Hello my friends. Today is June 27th and this is Markets Weekly. All right, so last week was a pretty eventful week in the markets. We had all sorts of developments on the AI front and the Nasdaq declined by about 4% just the past week. So today, first let's talk about what's happening in tech and secondly, let's talk about something more thematic, that is the rise of the solo entrepreneur based on a study from the payments processor Stripe.

All right, starting with the markets. So as we all know, over the past few weeks we've had a tremendous rally in tech largely due to AI stuff. So the Vanguard, the leader of all this was the Kospi index, the Korean stock market index, which year-to-date has basically doubled. Now, the Kospi's performance is largely driven by two stocks, Samsung and Hynix, two of the world's largest memory producers. One of the things that we realize as we build out data centers throughout the world is that there are certain bottlenecks. And one of the bottlenecks is memory. In order to build a data center, you need a lot of RAM. And it turns out that the world just can't produce RAM, as much RAM as the data centers want. So that means RAM prices have been surging, about quadrupling in two years. And so the companies that sell RAM have been making a lot of money. So Micron in the US, Samsung, Hynix in Korea, they've been doing very, very well. And as a result, their stock prices have surged. But of course, it's not just that, there's tremendous amounts of retail speculation. Remember, leverage and momentum are what drive markets. So there are many anecdotal reports, news reports that in Korea people are taking out all sorts of loans and buying stock on leverage. There are all sorts of new ETFs that allow you to have leveraged exposure to chip stocks and so forth. So that is a big contributor to the massive rally as well.

So looking at the KOSPI index as a leader, this past week it had a pretty big stumble down 10% so limit down earlier in the week. So, that is a big red flag. Is the party over? So, the other big event of course was the release of Micron earnings. Now, Micron is now over now a trillion-dollar company riding the memory boom. So, a lot of people were looking at so Micron earnings on Wednesday seeing whether or not that would reflate the AI trade. Now, Micron delivered and beat. They had a tremendous tremendous quarter making a lot of money, a ridiculous amount of money. And so, after earnings you can see Micron after hours was as high as up 20%. And the NASDAQ overnight was up about 2% but surprisingly though that basically all faded when the markets open. And so, that seemed to be somewhat of a caution sign to many. Now, there's a few developments related to the AI trade that might be contributing to this. Okay, well, first off overarching point and many people have made this is that we are towards the end of the quarter and so there's going to be some quarterly rebalancing by the larger institutional investors say people who want to have a set out allocation to the stocks and set out allocation to bonds. So, as we head into quarter end because stocks have done well, some of these guys are going to have to sell some stock and buy bonds. So, there's a mechanical rebalancing effect that's that's playing in the background as well. That does have an impact.

But, one of the one of the consequences of the tremendous rise in RAM prices is that the companies that sell products that have RAM as an input are being impacted. So, RAM prices again very good for people who sell RAM, not so good for people who consume RAM. So, this past week we also saw Apple notably increase the prices of many of the products that they sell, citing uh the inflation in RAM, forcing them to pass on some of the cost to the consumer. And Apple price Apple stock prices were down 5% on that day, which is for Apple is a pretty notable decline. And in addition, you had many other vendors say I think I believe Microsoft Xbox, uh Nintendo Switch, are all citing that because of components inflation, they're either making adjustments, maybe they're not able to offer as much memory as they would like, or they're raising prices. So, all in all, this is going to have an impact on spending in consumer electronics, whereas consumers maybe they were thinking that they could get a new phone, but because phone prices are higher, maybe they'll use their old phone a a little bit longer. And the same thing for computers and so forth. So, what you see is that although this has been although the huge AI boom is benefiting the RAM producers, for other parts of the tech ecosystem, it's becoming a bit of a headwind.

One other thing I'll add is the idea of an earnings bubble. This is an idea I first heard from Peter Berezan of BCA Research. So, basically, as we all know what a price bubble is, uh prices go up up up and then go down down down, basically forming a V top and uh basically implode bigly. Now, the idea of an earnings bubble is earnings behaving the same way. So, for example, semiconductor earnings going up up up, forming some kind of a V top, and going down down down. Now, we first saw this Well, actually, no, we first saw We saw this during COVID as well. According to uh this graph that Peter put together, during COVID, you also saw an earnings bubble in COVID-related beneficiaries, right? So, at that time, remember there were shortages in all sorts of things, so uh some COVID industries were particularly uh benefiting from the situation, and you saw kind of an earnings bubble there as well, whereas their earnings surged during COVID, but as the pandemic emergency passed, went back down to normal. So, the idea is that the semiconductor earnings boom is something that is basically transitory. Eventually, we'll have enough semiconductors. Eventually, there's going to be competition entering into the field. We already hear many reports of, say, Google or what what not making their own chips. And of course, eventually people like Micron and Samsung, they're going to have their new fabs online producing more RAM chips, and that's going to impact their margins as well. So, from this perspective, the earnings boom in semiconductors is a temporary thing, and it's going to go back down. And what historically happens is that the stock market the stock prices also go back down as well. Something interesting that Peter noted was that a So, some people are waiting for analysts to downgrade earnings before selling the stock. What Peter has found is that historically, uh the stock price declines first, and then the the the downgrades from analysts, when it comes to earnings, come later. So, analysts analysts reportings are a lagging indicator.

