Nvidia versus national budgets: When technology overtakes governments

On Tuesday, the head of the US Federal Reserve gave his speech. Anyone expecting to hear anything significant was disappointed. Jerome Powell currently comes across as a hesitant person who does not know where he is heading. Interest rates should be lowered, but not too much. Inflation remains dangerous, but not so much that an interest rate hike is necessary. The labor market is weakening, but not so much that America needs to expect a recession. In other words, Powell admits that he does not know where the markets are headed. The situation is unclear.

His speech only confirms that if you want to understand the situation on the markets today, you cannot rely too much on rational considerations, otherwise you will quickly lose your way – as the Fed chairman is doing now. On the other hand, it can be liberating to admit that we do not know where the markets are heading. For long-term investors, this situation is a test of patience, because under the current circumstances, it is best to wait and see and only invest when the situation is clearer.

Trump against everyone

Donald Trump gave a speech at the UN that could be described as “against everyone.” He criticized migration and climate change and, of course, did not fail to praise himself.

For investors, his U-turn on Russia was interesting. Among other things, Trump made it clear in a post on his social network that the peace negotiations are over for now and that he will continue to support Ukraine. More specifically, he will continue to sell weapons to NATO countries, which will pass them on to Ukraine.

Although supporters of aid to Ukraine interpreted this as a return of the US to the game, Trump is in fact seeking to leave the conflict to Europe. His main interest is in the continued purchase of American weapons. Shares in arms companies are likely to continue to perform well under Trump.

The second important announcement, to which the oil market responded with a rise, was the strong pressure on Russia. Trump clearly called on Europe to become independent of Russian oil and gas. Currently, there are only two countries that purchase oil directly from Russia: Hungary and Slovakia. Although Trump earned praise in liberal circles for his attack on the Russian economy, in reality he is only fiercely defending the interests of the American oil industry. Investors know this, which is why American oil producers' shares responded to his statement with a significant rise.

Nvidia's huge investment plans

Fortunately, in a week when no important macroeconomic data or corporate results were scheduled, Nvidia came up with some big news. This meant that the market did not have to focus solely on political figures such as Powell and Trump.

Nvidia announced the signing of a cooperation agreement with OpenAI. The company plans to invest more than $100 billion in the construction of a data center with a minimum capacity of 10 gigawatts. These are enormous sums and ambitious plans. To illustrate: this amount far exceeds the annual budget of Slovakia. Large multinational technology giants have resources that exceed the budgets of most smaller countries. Nvidia not only wants to support OpenAI financially, but also supply the chips needed to build this data center.

The new contract comes just days after Nvidia announced an investment in Intel. By joining Intel, the company becomes a strategic partner of the US government, which also has a stake in the company. Nvidia is no longer just a chip manufacturer, but also an important player in both technology and geopolitics.

Nvidia's shares responded to the news of the investment in OpenAI with a slight increase, but this is not particularly significant. What is important is that the company has adapted excellently to the spirit of the times. From a former manufacturer of graphics cards for the gaming industry and cryptocurrency miners, Nvidia has jumped on the artificial intelligence bandwagon.

It has not stood still and does not want to remain just a chip manufacturer. By investing in OpenAI, it is gradually gaining influence in the most visible part of artificial intelligence – ChatGPT, which now has 700 million active users. Nvidia is therefore not only investing the funds it has earned in improving its chips, but is also building up an entire network of companies and services related to artificial intelligence.

In the future, it will not have to limit itself to manufacturing semiconductors, but will also be able to offer its own services. The potential for further dynamic growth is obvious here. Even though Nvidia's shares are expensive, the management's strategy makes the price reasonable.

How long will the optimistic growth of the financial markets continue?

Developments surrounding Nvidia and other technology giants such as Oracle and Broadcom give reason to hope that the US markets will continue to grow. However, the growth of technology stocks seems to be a smokescreen suggesting that everything is fine, which is not the case. The main problem remains the enormous government deficits. It is now crucial to keep an eye on the US bond market.

If yields rise despite the prospect of further interest rate cuts, it means that the bond market does not believe that the Fed can change the situation through interest rate cuts alone. Not only the US Federal Reserve, but also President Trump faces challenges.

The US financial data for August revealed an interesting finding: customs revenues amounted to a record-breaking $29.5 billion. So tariffs work, but there is a big “but.”

The government deficit amounted to $345 billion in August, which is an improvement over the $380 billion of the previous year, but still not enough. To offset the budget deficit, tariffs would have to increase more than elevenfold.

To illustrate: the $345 billion deficit is roughly equivalent to the annual budget of countries such as Sweden or Norway. The sustainability of US government debt could therefore be an issue that could take the wind out of the markets' sails at any time.