Which Way Wednesday – CPI Reflects July’s Pause in the War – So What?

Jim Chanos agrees with me:  

Jim was also one of the few people who agreed with me in 2006 that the Real Estate/Mortgage bubble was about to collapse and we were right then – only we were two years early! That’s the trick I’ve been discussing with out Members this week – if we want to keep playing the last bits of the rally – we have to accept the idea that we are very much risking a 10% drop in our portfolios. No realistic amount of hedging is going to protect us from that reality…

That’s fine as long as we think we can make more than 10% if the market doesn’t drop and we’ve had two consecutive 10%+ months in a row for our portfolios – so we only need another month but it’s VERY IMPORTANT to keep in mind – these excess gains are also our hedge!  

As I teach our Members, Jim Chanos has 40 stocks in his multi-Billion Dollar fund, not 400 – running a successful portfolio is about quality, not quantity and you can hear from the interview that, like us, he’s always looking forward to see if he needs to adjust his mix.  Here are the key takeaways from the interview:

• • This is NOT a “short AI” call. Chanos runs a hedged 40-name book, not a directional short. His argument is relative-value dispersion — long the profitable chokepoints, short the capital-intensive derivative infrastructure.

  • The core analytical claim is a duration mismatch: operators sign 1-2 year spot-priced contracts at 20-25% implied returns, then build 20-year physical assets on that assumption. He calls it “terrifying.”

  • The headline data point: hyperscaler ROIIC has collapsed from ~40% eighteen months ago to ~20% today, could hit ~10% within a year if capex continues. Oracle is already the weakest cohort member — its stock is down 65-70% from peak.

  • The “Construction in Progress” accounting trick: GPUs that have arrived but aren’t plugged in sit in a PP&E sub-account and don’t depreciate for up to 18 months — inflating reported earnings while economic/technological obsolescence runs.

  • The “Nvidia ceiling” rule: no company dependent on Nvidia to exist should trade at a higher multiple than Nvidia. Micron ($100 → $1,250 peak → $950 on assumed 80% margins despite negative gross margins 3 years earlier) is the flagged violator.

  • Power is NOT the bottleneck bulls think — it’s 5-6% of data-center revenue and transmission/permitting resolves in 2-3 years.

  • Nebius pivoted to an “asset-light” model on the taping day after two years of selling investors on GPU ownership — Chanos ($4.40 of capex per $1 of revenue) reads this as insiders repricing before the market.

  • Chanos is careful to say the AI models themselves are “the magic“ — his critique is aimed at financing and accounting, not technology.

So anyway, this is not a doom and gloom perspective from either of us but we’re all riding on a road with dangerous curves at high speeds and it is PRUDENT to be aware of the dangers – and the LIMITATIONS – that lie ahead – or we are going to crash!

This morning, for instance, we’re getting the CPI report for July but July was two weeks ago already and there was a pause in the war into July that is unwinding now – as you can see from the Oil chart:  

Oil actually averaged $80 in June and July – on the way down in June and back up in July and we’re starting August averaging $80 too but what really matters is the slow, steady erosion of our Strategic Petroleum Reserve, which is the mechanism the Government has been using to lessen the impact of 10-20% of the World’s oil failing to come out of the Strait for what is now going on 6 months of our two-week war. 

THAT matters but, like most slow-moving disasters (Aging Population, Global Warming, Water Shortages…) traders act like frogs in slowly boiling water – just swimming along without a care in the world until “suddenly” it’s a disaster – and also far too later to get out. 

• Pimco’s Seidner Says Angst Over Fed Credibility Is Unwarranted – Why? Because Pimco holds $2,330,000,000,000 worth of bonds, mostly at 3% or less and as rates rise for newly issued bonds (over $2Tn this quarter!), their bonds become less valuable – that’s why!  

• For almost 20 years, Pimco has been buying bonds in the 120-130 range and, in 2023 they went all the way down to 105 – call it a 20% loss on $2Tn and we recovered a bit but now falling back to 105 and who’s to say that will hold with the US rocking a $2.5Tn deficit while Hegseth says he needs another Trillion and we’re already past the $40Tn mark in overall debt which is MOSTLY short-term at 2.5% ($1Tn in interest) but if the average moves to 5% (and the Fed Funds Rate is 3.675% currently) then we are on the hook for $2 TRILLION in annual interest payments alone!  

None of this is news, we’re just swimming around and the water is getting hotter and hotter – Jim Chanos and I are just telling you it will soon be time to jump out before you’re boiled to death!  

13 years ago:

And now we’re twice as much in debt and out of missiles!