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The Information : Nvidia’s Jensen Huang Is on Top of the Wdset, Focused on Relea

Nvidia’s Jensen Huang Is on Top of the World. So Why Is He Worried?

Nvidia’s CEO, mindful of the downfall of onetime hardware giants like Cisco, is aggressively pushing his company into software and cloud services, putting it in competition with its biggest customers.

Around Christmas last year, Nvidia CEO Jensen Huang called a series of meetings with company executives to discuss a growing concern: whether Nvidia’s biggest customers were going to run out of data center space to install its artificial intelligence chips, which could hurt sales, according to someone who attended the meetings.

Huang told colleagues he was worried cloud server providers such as Amazon Web Services and Microsoft, which collectively have been buying about half of Nvidia’s AI server chips in recent quarters, weren’t moving fast enough to set up new data centers and power sources to accommodate the chips they had ordered, known as graphics processing units. After the meetings, Nvidia managers stepped up their pace of asking cloud providers whether they had enough space and electricity to accommodate their orders, according to an employee at Nvidia and several customers and data center operators.

The Takeaway

• Huang has been concerned about whether his biggest customers are moving fast enough to install and generate revenue from Nvidia’s chips
• Nvidia’s effort to dictate how its next chips should be installed in data centers led to a standoff with Microsoft
• Nvidia is designing racks for its next flagship AI chip, potentially pressuring the margins of server makers Dell, HPE and Supermicro

“Nvidia will not ship GPUs unless the customer can certify that they have data center capacity in which to place those GPUs,” said Raul Martynek, CEO of DataBank, a data center provider whose clients include cloud providers.

Huang has become a business rock star and the chief cheerleader of an AI boom that has propelled his microchip firm’s once-in-a-generation growth and profits, lifting its value to the same $3 trillion level enjoyed by both Microsoft and Apple. But behind the glamour and well-deserved victory laps, Huang and his colleagues have also focused on countering the next threat to the business—the likelihood that demand for Nvidia’s chips will eventually slow down.

To guard against that possibility, Nvidia has begun selling more software to AI developers and a year ago even set up its own server rental business, DGX Cloud. That move put it directly into competition with its biggest customers—cloud providers such as Microsoft and AWS. Bizarrely enough, DGX Cloud operates on clusters of Nvidia-powered servers that it leases from those cloud providers. Nvidia then rents the servers to its own customers at a higher cost, promising them better computing performance.

The move has created tensions within the industry. AWS, the biggest cloud provider, initially resisted letting Nvidia carve out its own rival business within AWS data centers. But after all of AWS’ smaller rivals agreed to Nvidia’s terms, AWS relented, saying it would offer DGX cloud with a newer Nvidia AI chip that other cloud providers didn't have yet. AWS also may have been concerned about upsetting a critical supplier at a time when its chips were hard to come by.

Last fall, Nvidia even considered leasing its own data centers for DGX Cloud, according to a person who was involved in those discussions. Such a move would have cut out the cloud providers entirely. Nvidia also recently hired a senior Meta Platforms executive, Alexis Black Bjorlin, to run the cloud business. It isn’t clear whether Nvidia plans to move ahead with its own data centers for DGX Cloud.

As Nvidia takes these steps, its salespeople are going to great lengths to understand what customers are doing with Nvidia’s chips. Among the questions Nvidia’s salespeople are asking cloud providers lately is who their customers are and what kind of commitments they are signing to rent those servers. The answers could help Nvidia plan ahead for sales and could also help it learn about prospective customers for its own cloud server rental business.

While Huang manages these various efforts, he remains conscious of one factor that could affect sales: the fact that big tech companies buying his chips are making a large investment with an uncertain return. Microsoft, Meta, Elon Musk’s xAI and others are using chips to train experimental new AI models, which do not immediately generate revenue. When Meta CEO Mark Zuckerberg acknowledged the uncertainty about revenue in late April, the company’s stock dropped sharply as investors expressed their dissatisfaction with the situation. It’s conceivable investor pressure could prompt some of these companies to pull back on their chip purchases.

At the same time, Microsoft, AWS and other cloud providers have experienced a resurgence of demand for traditional computing workloads, not just AI, so they can’t afford to expand their data centers only to accommodate Nvidia chips, according to two people who work for one of the major cloud providers, as well as executives of several data center operators.

