England is perfect. It has tripped up in this unusual economic, financial, and political world we are living in. Yet it has been better than others, including in its honesty, humility, and willingness to learn from its mistakes.”

We British do have a habit of being excessively self-critical and assuming that everybody else does most things much better than we do ourselves – rugby, cricket and football included – and it is, to be honest, a tonic to hear a voice as authoritative as that of Mr El Erian sing our praises, even if only quietly. That said, we should not go overboard, even when noting that consumer price inflation has fallen to the much heralded 2 percent as price pressures in this country, especially in the food space, had outpaced those elsewhere and holding them stable at elevated levels still statistically counts as non-inflationary.

As quarter end, and half year end, approach, I find myself preparing for the customary quarterly investment committee meeting at which I will be expected to express a cognisant opinion of what lies ahead for the coming quarter. In that vein, I was yesterday on a preparatory conference call with the executive members of the committee. Being reminded by Mohamed El Erian that this is an “…unusual economic, financial, and political world …” is of little help when the objective is to rather simply generate positive investment results for the clients. Finding a justifiable balance between risk and reward is no easy matter, especially when one finds that one never has enough of what’s going up and always too much of what’s going down. I shall be off to London on Friday to attend the full meeting from which I shall report at the beginning of next week.

A new Chief Investment Officer, who was recently appointed as the long-term holder of that position, has himself been promoted so that, after 10 years, a fresh wind will be blowing in the committee room. The format is set to change slightly, and more time is to be allocated to open debate, something of which Mr El Erian would surely approve. In yesterday’s conference call, I alluded to the expiry of the Petrodollar agreement which has prevailed for the past 50 years, and which determined that Saudi Arabia would exclusively price oil in dollars. I’m not alone in seeing this as a pretty significant change in the way the world functions – Liam Allen of the Inside Baseball with Old Chestnut podcast ( ibwoc.com ) raises the point in this week’s edition – and I was a little surprised that some of the individuals on the call appeared not to have clocked the event.  

In the white noise of daily market activity, it might appear as though central banks are here for little other than to prevent recessions – wrong! – while it has in recent times become somewhat forgotten that maintaining the external value of the currency sits right at the very top of the list of responsibilities. What impact the end of the Petrodollar Agreement might have on the greenback is hard to predict but an impact it will surely have, even though that might not become immediately obvious. I shall be keeping a close eye on developments in the oil market as this might prove to be the butterfly flapping its wings in the Amazonian rainforest.   

Meanwhile, the rollercoaster ride that is the cryptocurrency world rumbles on. Not unlike Nvidia stock, one’s attitude will vary depending on where and when one entered the market. At the time of writing BTC/US$ is marked at around US$ 61,100. If you bought it this time last year at US$ 30,000-odd you might not feel too bad although less than three weeks ago it was a cool US$ 10,000 higher.  I’m sure a lot of people have a lot of fun trading bitcoin and other cryptocurrencies and coins and I’m sure some of them have made a pretty penny doing so. Ultimately, however, trading is a zero-sum game. As my late and much-lamented friend Hans Rieckmann used to say, “The money is not lost, it simply belongs to somebody else.”. He should have known. How or why bitcoin trades as it does remains as far as I can tell unclear and no matter how often I stare at the charts, there is no discernible pattern. Some wise guy – I can’t remember who it was – once suggested that if the chart doesn’t tell you what you’re looking for, try reading it upside down.

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