Now, in addition to that, though, we also have very interesting information on the open weight model news. So, the way that this is working out, so that there's basically AI is basically just in two regions of the world. There's the United States, and there is uh in China. Now, these two countries are having very different business models for AI. For in the US, it's closed model, so you have Anthropic, you have Gemini, uh you have ChatGPT, OpenAI. So, these guys have closed proprietary models that people pay subscription fees to use. In contrast, in China, there's a lot of open weight models, so models are basically open source. You can download them. You can run them yourself. You can make changes and so forth. It is something that is totally open to the public. Now, the consensus is that the US models are ahead of the Chinese models. We call them frontier models by a few months. But, what happened over the past week or past couple weeks is that people more people have been using the latest open weight models from China and they're discovering that they are really good. In some ways comparable to to the very good US models. Now, of course, the absolute best US models are still a few months ahead. But, GLM 5.2, for example, many people on X, many people who have lots of experience in AI are very impressed by what they can do.

So, that is going to have a big impact on some of the proprietary AI model companies here in the US because that is going to eat into their revenue stream. Another piece of news the past week, of course, is that OpenAI is thinking they're going to push their uh IPO maybe to next year. Maybe that's in part to their economics. Maybe it's in part because Elon with SpaceX has swallowed up so much of the investor enthusiasm. SpaceX, by the way, has is down significantly from its highs. Although, of course, it just started trading recently. Now, in the AI ecosystem, you have all sorts of uh people who are trying to make money, right? The obviously the people who sell the GPUs and the RAM, uh they've been doing a lot doing very well. They sell the picks and shovels to the gold rush. On the other hand, you have these people who sell models. So, like Cloud, for example, based on subscription fees. Now, if the open weight models are very competitive, it is a huge huge challenge to their business model because although the open weight models are not as good as the very best, for most applications, they're going to be good enough. As someone said, you don't need a Nobel laureate to come, you know, do your Excel spreadsheet, right? So, maybe someone who is just, you know, reasonably smart can do it as well. And so, from a cost-savings perspective, people are might want to use open weight models. And in addition to that, there's a very strong privacy aspect as well.

When you use an open weight model when you use a closed-end model like Cloud or ChatGPT, your data goes goes elsewhere. And if you are a company, say you did a law firm with lots of confidentiality concerns, or if you're a medical service provider that has confidentiality patient confidentiality ality concerns, you know, this is not necessarily what the user is, you know, thinking about, but it could just be a regulatory thing as well, whereas the government has all sorts of of laws that protect your data. Now, that's a big concern from a liability perspective, and maybe you would like to have your own proprietary model that you can build at home running open weight models that uses uh that you're comfortable leaving your own data in. And this could be just even if you are a big Fortune 500 company, you have all sorts of trade secrets that you don't want to be out in the ether being sent to um some data massive data center from a third party, you want to keep your data in your own company. Maybe this is a future. And so, this development is going to be a very big threat to the closed AI models. And so, again, these guys who have trillion-dollar valuations at the moment uh might not have them later on depending on how this works out.

Now, another interesting news is that there is increased efficiency developments when it comes to using hardware. Now, so far at the moment, the guys who have big data centers, that's actually a profitable business of renting out compute. Um the model development stuff, it's very expensive. It it may not be super profitable, but so far at least the data center stuff, leasing out compute is a profitable business. Now, one threat to that, of course, is that if the models become more efficient, then there is going to be, structurally speaking, less demand for compute cuz you just don't need as much to do the same thing. And there have been increased developments that suggest that, you know, obviously, technology is something that's very disruptive. You have a lot of people working on this problem. Again, nobody wants to pay so much money for for for RAM and so forth. Maybe if we needed less of it or even less GPU power, maybe that would be maybe that would be uh that'd be profitable, but it would also mean less demand for for compute. Uh there's a few companies that have created GPU leasing indexes to try to capture demand for compute. And as you can see from this one, it does seem that compute, which was has been surging the past few months, is no longer doing that. So, that's something to keep in mind as well.