With these issues in mind, Huang has been carefully managing how Nvidia allocates chips so no one company amasses too many of them, colleagues and customers say. He’s also tried to influence how customers assemble GPUs in their data centers, pushing them to follow server-rack designs Nvidia thinks will lead to better computing performance.

But following Nvidia’s suggestions would make it harder for customers to shift to competing chips if they wanted to do so later, according to people at Nvidia and with some of its customers. This has led to periodic stand-offs with a key customer, Microsoft, over how the cloud provider planned to install Nvidia’s forthcoming chips, said a person who has been involved in the talks.

Nvidia also is looking to squeeze as much revenue as it can from the cables, racks and other hardware that connects the servers housing its chips, possibly at the expense of server manufacturers such as Dell that have long made servers with Nvidia chips.

Nvidia's GB200 chip on display at Computex in Taiwan earlier this month. Photo via Getty

‘All of the Leverage’

Nvidia’s revenue from selling software and cloud services is tiny compared to its core server chip business. But in August last year, Chief Financial Officer Colette Kress said the new businesses already were on pace to generate hundreds of millions of dollars annually, and three months later she said that they would finish 2023 on pace to generate more than $1 billion annually, meaning they now contribute about 1% of Nvidia’s total revenue. In contrast, its core server chip business generated $47.5 billion last year.

In May, Nvidia disclosed that it had committed to spend nearly $9 billion on renting cloud servers from its top customers, mainly for internal research and development but also to boost its cloud server rental business. Some customers and former employees believe that business could eventually insulate Nvidia from an inevitable chip downturn and make it more difficult for customers who are renting its servers to pursue alternative chips.

The cloud and software products are “underappreciated by the analysts and technology community” as a business that could generate tens of billions of dollars a year in revenue, said Sasha Ostojic, a former Nvidia executive who is now a partner at venture firm Playground Global. “Nvidia has all of the leverage” it needs to grow services that complement its chips, he said.

On top of being a potentially lucrative revenue stream, DGX Cloud has become a way for Nvidia to help some of its customers transition to its newer-generation chips. For example, software maker ServiceNow, which has historically bought Nvidia servers for its own data centers, now also rents these servers from Nvidia directly.

Last year, when demand for GPUs was “so high, I said, ‘Hey, Jensen, I may need more [servers],’” said C.J. Desai, ServiceNow’s president. Huang told him: “That’s totally fine, but you should be able to burst the capacity into DGX Cloud.”

Desai said ServiceNow’s AI ambitions are “very dependent” on Nvidia’s products, including software introduced earlier this year that helps companies run AI efficiently in their apps. Desai declined to discuss how much his company is spending on the products, but said the amount has been growing and ServiceNow has turned down offers from rival cloud and chip firms because its engineers strongly prefer Nvidia’s “full stack.”

An Nvidia spokesperson declined to make Huang available for an interview for this article. “We prove our value to customers every day. Nvidia offers customers the lowest total cost of ownership, exceptional performance, and innovations at every layer of the stack—from chips to systems to software and algorithms,” the spokesperson said.

Huang’s moves reflect his paranoia as a founder who has survived multiple moments of near doom during the company’s history, including after it went public in 1999. The Christmastime meetings last year, for instance, could merely be part of the formula that has carried the company to great heights—turning its GPUs into the lifeblood of OpenAI, biotech and pharmaceutical firms, quant trading firms and scores of other AI developers.

Jensen Huang shows off Nvidia's next flagship AI chip, Blackwell. Photo via Getty

“There’s no complacency at Nvidia,” said Jeff Herbst, a venture capitalist who spent two decades at Nvidia leading business development and acquisitions until 2021. “You wouldn’t really know whether times are good or times are bad from the tone or the tenor of the meetings.”

‘Taylor Swift for Tech’

Nvidia got its start 31 years ago selling GPUs for PC gaming systems. Huang laid the foundation for Nvidia’s recent ascent in 2006 by launching Compute Unified Device Architecture, a programming language that taps into computing power provided by graphics chips. CUDA saved developers time by automating the process of building applications that harnessed the chips. In recent years CUDA has become a major factor in Nvidia’s sales: Millions of programmers don’t want to bother learning how to program with rival chips.

