Tear Down the Wall

The first half of this month coincided with earnings results, Fed rate cuts and US elections; if you manage other people’s wealth, it’s been a very demanding period, prompting a significant amount of reflection. Although we’ve had important stories develop this week, it’s been calmer, nonetheless. We’ll take it!

Nvidia and the current state of AI

Despite being the second largest company on the S&P 500 and the largest holding in our portfolio, Nvidia’s earnings were not a market mover. Even before their results were announced, we were not anticipating anything major as we are waiting for them to begin to ship their new Blackwell chips in large numbers. The company did well to beat forecasts and provide guidance above estimates, yet the market didn’t know how to react; in the afterhours market, it was down 5% immediately after releasing results, was closer to  -2% during the earnings call, opened at  -3%, went as high as +4% and closed the day up 0.5%. If this non-event deters people from taking silly option bets on outsized movements, that’s a win for long term investors; the additional volatility brought on by speculation is not welcomed even if it could drive prices higher in the short run.

CEO Jensen Huang addressed the idea that generative AI has ‘hit a wall’ in its development in a very direct manner which requires little interpretation: he said ‘no’. Scaling, in the most simplistic way to describe it, is the process of increasing the size and processing power of neural networks, datasets and models. Put another way, it’s like building a bigger brain for AI and increasing the tools for it be trained. In recent years, we have seen AI performance double every six months – this is four times faster than semiconductors which, under Moore’s Law, saw their performance double every two years over several decades.

Mr Huang was not the only one that needed to address this. While some have said that the developments in AI have stalled, pointing to Open AI’s popular GPT-4 model being used since March 2023, Open AI posted on X (better known as Twitter) that ‘there is no wall’, earlier this month. Microsoft CEO Satya Nadella, at this week’s Ignite conference stated, “what happened in the cloud in 10 years is happening with AI in a compressed period, maybe half the time” and that he does not see the industry failing to progress. If the rate of change within AI is to slow down, it’s likely a human capacity restraint; not enough Blackwell chips, not enough transformers to increase our energy output, impatient investors, etc. There has always been a fair amount of skepticism related to AI, therefore, any sign of a slowdown in innovation will be pounced upon by these AI bears. We see no reason to doubt our current trajectory, even if it means going at a slower pace.

Varia

Google may be forced to sell off its popular Chrome browser: speculation has grown that the US Department of Justice is pushing for Google to sell off the world’s most used browser due to its alleged monopoly in search. The potential change here would have far reaching implications for the industry, which we may choose to cover at another time (one would need to write a book to give the topic justice). Rumors also persist that the DOJ is not satisfied with the Chrome proposition, it’s also looking closely at the company’s Android mobile operating system.

Bitcoin to the moon: the world’s largest cryptocurrency has been on a tear since the US election with prices rising more than 35% since the US election results on November 6th. Enthusiasts, emboldened by the President-elect’s claim to have the most pro-crypto congress in history, have been piling funds into bitcoin etfs and into MicroStrategy, a company that leverages itself to buy more bitcoin and has seen its shares rise 78% since election day. To those who have made a profit in the space, we commend you but for our clients, we simply cannot invest in something whose value is not linked to any cashflow expectations or economic application. Bitcoin had its mainstream moment four years ago and to this day we have not seen wider adoption. What we have seen is the financialization of the currency, with institutional acceptance; ironic that this is what it takes for the value to go up when the original selling point of this was to have something decentralized and uncorrelated to institutions.

Caisse de Depot under the global spotlight for the wrong reasons: this week, the US charged Gautam Adani, Asia’s second wealthiest individual with bribery. Prosecutors allege that defendants promised to pay more than $250 million in bribes to Indian government officials to win solar energy contracts and that they concealed that fact when raising money from investors. One of the firms involved in the scheme is Azure Power Global, where the Caisse de Depot et Placement du Quebec is the majority shareholder. Three (now) former employees of the Caisse are accused of having participated in the scheme. These charges have been heard round the world. Mr Adani is worth more than $50 billion, Adani group more than $200 billion, the Caisse de Depot oversees C$450 billion and it is not the only Canadian pension plan implicated in this investigation.

Political capital takes a hit: Matt Gaetz, who was nominated to head the Justice Department as Attorney General has withdrawn his candidacy in the face accusations of inappropriate relations with a minor. For investors, we are already looking closely at RFK Jr, as his nomination to serve as Secretary of Health and Human Services would have far reaching implications for the pharma and healthcare industry and we are all eagerly awaiting to hear who will be nominated for Secretary of the Treasury. This week’s development has certainly impacted the President-elect’s political capital and has now cast some doubt on his wide-ranging agenda.

Again, a lot has happened this week but no major changes on the market to register. Next week is Thanksgiving in the US, which is historically a quiet period; I’m not brave enough to predict that this will be the case this year but I certainly am hoping for it!

Healthy distraction

The Canadian government will be suspending GST and HST collection between December 14 and February 15, on qualifying goods such as restaurant meals, children’s clothing, toys and books (to name a few examples) as a way to support and promote consumption during the holiday season.

As per the Department of Finance, a family that spends $2000 on qualifying goods would realize savings of $100 over two months, or $260 for those who live in provinces which collect HST.

Our interpretation: it’s a small relief that could help some but it’s also an opportunity to spend a little more, if you can afford it. 

Have a great weekend!

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