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Today’s Points:

• Nvidia’s sales continue to grow like a weed, but the company expects deceleration.
• It caused some concern that they’re assuming no sales to China ahead.
• France’s political brew is boiling over again.
• A Fed anthology to keep you entertained.
• AND: Britain’s mess of 1976.

Nvincible?

Nvidia Corp., the first company ever to amass a market capitalization above $4 trillion, continues to keep us excited. Its growth is undeniable, with the real concern more about the sustainability of revenues and profits, rather than share price.

In the latest episode, the company announced second-quarter results after the market closed Wednesday, and after-hours traders didn’t like them. That said, a fall of about 3.5%, which CEO Jensen Huang’s appearance on the earnings call didn’t really shift, is a moderate response by Nvidia’s standards:

If that holds up once markets reopen, it will translate into a fall in market cap of about $140 billion. That is, of course, a lot of money; it’s roughly enough to buy the whole of Pfizer Inc. at current valuations. But Nvidia’s growth has been such that this may not hurt so much. Over the last year, its market cap has overtaken the total valuations of the main stock indexes in the UK, France and Germany. It’s also overtaken the entire S&P 500 energy sector, to whose members will fall the task of powering the machines that use Nvidia chips:

But the Nvidia narrative continues to be about its phenomenal success in selling people chips and doing so at a profit. This chart compares the growth of sales and of earnings for the company and the S&P 500 as a whole over the last decade. Since the arrival of ChatGPT in November 2022, Nvidia has gone into orbit:

Growth in EPS and revenue continue to be phenomenal. They cannot carry on at this rate indefinitely; Nvidia will have to start looking for customers elsewhere in the solar system, so deceleration per se is only to be expected before long. The two flies in the ointment that prompted the selling were:

• Data center growth — central to the artificial intelligence story — was a little below forecasts; and
• The company announced that it had effectively made no sales to China during the quarter, and that its future projections were based on the assumption that China would continue to be off-limits. 

On the China issue, Nvidia also made the very disquieting disclosure that the much-ballyhooed deal to pay 15% of its Chinese revenues with the US government still hasn’t been finalized. 

Still waiting for the deal to be finalized. Photographer: Chip Somodevilla/Getty

The good news, without being Pollyanna-ish, is that Nvidia is being very responsible, and any resumption of sales to China will be pure upside compared to the current forecast (even if they share a chunk with Uncle Sam). The bad news is that the administration’s modus operandi of striking vague deals in principle and not thrashing out the details creates real problems for anyone trying to plan their business with a spreadsheet.

Nvidia is trying to say that as clearly as it can without incurring presidential wrath. The company stood up to the administration about as much as anyone in the corporate world now dares, saying the government had “not published any specifics or codified any terms of the agreement.” As Dave Lee points out, from Huang’s perspective, the administration is standing in the way of a $50 billion bonanza.

Back to the Barricades, and the Bond Spreads

After a nine-month respite, we need to start worrying about French politics again. The key chart, with trigger warnings for all those who lived through the euro zone sovereign debt crisis, is this one: The spread of 10-year French OATS over German bund yields is almost back to its highs during last year’s political crises:

French stocks have resumed sharp underperformance of the rest of Europe:

Points of Return covered President Emmanuel Macron’s failed gamble on snap elections, the three-way tie that logjammed the legislature, serious budget travails, and the resignation of Prime Minister Michel Barnier after failing to win a budget vote. With fiscal negotiations about to restart, his successor, Francois Bayrou, is calling a confidence vote Sept. 8 that he is likely to lose. Worse still, his finance minister warned in as many words that France might need help from the International Monetary Fund, awaking extremely unpleasant memories in the UK, which accepted a bailout in 1976. What next, and why should we care?

The biggest argument not to worry comes from this chart, on the spread of OATS over Italian BTPs. Italy has long been the fiscal sick man of Europe, and markets were terrified when it elected Giorgia Meloni, from a party of the hard right, late in 2023. She seemed just as anti-European and dangerous as the National Rally’s Marine Le Pen, who was thwarted in last year’s parliamentary election but who has a good chance of winning real power soon. And yet the market has warmed to Meloni, and the risk premium for buying BTPs rather than OATS has almost disappeared under her tenure:

The Meloni experience suggests that a leader from the far right needn’t be so bad at all, if they’re in control (Meloni is more secure in her post than any Italian premier in a long time) and pragmatic. It’s not in the interests of Meloni or Italy to provoke a confrontation with the European Union, so she hasn't done it. Le Pen also has a history of ferocious Euro-skepticism, but she will not want to trigger a crisis as soon as her party finally reaches power.