Nvidia sales began soaring in the 2010s, after AI developers such as Google began utilizing the chips to train large machine-learning models known as deep neural networks. Those AI models helped companies tailor websites and advertisements to individual customers, as well as boosting the accuracy of facial recognition and voice assistants’ ability to recognize people’s voices.

Huang has also had misses, including an audacious effort to develop software, not just chips, for self-driving cars, which involved hiring a substantial team of engineers. The plan didn’t work out. But the company got a boost in 2019 following its $7 billion acquisition of Mellanox Technologies, which gave it a stronger foothold in corporate data centers—locations where its AI chips have increasingly ended up.

“He wants to revolutionize health care, robotics, manufacturing, and in order to do that, he thinks, ‘What do I need to do now to enable that?’” said Umesh Padval, a venture capitalist who was on the board of Mellanox when Nvidia bought it.

OpenAI’s launch of ChatGPT, built using Nvidia chips in Microsoft data centers, sparked a nearly unprecedented boom for the chipmaker. Nearly every major technology firm and countless other developers scrambled for GPUs to develop their own conversational AI and models that generate images and video based on descriptions of what people want to see. Nvidia also has provided capital to scores of those developers, including Mistral, Cohere, Runway, Wayve, Figure and Perplexity. Nvidia’s market capitalization has risen eight times to $3.2 trillion since ChatGPT’s launch, and on June 5 Nvidia briefly overtook Apple as the world’s second most valuable public company.

“If you’re Nvidia, what you really want is this very powerful flywheel of better software services that keep customers in your orbit,” said Aaron Levie, CEO of storage firm Box. “I think that [Huang]’s running that playbook quite well.”

At Computex, the tech industry conference in Taipei the first week of June, throngs of press chased Huang around town. In an indication of Huang’s stardom, a “Jensen Huang food map” illustrating eateries patronized by the black-leather-jacketed executive was hailed online as the hippest Taipei gourmet guide.

“He’s like Taylor Swift, but for tech,” Meta CEO Mark Zuckerberg said on Instagram after posting a photo of himself with Huang in March.

Jensen Huang at Computex in Taiwan earlier this month. Photo via Getty

Though the 61-year-old Huang has soaked up the limelight, he has been managing tricky relationships with companies like Microsoft that are buying Nvidia’s chips while at the same time trying to lessen their reliance on those chips.

Don’t Get ‘Sunned’

There is an inherent vulnerability in the business of selling chips on a one-off basis: As fast as sales have been rising, they could drop as demand inevitably cools off.

For Nvidia, a future without a steady new profit stream might not be pretty: As numerous commentators have pointed out, in 2000, Cisco Systems suddenly became the world’s most valuable company from selling routers at the height of the dot-com bubble, when telecom built new data centers, only to watch those centers go unused as internet-based revenue failed to materialize the way technology executives and investors thought it would. Cisco hasn’t recovered from the sales dropoff it experienced as its hardware became a widely available commodity.

Privately, Huang has told colleagues Nvidia must make sure it doesn’t end up like companies such as Cisco or Sun Microsystems, referring to their quick rise and eventual fall. Sun became a juggernaut in server and computer hardware in the 1990s, but after the bubble burst, the company didn’t capitalize on the burgeoning software market, which Microsoft and others captured. “He tries to remind people not to get ‘Sunned,’” said one Nvidia employee who has heard him say it.

Over the past few months, Nvidia has launched several software products it hopes will diversify its business from hardware. On an earnings call in February, Huang described the business, Nvidia AI Enterprise, as an “operating system for artificial intelligence” that customers would use to train and run AI. Nvidia charges $4,500 per GPU per year for access to the software. “My guess is that every enterprise in the world, every software enterprise company…will run on Nvidia AI Enterprise,” Huang said. “And so this is going to likely be a very significant business over time.” Nvidia has said design software maker Adobe and cybersecurity firm CrowdStrike are among the customers for the system.

“He is not selling chips—he is selling GPUs, software and systems for modern data centers,” Padval said. “People think it is just a GPU company, but it is much more than that.”

