Capital Perspectives: Market Insights from the Oklahoma Ready Mixed Concrete Association Event

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I had the pleasure of presenting the Market and Economic Update at the Oklahoma Ready Mixed Concrete Association Summer Meeting at Shangri-La Resort on Grand Lake this past weekend. Below are a few presentation takeaways.

I called the 10-year Treasury yield “the key number” because it is effectively the base rate to which risk premiums are applied when valuing other long-term financial assets (e.g., corporate bonds, equities, etc.).

Furthermore, this revenue can be split into two parts:

(1) The average inflation expectation for the subsequent decade, embedded in the prices of Treasury Inflation Protect Securities and

(2) The real yield. Contrary to what many might expect, it is the real yield component that has been pushing nominal 10-year Treasury yields higher in recent years, as this market has never, to any meaningful extent, lost confidence that inflation would return close to the Fed’s 2 percent target.

“Reports of my death have been greatly exaggerated.” I attributed this quote, often associated with Mark Twain, to the US dollar.

Ever since I’ve been in this business, there has been a small but loud warning about the demise of the US dollar in general and its status as a reserve currency in particular. In order to replace the US dollar as the world’s reserve currency, an alternative would have to emerge that offers an improved store of value and medium of exchange. Whether it’s other national currencies, digital currencies, or precious metals, there is currently no serious contender.

Currently, other alternatives may be competitive as a store of value or a medium of exchange, but not both, and more importantly, not on the scale required. Now, at some point, this may become a credible risk. But if it does, it will likely be decades. Meanwhile, the Nominal Broad US Dollar Index has been in a secular bull market since the global financial crisis.

While broad valuation measures are at historic highs, this has been driven largely by a handful of mega-cap technology companies. As a result, despite some “broadening” of the equity rally in recent sessions, the extent to which stocks move together (i.e., correlations) has fallen to historically very low levels.

Since AI chip maker Nvidia is the mega-cap tech company with by far the largest recent share price gain, I discussed it in more detail.

Nvidia’s meteoric rise is consistent with Cisco’s dot-com bubble years. This is of course not a flattering comparison, since we know the dot-com bubble eventually burst. This stock price surge has generated a lot of public interest (e.g., an explosion in web searches for the company), consistent with previous bubbles.

However, and importantly, Nvidia’s forward P/E multiple (per Bloomberg) of 47x, while high relative to the market, is consistent with the company’s normal range over the past 7 years. In contrast, Cisco’s forward P/E multiple exploded from where Nvidia currently sits in the mid-90s to well into the triple digits in the late 90s. As I’ve shared in this space before, it’s not clear to me that Nvidia is representative of a bubble, as many have alleged.

The above highlights are from the Markets section of the report. I plan to cover the Economic conclusions in my next post.

Chas Craig is a Director of CEC Wealth Management (www.cecwm.com).