Now, in addition to all this stuff, I'll also note that we do have some interesting developments just in the global macro front, specifically in rates. So, an interesting thing that I've seen over the past few months is that as oil prices absolutely surged, we priced out rate cuts and we began to price in rate hikes. So, that totally makes sense and is in line with the commentary we received from Fed officials. Now, the interesting thing is that as crude oil has come down and looking at spot oil, it's basically where it was before the Iran war, you have interest rates that continue to remain high. Maybe interest rates are a bit maybe the market is a bit lagging in its thinking, but that that is an interesting divergence and it could possibly speak to uncertainty as to how the Fed is going to react going forward. Now, the market prices in the Fed path of policy based on its understanding of the Fed reaction function. We knew what the Powell Fed thought and if it were still the Powell Fed, I would totally think that we would probably should have rate cuts back on the table Um at least maybe next year not this year but at the moment though we have a new Fed and we have a new Fed chair who is committed to not telling you anything about what he's going to do and so the market I think is a still a bit uncertain to that. One thing that I that really has been catching my attention the past few weeks is that some very connected people that are connected to the treasury have been suggesting that you know the Fed is going to hike and so that may be something that that Kevin is is thinking of doing maybe just to prove his street creds or something like that but again this is a interest rates is a political decision and so if you have super highly connected people kind of floating this out it's something to pay attention to.

Now a consequence of this of course is that the dollar has absolutely surged. Some people would say that the move have has been real rates and this real rate dollar but in this real rate nominal thing it's kind of an artifact due to how inflation is priced in the markets. Now there's not that many people trading inflation and it's kind of an liquid market but in any case just looking at nominal yields they are higher than were before and that seems to be leading to a strengthening of the dollar. Now if you look at the dollar across the many crosses you can see that you know against the yen obviously it's breaking out breaking through that 160 line in the sand that has been so protected surging against the euro against the CAD CAD is going to be weighed down a little bit by low lower oil prices as well but it's also exerting pressure on a lot of quote unquote debasement trades that we talked about earlier in the year. Silver for example remember we made a video on silver when it was going parabolic I went to a local precious metals dealer trying to sell my silver guys telling me that they just couldn't buy it because they were overflowing. And so that was only a few months ago and now look look at where it is. Now, gold of course imploding as well. Again, once you fall below that 200-day moving average, a lot of people have to change how they view the world and that that's that's not good.

And of course, Bitcoin as well declining so much that famous YouTuber TechLead who retired based on his Bitcoin wealth is now making YouTube videos again, which I really appreciate. He's a high IQ person, so I learn from his videos. One of the interesting theories he has in his latest video is that in a world where we have social media and where there's widespread retail involvement, attention attention is a big driver of asset prices. And one of the reasons why Bitcoin prices have been declining is that there's just less attention devoted to it. Over the past couple years, Bitcoin was very visible. Visible. You even had then candidate President Trump showing up and speaking at the Bitcoin conference. And you had a lot of people who got rich off of Bitcoin engaging in a lot of conspicuous consumption. Lambos, mansions, all sorts of people just kind of dancing around on Twitter showing everyone that they were rich because they bought Bitcoin. That drove a lot of attention to Bitcoin and led to a lot of buying. Now, what seems to have occurred is that a lot of people who have been doing this have gotten physical threats. And so, people realize that it's not fashionable to flaunt your Bitcoin wealth. So, a lot of people a lot of Bitcoin influencers have become a lot more quiet about about their wealth. And so, that has led to less focus, less attention devoted to Bitcoin, which of course does not have earnings calls and stuff like that. And so, it seems to have faded into the background and that's weighing on its price. Now, by the same token, the attention has all gone into AI the past few months. And again, that's what people talk about on social media and you have a lot of people making a lot of money off of it and that's what's driving price action. So, I guess that totally makes sense in in a world where, you know, it's just leverage or momentum. And so, maybe things like you know, Google Trends or Instagram really is what's going to drive what the next bubble is.

All right, so that's what we talked about in markets. So, the second thing that I want to talk about again, we're going more thematic on a weekly basis because I think it's more interesting is the rise of the solo entrepreneur. See this, of course, as you all know, I used to have a Substack business. Mostly, I just trade the market now. But I this there is a broader trend in the market backed by data now that we have a change in how work is going to function, I think. And I think this is a durable trend. So, in the US and many countries historically, you know, the path or not historically, okay, for the last generation or two, the path was here that you go to school, you work in a company, and you kind of climb the ladder, and then everything is great, right? You just kind of ride the wave upwards, and that's certainly how the boomers have worked. But I think that's not going to be healthy and to work in the future. What we see from government data and with Stripe data, there's a study written by Ernie, who is the chief economist at Stripe. Stripe is one of the largest payment processors in the US. So, if you have a business, you obviously have need a way to accept credit card payments, and often times that's going to be Stripe. So, they have a lot of data on this.