Even if the software business doesn’t grow as quickly as Nvidia hopes, it could drive more loyalty to the company’s chips and shield its core business from cheaper competitors down the line—including the AI chips each of the major cloud providers is trying to sell as an alternative to Nvidia’s.

“If you’re Nvidia, what you really want is this very powerful flywheel of better software services that keep customers in your orbit,” said Aaron Levie, CEO of storage firm Box, which rents Nvidia GPUs and resells Nvidia’s software for running AI to its own customers. “I think that [Huang]’s running that playbook quite well.”

Tussling With Microsoft

In yet another effort to generate more hardware revenue, Nvidia is trying to have more influence over how its largest customers buy and install its GPUs. Typically, large cloud providers build their own customer server racks, which they use across their global data centers and for various kinds of chips. But when Nvidia approached customers about its next flagship chip, the GB200, it tried to convince them to buy the rack exactly as it had designed it, according to several people who have been involved in the talks.

Microsoft and Nvidia feuded over the issue for several weeks this year. Andrew Bell, a vice president at Nvidia, asked counterparts at Microsoft to buy a server rack design that was a few inches different in measurement from the racks Microsoft uses in its data centers, according to someone who was involved in the talks. Such a change would hinder Microsoft’s ability to easily switch between different AI chips. Bell said customers who agreed to buy Nvidia’s server rack design could be first in line to receive its new chips, but Microsoft executives demurred.

Microsoft executives had already felt pressured to buy Nvidia’s networking cables, which connect Nvidia servers to each other, because they believed Nvidia would prioritize such purchases over those that involved only its GPUs, according to a former Microsoft executive who was involved in it. Nvidia networking chips and cables accounted for roughly a third of the money Microsoft was spending on Nvidia products as of early 2023, this person said.

The dispute over the server rack design eventually reached the desks of Microsoft Chief Technology Officer Kevin Scott and CEO Satya Nadella, said one of the people who was involved. In the end, Nvidia backed down and agreed to let Microsoft design its own custom racks for the GB200 chips. (Google and AWS are also expected to produce custom racks for GB200s, according to two Nvidia employees.)

Jensen Huang, left, and Microsoft CEO Satya Nadella attend an AI forum in Washington in September 2023. Photo via Getty

But Nvidia may still end up making more money from the GB200 racks smaller customers buy. In a change from prior years, Nvidia this year plans to design and procure the materials for servers and racks that hold GB200 chips before handing them off to the server manufacturers that build and ultimately sell them, according to two Nvidia employees who have been involved in the plan. The change would hurt server makers Dell, HPE and Supermicro, which have predominantly designed such hardware in the past. Those companies generate a higher margin from the racks they design than from using Nvidia’s designs, according to a manager at a major server assembler. (Spokespeople and executives from Dell and Supermicro didn’t respond to written requests for comment. A spokesperson from HPE declined to comment. )

Playing Favorites

As he tries to build new software businesses, Huang is attempting to maximize the growth of hardware sales while ensuring no single customer gets leverage over Nvidia. That might explain last week’s announcement that Oracle, a relatively small cloud server provider, would obtain a large number of Nvidia chips and start renting them out to Microsoft and OpenAI by early next year. Microsoft would have preferred to purchase those chips directly, though one person with knowledge of the deal said it might have struggled to find space and power for that many new chips.

Huang also has maintained a special relationship with CoreWeave, another small cloud provider whose revenue last year soared to hundreds of millions of dollars, up from $25 million in 2022, after it got generous allotments of Nvidia GPUs at the expense of bigger cloud providers. Microsoft also had to rent GPU server capacity from CoreWeave to meet its needs.

To be sure, there’s no imminent risk to Nvidia’s hardware sales. The company has generated $40 billion in free cash flow in the nine months that ended in April thanks to its unrivaled technology, and it says demand for the next flagship chips, due out later this year, are through the roof.

Nvidia’s Kress said in May that purchases of GPUs by governments or government-backed companies would lead to sales in the “high-single-digit billions” this year, implying that the customer segment had plenty of steam left.

Still, the price to rent Nvidia’s H100 chips in the cloud has fallen nearly 30% in the past year, and that could indicate a slowdown is coming, said Dylan Patel, chief analyst at chip research firm SemiAnalysis, which also monitors cloud provider prices. Compared to last year, companies can also more easily rent the chips without committing to multiyear deals with cloud providers, he said.

