Circular Financing Worries Surround Nvidia

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00:00It is the first day of December and actually a couple of hours ago we started things looking

00:04pretty bleak. NVIDIA has turned a corner which has kind of changed a little bit the tone but

00:10basically tech lower, crypto lower and we started December in risk off mode. Why?

00:16Yeah I mean we had a really solid rally last week you know on those expectations that the

00:22Federal Reserve will be cutting interest rates in December but as we start off this new week

00:28there's been a turnaround in that sentiment and I think the catalyst for that for me came from

00:33Japan. So we had Bank of Japan Governor Ueda adopting a more hawkish tone really ramping up

00:41sort of expectations for a December rate hike. Now what does this mean and why is it important?

00:47Basically there are concerns now that we might see the unwinding of the carry trade. So that's when we

00:53sort of have institutions, investors borrowing in the low interest yen in order to invest in higher

01:01yielding riskier assets. Now if we're seeing the Bank of Japan raise interest rates, we've got yields

01:07in Japan, 10-year yields at a 17-year high. There is this concern that we're going to start to see

01:11the repatriation of those funds back to Japan. Now this is important because liquidity changes

01:18and those sort of sectors of the market such as crypto, such as tech which are really sensitive

01:25to liquidity are where we're seeing that sort of risk off come through. December historically strong

01:33particularly for technology right and when I was on vacation last week what a week to pick

01:37and we had the Thanksgiving holiday. Circular financing was a factor. NVIDIA in particular weighing on the

01:42index level, you just heard the reporting about how the synopsis NVIDIA deal is not circular financing

01:49to the mind of the leaders of those companies. Do you buy it and how big a factor is that in this

01:54market right now? Really good question. I mean this is front and central I think in a lot of investors

02:01minds at the moment particularly as soon as we hear the name NVIDIA. NVIDIA has been investing in firms

02:06that you know are or will be major customers of its products. So you know that has raised concerns

02:12within sort of the markets and we've seen that play out in previous weeks where NVIDIA really has come

02:19under a lot of pressure. It does feel like that that is sort of starting to turn a little bit of a

02:23corner. Obviously those comments today I think will help a little bit to ease those concerns but at the

02:29end of the day there is this sort of worries surrounding circular financing and they're not going to

02:35disappear overnight and that's because circular financing makes an ecosystem fragile. You know

02:40it just takes one disappointment for the whole loop to fall apart. So I think it is right that the

02:45market does question whether this circular financing could be a problem. Meanwhile Fiona you could think

02:52that these are companies that are strategically thinking of how they can ride extra upside should

02:57the AI wins really come to bear. We're going to be digging into how OpenAI is backing a fund of its own

03:03VC partner that is looking at integrating its technology into portfolio companies into service

03:08companies for example. It wins not only by adoption of its technology but on seeing some equity upside

03:14Fiona. What do you need to see to vindicate that the productivity gains are there?

03:21Yeah this is why it's so difficult because I think sometimes or often if you're in that bubble

03:27and it's falling apart you won't often realize when it's actually too late. So you know I think the

03:34numbers that we've been seeing from Nvidia have been encouraging. You know the latest the reports

03:40earnings report was was extremely positive. There weren't really any faults there. I think this is

03:45just a nervousness that we're seeing. But I think at the end of the day we know that AI technology

03:51is solid. We know that it exists. It's going to increase productivity. There are obviously concerns

03:57over monetization, circular funding, revenue lagging investment. But I think you know longer term

04:02this technology does have a broad use and I think that's why over the longer term this trade is still

04:08one that has upside. You know if we just think about the horizontally automation, R&D, customer service,

04:15vertically different sectors and then infrastructure level as well. So this is a very broad,

04:21broad technology which sort of helps ease those concerns over the bubble fears I guess.

04:28What about crypto?

04:31Yeah crypto. I mean what if every Monday I feel I wake up and something else is happening in crypto.

04:38You know we saw that rejection at that 92,000 just above that 92,000 level which was a pretty key level.

04:45And I think again this is that unwinding or fears over the unwinding of the yen carry

04:50trade. Crypto is very sensitive to liquidity and that fear that there might be a slight reduction

04:56in liquidity if that unwinding of the carry trade happens is what I see pulling on crypto.

05:02Institutional demand is still very weak. You know we saw November ETFs they saw outflows of

05:083.48 billion. So huge outflows. I think second largest, second worst month that we've seen so far.

05:15So that really does need to turn around before we can expect to see any sort of recovery or solid

05:21recovery in the Bitcoin price or crypto prices.

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