Mad Hedge Technology Letter
April 26, 2024
Fiat Lux
Featured Trade:
(WHAT STAGFLATION MEANS FOR THE FUTURE OF TECH STOCKS)
(GDP), (PCE), ($COMPQ)
Posts
Stagflation has reared its ugly head and yes it’s not here yet, but the risk it will hit us can’t be ignored at this point.
I’ll tell you what this means for tech stocks as well.
I won’t say that I told you so but this could have been seen from a thousand miles away.
The persistent increase in federal debt spent like a drunken sailor doesn’t mean anything until it means a lot this time around.
Remember that all that “job growth” came in the form of mostly government jobs and part-time workers adding more part-time jobs to pay for the cost of life.
Now the numbers finally prove this as inflation stays sticky and growth has curtailed with the U.S. Real gross domestic product (GDP) rising just 1.6% from a year ago in the first quarter, which is a sizeable miss from 3.4% growth seen in the fourth quarter of last year.
Meanwhile, the Federal Reserve’s favorite inflation gauge—the core personal consumption expenditures (PCE) price index, which excludes more volatile food and energy prices—surged from 2% in the fourth quarter of 2023 to 3.7% in the first three months of this year.
I believe we are in the early throes that will usher us down a path of increasing inflation and lower growth which is the summation of stagflation.
Even with stagflation, certain tech companies will still grow, and do well.
Drowning in federal debt - now in the many trillions and skyrocketing each day.
It now also has a landing spot besides Ukraine and that’s in the form of more American inflation.
Prices will go up and adding more government jobs won’t bring down inflation.
Then the big question becomes, does the Fed save the dollar or save the US economy?
When the rubber hits the road, I do believe the Fed will choose to save the economy over the purchasing power of the Americans.
This means that the price of a loaf of bread will give you sticker shock because a dollar in 2024 will be worth a lot less in 2025 and beyond.
But the important thing is to save the economy and the biggest growth element to the US economy is, you guessed it right, tech stocks.
Tech stocks will outperform during a time of stagflation because even if most of the rest of the economy is doing poorly, tech will still navigate around these tougher times.
The Fed has essentially crippled purchasing power with its “transitory inflation” blunder, and I don’t think they have the guts to take down the stock market in an election year.
Therefore, I do expect interest rate cuts to take place later this year, and that will put a floor under tech stocks and marry up that with the AI narrative one must love the end-of-year prospects for Nvidia, Microsoft, Google, and Amazon.
Get ready for the medium term because it’s most likely to involve the “bet on the Fed pivot” rally which will take us to the next up leg in the Nasdaq.
Readers should take solace in the fact that tech stocks will go up in stagflationary environment, but of course, tech stocks have that extra mojo when rates and inflation are low.
Mad Hedge Technology Letter
September 1, 2023
Fiat Lux
Featured Trade:
(BEST BUY PUTS IN A SHIFT FOR TECH)
(BBY), ($COMPQ)
Mad Hedge Technology Letter
August 30, 2023
Fiat Lux
Featured Trade:
(BULLISH SIGNS FOR 2024)
(AMZN), (GDP), ($COMPQ)
In a fireside chat with some of Amazon’s (AMZN) key lieutenants, CEO of Amazon Andy Jassy ran out of patience.
It’s the end of the line for many.
Critical members of Amazon are still holding onto the rose-colored fantasies of the lockdown era, where workers made their living wearing pajamas all day and took snoozes whenever they wanted.
Not anymore was the message from Jassy.
Enough is enough.
Employees usually don’t have the 30,000-foot view that executives like Jassy have even if they pretend to sometimes.
The paradigm has shifted to the point where management wields all the bargaining power as tech companies trim the fat off their business model.
This spat epitomizes where we are right now in the tech cycle and the wider US economy as a whole.
Tech ($COMPQ) is in a holding pattern where the biggest and best are utilizing a strong balance sheet, but they aren’t doing something so amazing where we chase the hot money with more hot money.
Ironically enough, the US GDP annualized rate just got revised down from 2.4% to 2.1% as spiking interest rates and high inflation eat into growth.
Although companies like Amazon are still doing ok, it’s not to the point where key members of staff can lounge in their sleeping gowns and work one hour per day.
There is resistance from higher management demanding Amazon workers come back to the office.
The deeper underlying message here is that the US economy is still growing buoyantly enough and that signals strength going into 2024 for tech stocks.
There is a better than 50% chance that the US economy won’t enter a recession next calendar year and the tech sector will benefit as it grinds higher.
An important trend I have noticed is that tech shares can absolutely march higher in lockstep with accelerating bond yields.
Many believed this was counterintuitive and I admit, traditional orthodoxy has taught us to respect this inverse correlation.
However, this time-honored belief has come unstuck this year and fighting the Fed has been the tech trade of the year.
What’s next for Amazon?
This is a stark change from February this year when Jassy said he had "no plan" to force workers back.
But now, Jassy reportedly reiterated a rhetoric that has emerged in more recent months: don't comply with return to office, face the consequences.
In July, Amazon employees would be forced into a "voluntary resignation" if they refused to return unless they were one of the rare few who had obtained permission from the company's leadership—internally named the S-team.
Former Twitter CEO Elon Musk was the first tech executives who started this fad by firing 80% of Twitter’s staff when he acquired the company.
That philosophy has really gutted the bottom of the chain in tech companies and shares of tech firms will benefit from this through 2024.
Instead of paying for expensive workers to sit at home, tech management are summoning up shareholder returns in the form of dividends and share buybacks to extend the tech bull market to the end of 2024.
I am still bullish tech stocks moving forward and algos are still programmed to bet on a Fed pivot. Tech goes up until the Fed pivots.