Another issue: While the biggest technology companies have the expertise to handle Nvidia’s most advanced chips, which require special cooling and other conditions, many startups, multinationals, governments and academic buyers do not, according to some of these customers as well as the companies that do business with them. So as Nvidia flagship H100 chips have become easier to find this year following a prolonged shortage last year, less-sophisticated buyers haven’t been using them the way they are intended—essentially, it’s like they’re driving a Ferrari on slow city streets.

That means as Nvidia chips become more expensive, some of these customers may not want to upgrade. “We’ve found that oftentimes you don’t need the latest generation of Nvidia GPU to get great performance,” said Matthew Prince, CEO of Cloudflare, which operates a cloud service.

The Information : Apple Suspends Work on Next High-End Headset, Focused on Relea

Apple Suspends Work on Next High-End Headset, Focused on Releasing Cheaper Model in Late 2025

The Takeaway

Apple is suspending work on its next high-end Vision headset as sales of the $3,500 Vision Pro slow, focusing instead on releasing a cheaper model by the end of 2025. The shift could spark a similar pullback by competitors building expensive headsets.

Apple has told at least one supplier that it has suspended work on its next high-end Vision headset, an employee at a manufacturer that makes key components for the Vision Pro said. The pullback comes as analysts and supply chain partners have flagged slowing sales of the $3,500 device.

The company is still working on releasing a more affordable Vision product with fewer features before the end of 2025, the person involved in its supply chain and a person involved in the manufacturing of the headsets said. Apple originally planned to divide its Vision line into two models, similar to the standard and Pro versions of the iPhone, according to people involved in its supply chain and former Apple employees who worked on the devices.

Apple’s decision to halt work on the next version of its high-end headset is the latest example of the company reshuffling priorities. Apple has ramped up work on AI-powered features while paring back money-losing projects like its self-driving car, which it canceled earlier this year after spending nearly a decade on development. Augmented reality is one of Apple’s biggest bets. The company aims to eventually replace the iPhone with lightweight glasses, and the Vision Pro is the first step in building consumer and developer interest in that effort.

Although it’s possible that Apple could resume work on a high-end Vision product down the road, suspending development of the next high-end headset for now could have repercussions for the rest of the AR and virtual reality industry, which views the headset as a litmus test of consumer appetite for a premium device. Meta Platforms, for instance, started work in November on a new high-end headset, internally code-named La Jolla, according to multiple current and former Meta employees, five months after Apple announced the Vision Pro. Before that, in January 2023, Meta had axed plans to build a more expensive Quest headset after it saw weak sales of its $1,500 Quest Pro. A Meta spokesperson didn’t reply to a request for comment.

An Apple spokesperson declined to comment.

After the Vision Pro’s U.S. launch in February, independent reviewers criticized its lack of content, poor comfort and limited use cases, while bloggers and columnists have flagged examples of owners that have stopped using the device because of these issues. The device is set for an international launch in countries including China, Japan, Australia and major European countries at the end of June, and Apple earlier this month announced a new version of the Vision Pro operating system to address user complaints and rejuvenate interest in the device.

Even with a looming international launch, one supplier that makes components for the Vision Pro cut production by half in May after receiving a forecast from Apple predicting weaker demand through August. The supplier, which has no competitors, made parts for about 460,000 Vision Pros as of April, one of its employees said, and planned to make enough parts for another 100,000 headsets between May and August. The numbers suggest that Apple has at most produced about half a million units this year and doesn’t expect to make significantly more than that through August.

Apple had been deprioritizing the successor to the high-end Vision Pro for the past year, over time assigning fewer employees to work on the second-generation model, according to one person who worked on the device until earlier this year. Within Apple, the focus last year shifted to reducing the cost of the first-generation model’s components, although development did start on an upgraded Vision Pro display, the person said.

Cutting Costs, Shedding Weight

Apple began work in 2022 on a cheaper Vision product, internally code-named N109, The Information previously reported. The company’s aim is to make this version as affordable as a high-end iPhone, which retails for up to $1,600. At the time it started the work, Apple aimed to release the more affordable product at the end of 2024.

