MAXIN GLOBAL FUND - USD is a Long / Short Directional hedge Fund incorporated in Luxembourg. It started trading on February,22 2022 and replaces MAXIN ADVISORS' MODEL PORTFOLIO which has been trading since January 1st 2014.
German Recession and AI Craze
Germany Is Officially in Recession
As we expected, the German economy fell into a sharp contraction in the first quarter of 2023, taking by surprise most economists that were basing their projections on the observation of the data of January and February.
The sharp downturn of March that we highlighted through the industrial production and business survey data made Germany’s GDP contract by -0.3 % when compared to the previous quarter following a -0,5 % contraction in the last quarter. of 2022.
As such, with two consecutive quarters of contraction Germany is suffered its first recession since the start of pandemic, extinguishing hopes that Europe’s largest economy would escape such a fate. What is particularly significant is the fact that, precisely, Europe is not in a COVID lockdown induced downturn and that energy and food prices have come down sharply over the period.
The reluctance of households to buy was apparent in a variety of areas,” the German office of Statistics said in a statement. They spent less on food and beverages, clothing and footwear, and furnishing while companies like Zalando SE reflect the flagging consumer sentiment. The fashion retailer saw inventory levels driven higher in the first quarter by falling demand.
Domestic car orders, meanwhile, were down by about a third between January and April, according to the VDA auto industry association.
A deepening downturn in the key manufacturing sector is casting doubt on the rebound many economists anticipate for the coming quarters. A gauge of expectations by the Ifo institute fell for the first month in eight in May, while a survey by lobby group DIHK pointed to zero GDP growth for 2023.
The data also reveals that there was a plunge in government expenditure, while investment was up aided by construction in unseasonably warm weather.
Despite a Bundesbank report this week suggesting the economy may grow “slightly” this quarter the data points in the other direction and goods demand is cratering as consumers faced with elevated inflation prefer to splurge on leisure and travel, making economic growth increasingly uneven — a trend that is usually not sustainable.
The economic contraction over the past 6 months comes in stark contrast with the best advance in German equities since 2020, with the DAX Index up 35 % and hovering at all-time highs.
The scale of the downward revision to German GDP data means that the euro-area growth is likely to be revised lower in the first quarter as well. Other things equal, it would point to the region’s economy having stagnated at the start of 2023, but other downside revisions could well tip the rounding and place the entire region in a technical recession.
High inflation at 7 % and the most aggressive monetary policy tightening in decades are finally taking their toll on the real economy, exacerbated by a nascent decline in real estate prices, a tightening in lending standard following the US banking crisis and a slowdown in exports towards the US and Asia.
With the European Central Bank still hiking rates to bring inflation back to its 2% target it is difficult to see
complete, risking a stronger drag on growth how Europe’s second largest economy can bounce significantly oil the rest of the year, putting equity markets optimism at risk.
This week’s reversal and breakdown in the Dax 30 may be a sign that the good times for European equity investors are over, particularly as a weakening EURO may entice foreign investors to reduce their exposure to Europe.
Our core macro-economic scenario of a European recession unfolding in 2023 is unfolding as expected, and European equities will find it difficult to sustain their current levels in the face of declining economic activity, high inflation and higher interest rates.
AI Craze
Yesterday’s post market release of NVIDIA’s earnings delivered the the largest single-day market cap gain for any stock in US equity market history, adding almost $200 billion in market cap in one single day – or twice the size of Intel – and more market cap than the total market cap of 472 of 500 S&P companies…
The stock roared up 30 % after market as retail investors were rushing to buy, even after a rally that saw the company tremble in size ob^ver the past 6 months, to trade at 185x current earnings and 56x future earnings.
NVIDIA’s earnings were good, surpassing analyst estimates by 18 % while Revenues exceeded estimates by 10 % but still down -20 % lower than the profits of the year before with revenues down -13 % year on year-
Investors had already incorporated a giant premium for that grand vision in Nvidia’s market cap. prior to the release of its results.
What triggered this the May 25 moonshot and analysts rushing to raise their target price for the company was a huge lift in guidance that investors took as proof that Nvidia is already beginning to ride A.I. to one of the fastest profit explosions ever.
NVIDIA’s CFO Kress forecast that revenues will jump by 52% to $11 billion in Q3, way above the 7.5 Billion projected by analysts -suggesting that Nvidia’s growth has hit a new gear on strong demand for AI processors.
That news sent shares skywards 24% by mid-afternoon on May 25.
Overnight, Nvidia’s market cap swelled from $755 billion to close to USD 1 Trillion, or $198 billion.
NVIDIA is It’s now worth two-thirds more than Tesla. Only Apple and Amazon and Microsoft have ever posted similar dollar gains in a single day.
What remains to be seen is whether the AI Craze will fulfil its promises and whether NVDIA can sustain such advances and high valuations.
As was the case with the Dot.com bubble, the development of the internet led to the same “game-changing” narratives that drove the internet stocks and amongst them CICISO and INTY to record high, until they all collapsed a few years later, with the latter never recovering there all-time highs.
It is not the first time the US stock market -a gigantic casino driven by greed and narratives rather than rational fundamental analysis – takes promising companies to the pinnacle only to destroy considerable wealth when investors come back to their senses and when the winners start disappointing.
Narrative Artificial Intelligence is nothing new. Companies like Google, Microsoft, TESLA and Amazon have been working on it and developing it for years and their CEO’s have never touted it as a potential money maker in its own rights but as a furthering tool for their own prdocutsm search engines and Self driving vehicles.
It is the release of Open AI’s ChatGPT in December 2022 that finally captured the imagination of the general public, showcasing for the first time how it could change the day -to-day life of people and many industries, leading to massive production gains if ever reaching a stage of sufficient reliability and controls.
Many trades such as coders, Doctors, legal practitioners, or advertisers, to name only a very few could end up being decimated by its generalisation.
The Internet enabled people to stop memorizing things as the Internet acted as an external disk, allowing them to free the usage of their brains for thinking.
AI could take the whole process one step further by externalizing the CPU as well..
It is yet too early to say, and as was the case with the internet, the first movers were not the ultimate winners of this change
At current valuations – and particularly at 152x Enterprise Value over EBITDA – NVIDIA’s stocks price already factors in extremely good news and phenomenal growth for years to come.
NVIDIA faces significant risk as well. As its CEO pointed out, the US policies towards China may end up banning them form a market that represents 30 % of their sales, and any issue with Taiwan could be lethal for NVIDIA due to its reliance on TSMC for the production of its chips.
We ended up cutting our short position in NVIDIA entirely, focusing on absolute level of downdraft of our portfolio rather than on the merits of staying short.
We expected NVIDIA to beat expectations and could have tolerated the stock to rise 5 or 10 % on good results. We did not expect it to rise by 30 % on simple promises.
Welcome to the US Stocks market ! Clearly not a place for rational and fundamental asset management !
In these situations of market craze, there is no point in fighting what will certainly end up being a bubble.
MAXIN GLOBAL FUND – USD
Transaction Update 25 May 2023
New Asset Allocation
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