Le Pen can look to Meloni for inspiration. Photographer: Anita Pouchard Serra/Bloomberg

Bayrou’s budget proposals last month sounded even more unpalatable than the medicine Britain’s Labour party had to swallow 49 years ago. As summarized by Mizuho Securities, the premier wanted to save €43.8 billion ($51 billion) next year by:

• Scrapping bank holidays.
• €5bn effort to curb social spending.
• No increase in 2026 pension payments.
• Cutting stakes in some companies.

Le Pen has already said that her party will vote no-confidence in Bayrou, leaving him very little room for maneuver. Prediction markets put his chance of losing at 90%. It’s unlikely that Macron, whose term lasts until May 2027 and cannot be forced to leave, will call elections straight away. If he were to call an early presidential contest, he’s term-limited, so that would amount to resignation; and he’s not the resigning kind. Jordan Rochester of Mizuho Securities in London puts the odds of what happens after the confidence vote at:

1. 70%: Name a new PM, who will likely continue to work on the budget (largely on the same lines as Bayrou).
2. 25%: Call for snap legislative elections, given the political gridlock.
3. 5%: Call for early presidential elections.

The market’s implicit judgment is that an all-out financial crisis (possibly involving the IMF) could come before a Le Pen premiership or presidency. But neither is imminent. Even though Bayrou has tried to force the issue, the odds favor yet more infuriating drift in Paris.

Wot, No Federal Reserve?

The Lisa Cook issue continues to roil the financial world, without much upsetting any financial markets. Here’s some reading:

In Bloomberg, the law professor Stephen Carter says the Supreme Court won’t let Trump fire her, the Editorial Board says the stratagem won’t bring mortgage rates down, former New York Fed President Bill Dudley says he’s now worried about Federal Reserve independence, Claudia Sahm (once of the Fed) argues that the central bank needs to get out and explain itself better, and Marcus Ashworth criticizes the Bank of England’s Andrew Bailey for his own language at Jackson Hole. The highly respected John Cochrane writes in his Grumpy Economist newsletter that reasonable criticisms of the Fed’s institutional structure have been made both from the left (including by Senator Elizabeth Warren) and the right (including Trump adviser Steven Miran, freshly nominated to the board). In the New York Times, Jason Furman, former economic adviser to Barack Obama, urges the Senate and Supreme Court to defend the Fed’s independence, while Kate Shaw and Lev Menand, law professors at Penn and Columbia, argue for the court to thwart Trump. Thomas Drechsel of the University of Maryland published a fascinating paper quantifying the negative economic impact of presidential interference with the Fed. The Wall Street Journal’s editorial board — which doesn’t always see eye-to-eye with the publications I’ve cited — says that if Trump takes control of monetary policy, the country will come to regret it.   

That should keep you occupied. It’s a fascinating issue, and while it seems clear to me that the Trump strategy is terribly misguided, everything else soon devolves into nuance and gray areas. 

Survival Tips

Britain in 1976: Prime Minister James Callaghan and Chancellor Dennis Healey. Photographer: Evening Standard/Hulton/Getty

With bailouts for European nations back in the air, I have nasty childhood flashbacks to 1976, when Britain’s Labour government accepted IMF money in return for spending cuts that trashed their agenda and outraged supporters. Since the war, no major economy has been in as much trouble as Britain was in 1976, and the news from Paris makes it seem like yesterday. It also turned out to be the moment when the UK hit bottom and started a recovery (with a lot of help from Margaret Thatcher a few years later). Watching as a nine-year-old not knowing I would spend most of my life as an economic journalist, the drama fascinated me. The thing I miss about the episode, which was a national nightmare, is the way Labour’s leadership, though humbled, spoke honestly and clearly about why they were doing this. They haven’t gone down in history as great economic managers, but they admitted they’d gone wrong, did the right thing even though their supporters hated it, and paid the political price. Wouldn’t it be nice if today’s politicians could do the same. 

More From Bloomberg Opinion

• Bill Dudley: I Wasn’t Very Worried About the Fed. Now I Am.
• Claudia Sahm: The Fed Shouldn’t Take the Political Bait
• Marcus Ashworth: Trash Talk Is the Wrong Language for Central Bankers

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