As of earlier this year, Apple still didn’t have a firm prototype of N109, according to a person involved in its manufacturing. And the company has been struggling to find ways to cut the model’s cost without losing too many key features, which means the product could likely slip beyond its revised release date for the end of 2025.

One issue is that Apple wants the more affordable model to keep the Vision Pro’s ultra-high-end displays, which are among the most expensive components in the device, according to the person who worked on it and the people involved in its manufacturing and supply chain. Apple had been working with a Chinese company, Seeya Technology, to produce cheaper displays by next year that could supplant those of Sony, which until now has been the sole supplier of displays for the Vision Pro, those three people said. The person involved in its manufacturing said Seeya has so far struggled to meet Apple’s standards and the effort might fail. MacRumors reported on some of the cheaper model’s features last year, saying it would keep its high-end displays but include fewer cameras, a simpler headband and smaller speakers.

Apple is also trying to make N109 at least one-third lighter than the Vision Pro, according to the person involved in its supply chain. Some users have complained that the Vision Pro, which can weigh as much as 650 grams or 1.43 pounds, is too heavy to wear comfortably for long periods of time.

FT : Swiss regulator finds HSBC violated money laundering rules

Swiss regulator finds HSBC violated money laundering rules

Finma bans bank’s Swiss subsidiary from taking on prominent public figures as clients

Switzerland’s financial regulator has banned HSBC’s Swiss private bank from taking on prominent public figures as clients after finding the lender violated anti-money laundering regulations.

Finma imposed a range of penalties on HSBC’s subsidiary in relation to a case that involved several transactions between 2002 and 2015 in which more than $300mn was transferred between Lebanon and Switzerland.

HSBC failed to notify authorities about the transactions until September 2020, despite closing the accounts down in 2016 because of the risks of maintaining the relationships.

“In its checks, the bank failed to recognise the indications of money laundering presented by these transactions; it likewise failed to satisfy requirements for the initiation and continuation of customer relationships with politically exposed persons, and was thus in serious breach of its due diligence obligations,” Finma said.

As part of the sanctions handed down on Tuesday, Finma ordered HSBC to carry out an anti-money laundering review of all its high-risk relationships and business dealings with prominent public clients, known as politically exposed persons. Finma said the bank could not start new relationships with PEPs until it had completed its review.

Finma and HSBC declined to name the former clients involved in the case.

The Financial Times has previously reported that Switzerland’s attorney-general in 2021 started an investigation into allegations that Lebanon’s central bank governor and his brother embezzled more than $300mn from that institution through transactions to a mysterious offshore company.

In a letter to Lebanese authorities requesting legal assistance in 2021, the attorney-general’s office alleged that Riad Salameh, Lebanon’s central bank governor for 20 years until last summer, and his brother, Raja Salameh, transferred $333mn, from an account at the central bank to a HSBC Switzerland account in the name of “Forry Associates”. The transactions took place between 2002 and 2015.

Hundreds of millions were then funnelled from Forry to Swiss bank accounts controlled by both Salamehs, the investigators alleged in the letter. Finma started enforcement proceedings against HSBC in connection with the Lebanese clients in 2021.

Riad Salameh, who has denied all allegations of misconduct, was charged by prosecutors in Beirut in 2022 with embezzling more than $330mn in public funds. He is also under criminal investigation in Switzerland and seven other jurisdictions, probing allegations of financial crimes. These include France and Germany, which have issued warrants for his arrest.

Raja Salameh told the FT in 2021 that “my integrity has never been questioned. I have always earned my money legitimately.” The brothers did not immediately respond to a request for comment on Tuesday.

HSBC said it planned to appeal against the decision by Finma.

“We acknowledge the matters raised by Finma, which are historic,” the bank said. “HSBC takes its anti-money laundering obligations very seriously including complying with all laws and regulations in every market we operate in.”

The Geneva-based HSBC subsidiary has previously been hit with enforcement actions by Finma after a former IT worker leaked details of thousands of clients, which included details of the bank helping customers evade tax in 2008.

The case led to a criminal inquiry by Geneva’s public prosecutor into suspected “aggravated money laundering” and police raids at the Swiss bank’s headquarters.