So, according to their study, what they've noticed is that there's a huge uptick in people business formation for companies that have no employees. So, basically a solo entrepreneur. Now, if you look at this data, you can see that there's a huge surge in business formation around COVID. That's a lot of that is just basically fraud. So, there was PPP loans basically given out to money. About a trillion dollars in money doled out. A lot of it was fraud. It was basically the biggest unaccountable giveaway uh that that has ever happened in the history of this country. So, that accounts for large business formation then. But, recently though, you can see there is another surge. So, business formation has remained high even after PPP loans closed. And according to their data, and you can actually there are ways to kind of tell this out. For example, when you start a business in the US, you ask for an IRS EIN. So, uh basically identification number. And there you indicate whether or not you think you're going to hire employees. So, that's one way to know. So, anyway, based on recent data, big there's a big surge in business formations, and a lot of it is by people who don't have employees. So, people who work for themselves.

So, there is a wave of entrepreneurship going on. And because Stripe is a big payments processor, it can also have a have a sense as to how successful these businesses are. So, if you look at this data from them, you'll see that the cumulative time it takes for these businesses to reach 1 million in cumulative uh payments received, it's shortening every time. So, on one hand, more people are founding businesses, and on the other hand, the quality of these businesses are going higher, or a lot of them are becoming a lot more successful. In addition to this, they have another a data sample that is showing that um just compared to 2019, the amount of these that are actually making serious money, so 3 to 5 million, is actually significantly increasing. Now, this is something that is not just unique to the United States, but it's actually something that's happening all over the world. So, looking at this data set, you can see it's happening in in Euroland, for example, as well. So, more and more people are moving out into entrepreneurship.

Now, this this doesn't necessarily mean that you're writing your Substack, although that is a popular way of doing this. I think one of the most successful Substack ever we just discovered was SemiAnalysis that had 100 million in revenue last year. You know, I actually met its founder Dylan Patel a few years ago at an investment conference and he had a just wonderfully wonderfully done huge huge presentation with satellite photos and those sorts so forth about data centers being built all around the world and at that time I was like, who cares about this stuff? Little did I know it was it would be the future. But in any case, there are people like him and of course people like Citrini very successful people who have Substack, but it's not just that. You can have for example online drop shipping businesses YouTube channels, content creators and so forth. Again, a lot of people are making living off YouTube. It's difficult, but there are a lot of success stories through ads and so forth.

So this is a growing field and I think a lot of it is driven by the fact that the traditional path just doesn't work very well for most people. If you are talented and ambitious, like you go into a generic corporation. So one thing is that there's just not a lot of space for growth because a lot of the boomers are living longer and working longer and so they don't retire and because they don't retire there's just no space to advance for someone who is young and ambitious. And of course the DEI constraints are very real as well. If you are a white guy or an Asian guy, you will face very overt discrimination in hiring because they have their DEI quotas. So for a lot of people the best way to have success professionally is to be able to strike it out on your own. And you also have a lot of changes in technology now that allow that to happen.

So for example when I was building my Substack, we have changes in technology such that I can accept credit card payments throughout the world. That's Stripe, good service that they offer. But it's also this ecosystem of just know being able to set up a paywall, having a distribution email list serve that can reliably send emails. These are all tools that are readily available to anyone. Now, in addition to that, you also have AI that's able to do a lot of other stuff, right? So, if you wanted to strip data, if you wanted to do basic research, just asking the AI could get you really far. And compliance stuff as well. So, there's payroll, all this stuff can is a lot more available to people as standalone solutions than they were in the past. So, this trend for solo entrepreneurship, I think it's a growing thing, and it's probably going to be very disruptive. It's always going to be great for people who for people who are smart and motivated, but I think it's going to be actually quite disruptive for the rest of the economy.

So, I remember a few weeks ago you had the earnings call from Accenture, and they were down hugely that one day, maybe like 20% or something like that. And that is that these professional service firms that traditionally would be farming out these solo solo entrepreneurs are just basically going to be facing more competition. If you are a lawyer, for example, you could start your own law firm at much lower cost, have AI do more legal research, draft contracts, and so forth. And you're going to be able to charge lower fees and provide a comparable product. And for a lot of businesses, that's attractive. That's pretty pretty attractive. So, the profit margins of these bigger companies are going to go lower, it seems. And that's going to be There's going to be more profit given to labor, but it is a world where I think there is more opportunity, but you will going to have to hustle a little bit more, which is going to be great for for many motivated people. So, I think I really think that's an exciting time to um to be an entrepreneur and to be able to create things. So, looking forward more to how this is going to evolve. And um that's all I prepared for today. That's thanks so much for tuning in. Talk to you guys next week.