😮💨🇺🇸 New Debt Ceiling Agreement!
Hi all,
Happy Memorial Day Weekend (if you’re in the United States).
A debt ceiling deal has been reached in the U.S. which should hopefully reassure the markets come Tuesday when it opens - we have the story for you below.
In personal news, I booked a small trip to the Outer Banks in North Carolina. A friend’s family invited me as they rented a house on the beach, so as long as I bought a plane ticket, I could go with them! I’ll be there next weekend and a few days into the following week. If you have any suggestions on where to go in the Outer Banks, feel free to e-mail back by replying directly. I don’t know many people that have gone there; it seems like a Southern thing - but I will report back on what it’s like in future newsletters. We have some exciting YouTube videos coming up for you all, and I’m even thinking about creating some free course content for you in the future.
Stay tuned, and be well.
— Humphrey, Tim & Rickie
Market Report
President Joe Biden and House Speaker Kevin McCarthy have reached a bipartisan agreement on several key topics related to federal spending and debt, just days before the Treasury is expected to run out of cash. The agreement suspends the debt ceiling until January 2025, providing the Treasury with unfettered borrowing authority during this period.
A key point in the negotiations was the issue of discretionary spending, particularly non-defense spending. The deal keeps this spending roughly flat for next year and limits its increase to only 1% in 2025. This restriction applies to the funds that Congress allocates each year to federal agencies and programs. However, mandatory programs like Medicare and Social Security are exempt from these limits. Defense spending, on the other hand, is set to increase by 3.3% next year, which is lower than the rate of inflation.
An important component of the deal is the expansion of work requirements for older recipients of the Supplemental Nutrition Assistance Program, or food stamps. The deal gradually extends the work requirements up to age 54, compared to the current law's age limit of 49. Despite this, the Biden administration secured exceptions for veterans and vulnerable groups like the homeless and a provision that the tougher work requirements will end in 2030 unless Congress intervenes.
However, the deal's financial provisions include several concessions. The IRS is slated to lose the $10 billion it had reserved for enhancing tax enforcement and updating its technology. Additionally, around $29 billion in unspent funds intended for pandemic relief will be retracted. The deal also mandates a 1% cut in government spending if all 12 appropriations bills aren't passed by the end of the year. Despite these cutbacks, the agreement still needs to win the approval of lawmakers from both parties.
However, the debt ceiling deal isn’t necessarily all good news… Some are concerned that with a tentative deal pending, the U.S. Treasury will soon replenish its cash balance by selling more than $1 trillion of bills through the end of the third quarter, according to recent estimates. The U.S. cash stockpile currently sits at $39 billion, the lowest since 2017.
This could likely suck a significant amount of liquidity out of financial markets and add pressure given the Federal Reserve has been raising interest rates and shrinking its balance sheet. As the U.S. Treasury seeks to secure cash, it may inadvertently increase short-term interest rates for banks, potentially forcing them to raise borrowing costs for businesses and households. Bank of America predicts this could have an economic effect similar to a 25 basis-point interest rate hike.
Nvidia's recent earnings report demonstrated the company's strong position in the AI and computing industry, with a predicted surge in sales and an optimistic forecast for future performance. The company's shares have more than doubled this year, pushing its market capitalization close to a record high of $938 billion, driven largely by its role as a key supplier of AI chips for a range of applications, including language-generating tools such as OpenAI's ChatGPT. This growth has helped Nvidia solidify its position as the U.S.'s largest chip supplier by market value.
The company's sales for the current quarter are forecasted to reach a record $11 billion, an increase of 64% from a year earlier and significantly higher than Wall Street's expectations of $7.2 billion. This surge is fueled by the rising demand for AI applications and the computational power required to drive these technologies, as noted by Nvidia's CEO Jensen Huang.
The substantial growth of Nvidia is reflected in the rise of other chipmakers and companies focused on AI tools, indicating a widespread increase in demand for AI technology across industries. Despite the surge in demand and promising prospects, analysts caution that the company may face challenges in securing capacity to meet this rapidly growing demand. However, the overall sentiment is optimistic with Nvidia's leadership in the AI market driving an impressive growth trajectory.
In addition to its business forecast, Nvidia announced that it's working on partnerships with major tech companies, including Amazon.com, Microsoft, and Alphabet’s Google unit, to make generative AI more accessible to smaller businesses. This is expected to expand the use of their AI software and further increase demand for Nvidia's chips. This strategic collaboration underscores Nvidia's dominance in the AI industry and its continuous efforts to explore new avenues for growth and expansion.
It's worth noting that Nvidia's journey to becoming an AI leader started with its roots in graphics-processing chips for video games. It later diversified its product offerings when engineers discovered the chips' suitability for AI tasks and cryptocurrency mining. Despite some setbacks, the company has been able to capitalize on these shifts and the AI boom, which is currently driving its revenues and stock value. The AI market's vast potential and Nvidia's strategic position at the heart of this market suggest a positive outlook for the company in the years to come.
Forecast Ahead
Big Number: $2.3 billion in losses for NVDA short-sellers
Nvidia’s exceptional sales forecasts led to a significant stock surge, causing considerable losses for short sellers. In a single day, they faced a hefty $2.3 billion in paper losses due to Nvidia's stock rising by 27%, according to S3 Partners LLC. This increased their mark-to-market losses to $8.1 billion in 2023, as Nvidia's stock price has more than doubled this year. Despite a noticeable decrease in the number of shares shorted over the last 30 days, with many traders covering their positions at a loss, Nvidia's short interest value stands above $9 billion, making it the fourth most-shorted stock in the US after Apple, Tesla, and Microsoft.
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