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FT : Brussels to chide France over deficit as spending clash looms

Brussels to chide France over deficit as spending clash looms

EU officials fear bigger battle with Paris on budget rules if far right or left take power in election

Brussels is to reprimand France this week for breaching EU budget rules but is already bracing for a potentially far more serious clash with Paris should the far right or left take power.

The European Commission is preparing to open a so-called excessive deficit procedure against France and other countries on Wednesday for breaching the EU’s borrowing limit of an annual 3 per cent of GDP, a move that was largely telegraphed earlier this year.

The procedure is meant to nudge countries in breach to adjust course by requesting that they tighten fiscal policy. Refusal to comply can eventually lead to fines. France ran a deficit of 5.5 per cent in 2023 — the second-highest in the Eurozone after Italy.

The reprimand comes as France hurtles towards snap elections on June 30 and July 7. The far-right Rassemblement National is expected to win, according to opinion polls, with the left-wing alliance coming second. Both the RN and left-wing New Popular Front have made lavish spending pledges, although the RN’s exact commitments are vague.

The commission will follow Wednesday’s rebuke with instructions in the autumn to reduce spending once EU countries have submitted their multi-annual spending plans for review, part of a reformed EU process.

Economists at Bruegel, a think-tank, estimate France will be told to reduce spending by around 0.54 per cent of GDP per year over the next seven years, about €15.7bn in 2024.

Although such cuts this year are equivalent to around a third of France’s defence budget, the measures would be less demanding than what would have been required under the old EU rules.

EU officials doubt that a new French government will stick to the EU’s order to cut spending. The RN and NFP are promising a radical break with Emmanuel Macron’s pro-business economic policies and both have denounced the EU’s budget rules.

“It is a matter of concern because they need savings, and the platform of parties that look set to win are more on the spending side,” said an EU official.

Marine Le Pen fought the 2022 presidential election promising spending increases and tax cuts worth €100bn a year, according to the Institut Montaigne think-tank. The RN has been much more vague in recent days about its plans, but said it would proceed with cutting value tax on energy and fuel, which the government calculated would cost €17bn a year.

The NFP, hastily assembled last week to try to stop a far-right victory, has promised to scrap Macron’s pension reforms, raise public sector salaries, increase housing and youth benefits and cut income tax and social security payments for the less well-off.

The programmes of the RN and NFP were “diametrically opposed” to Brussels’ request to reduce spending, said Lucio Pench, non-resident fellow at Bruegel, and a former commission official on fiscal matters.

“There is a risk of encountering something that we have always wanted to avoid: a head-on collision with a country that would put the commission in a difficult place.”

Silvia Ardagna, chief European economist at Barclays, said EU capitals had learned that it was “better to compromise with the commission than be crazy”. Even if Paris did not meet required spending reductions both sides could then “extend and pretend”.

“Obviously, this requires that whoever gets into government in France also understands this,” she said.

Investors fretting at the prospect of an RN-led government and populist left opposition have already been selling French bonds and equities.

The difference between French and German government bond yields, a measure of relative trust in French debt, has risen to levels unseen since the 2017 presidential election, when Le Pen still advocated scrapping the euro.

French finance minister Bruno Le Maire warned that far-left and far-right spending programmes would make it impossible to service France’s debt, ushering in financial turmoil.

France’s debt ratio, at 110.6 per cent of GDP, is the third-largest in the Eurozone, after Greece and Italy. “With the projects of the far left and the far right, the debt cannot be financed,” he said on Friday.

French Bond Premium Risks Hitting Danger Zone, Candriam CIO Says

(ZH) Consumer Survey Shows Rising Bullishness

Consumer Survey Shows Rising Bullishness

The latest consumer survey data from the New York Federal Reserve had interesting data.

“The New York Fed’s latest consumer survey found that expectations that stocks will be higher in the next 12 months rose from 39% to 41% since last month’s reading. At the same time, inflation expectations dropped slightly. Consumer sentiment numbers have recently highlighted how certain demographics are thriving while others aren’t, but with the market near all-time highs, it’s no surprise that those who own stocks are feeling good.” – Yahoo Finance

The chart below shows the annual change in consumer surveys of higher stock prices. Unsurprisingly, investors have become increasingly exuberant about stock prices in conjunction with the market rally that began in 2022.

However, Yahoo suggests that the rising bullish sentiment in the consumer survey reflects the “haves and have-nots.” That statement is understandable when considering the breakdown of household equity ownership and the finding that the top 10% of households hold 85% of the equities.

However, consumer survey data shows rising stock market prices lifted confidence across age and income brackets. That should be unsurprising given the daily drumbeat of social and mainstream media highlights of the current bullish market.

Furthermore, when looking at the consumer survey data by income bracket, we see that the lowest and middle-income brackets have seen the most prominent advances in confidence.

Given the popularization of the financial markets through trading apps like Robinhood combined with a rising tide of social media commentary, it is unsurprising that lower income brackets have joined the fray hoping to “get rich quick.”

However, a warning is buried in the rising tide of bullish sentiment.

Market Warning In Bullishness

To understand the problem, we must first realize from which capital gains are derived.

“Capital gains from markets are primarily a function of market capitalization, nominal economic growth, plus dividend yield. Using John Hussman’s formula, we can mathematically calculate returns over the next 10-year period as follows:

(1+nominal GDP growth)*(normal market cap to GDP ratio / actual market cap to GDP ratio)^(1/10)-1

Therefore, IF we assume that GDP could maintain 2% annualized growth in the future, with no recessions ever, AND IF current market cap/GDP stays flat at 2.0, AND IF the dividend yield remains at roughly 2%, we get forward returns of:

(1.02)*(1.2/1.5)^(1/10)-1+.02 = -(1.08%)

But there are a “whole lotta ifs” in that assumption. Most importantly, we must also assume the Fed can get inflation to its 2% target, reduce current interest rates, and, as stated, avoid a recession over the next decade.”

Yet, despite these essential fundamental factors, retail investors are again throwing caution to the wind. As shown, household equity ownership has reverted to near-record levels. Historically, such exuberance has been the mark of more important market cycle peaks.

If economic growth reverses, the valuation reduction will be quite detrimental. Again, this has been the case at previous peaks when expectations exceeded economic realities.

Bob Farrell once quipped investors tend to buy the most at the top and the least at the bottom. Such is simply the embodiment of investor behavior over time. Our colleague, Jim Colquitt, previously made an important observation.

“The graph below compares the average investor allocation to equities to S&P 500 future 10-year returns. As we see, the data is very well correlated, lending credence to Bob Farrell’s Rule #5. Note the correlation statistics at the top left of the graph.”

The 10-year forward returns are inverted on the right scale. Such suggests that future returns will revert toward zero over the next decade from current levels of household equity allocations by investors.

The reason is that when investor sentiment is extremely bullish or bearish, such is the point where reversals have occurred. As Sam Stovall, the investment strategist for Standard & Poor’s, once stated:

“If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?”

The only question is what eventually reverses that psychology.

Exuberance Fails With Reality

Unsurprisingly, equity markets are rising currently. Such is particularly the case as expectations for earnings growth have surged, with analysts expecting near 20% annualized growth rates over the next 18 months.

At the same time, corporations have engaged in massive share buyback programs, which have elevated prices and reported earnings per share by lowering the number of shares outstanding.

However, as economic growth slows, profit margins will begin to revert, and disinflation eats into earnings. Profit margins are tied to economic activity.

“Profit margins are probably the most mean-reverting series in finance. And if profit margins do not mean-revert, then something has gone badly wrong with capitalism. If high profits do not attract competition, there is something wrong with the system, and it is not functioning properly.” – Jeremy Grantham

Historically, when the market trades well above actual profits, there has always been a mean-reverting event to realign expectations with economic realities.

Many things can go wrong in the months and quarters ahead. This is particularly true when economic growth and unemployment are slowing.

While the consumer survey is very bullish on the outlook for continuing asset price increases, that sentiment is based on the “hope” that the Fed has everything under control. History suggests there is more than a reasonable chance they don’t.

LEN -2.7%, VTOL -1.2% (guidance), CRMT -0.5%

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>>> US Gapping up

Gapping up
In reaction to earnings/guidance:

LZB +9.8%, PDCO +7.6%, CGNT +3.6%, DTE +1.2% (reaffirms guidance)