Silicon Dreams and Tariff Schemes

Thursday, July 10, 2025

Executive Summary

Markets displayed their curious ability to compartmentalise yesterday, cheerfully celebrating NVIDIA's historic $4 trillion valuation whilst studiously ignoring Trump's latest tariff missives. The selective hearing suggests investors have decided growth narratives trump trade theatrics—at least for now. Yet with sentiment indicators flashing warning signs and GPU rental costs deflating, one wonders if this silicon euphoria has legs.

The Trillion-Dollar Question

NVIDIA's ascent to become the first company worth $4 trillion represents either the ultimate vindication of the AI revolution or the most expensive case of collective delusion since tulips. The chip giant's valuation now exceeds the GDP of Germany, yet paradoxically appears reasonably priced on growth metrics—a PEG ratio of 0.94 that would make value investors weep with envy.

The milestone comes as reports emerge of Chinese firms planning to install over 115,000 NVIDIA chips across 39 desert data centres, suggesting demand remains robust despite export restrictions. Yet beneath the euphoria lurks an inconvenient truth: GPU rental costs have tumbled 20% since September, with annualised revenue per H100 chip falling from $25,000 to under $19,000. The "scarcity premium" that justified eye-watering valuations appears to be evaporating faster than morning mist.

Trump's Tariff Tango Continues

The President's latest batch of trade letters—targeting seven more countries with levies ranging from 20% to 30%—was met with market indifference that bordered on insolence. The Philippines faces 20% tariffs, whilst Algeria, Iraq, and Libya contend with 30% rates. Most tellingly, Brazil now confronts a punitive 50% tariff alongside a Section 301 investigation for "attacks on Digital Trade activities."

Markets appear to be pricing in the "TACO trade" (Trump Always Chickens Out), betting that the August 1st deadline will yield negotiated settlements rather than economic warfare. European Commission President von der Leyen's confidence about finalising an EU-US deal "within days" suggests diplomacy may yet triumph over drama. Still, the threat of pharmaceutical tariffs sent a shiver through global supply chains, with Indian exporters particularly vulnerable.

Fixed Income & Currencies: Yield Curve Redemption

Treasury markets experienced a curious rally despite equity exuberance, with the 10-year yield tumbling 8 basis points to 4.34%. The move smacked of short-covering after yields had surged from 4.19% to 4.43% since early July. The $39 billion 10-year auction proved unremarkable—stopping through by 0.3bps with decent demand metrics, though hardly inspiring.

The FOMC minutes revealed a committee as divided as a Brexit dinner party. Whilst "most" members expect rate cuts this year, only "a couple"—likely Governors Waller and Bowman—would consider July action. The revelation that "several" participants believe the current rate may not be far above neutral suggests the Fed's tightening cycle may have run its course, even if timing remains contentious.

The yen's retreat from 147 levels suggests intervention fears remain potent, whilst the euro's softness reflects trade uncertainty. Sterling's resilience comes despite Starmer's tax pledge reaffirmations—perhaps investors appreciate political predictability, however briefly.

Winners and Losers: Silicon Valley's Conquest

Market Dynamics: Euphoria's Expiry Date

Sentiment indicators are flashing warnings that would make a lighthouse keeper nervous. Bespoke's "risk appetite" basket—comprising speculative darlings like DraftKings, Flutter, Coinbase, and Robinhood—closed at records yesterday, having exploded higher since April's tariff-induced nadir. Bitcoin's surge past $112,000 to fresh all-time highs completes the speculative picture.

Key Insight

The homebuilder bubble of the 2000s offers a sobering historical parallel. That episode saw the index triple whilst trailing P/E multiples never exceeded 12x—all bubble, no valuation. Today's AI euphoria follows a similar script: massive price appreciation driven by earnings growth rather than multiple expansion.

Yet warning signs multiply. GPU deflation suggests the scarcity premium that justified astronomical valuations may be dissipating. Amazon's Prime Day stumble—sales down 40% on opening day—hints at consumer fatigue. Even the Federal Reserve's dovish pivot appears priced to perfection, with markets pricing 52 basis points of cuts by December.

Bottom Line

Yesterday's market action epitomised the triumph of narrative over nuance. Investors celebrated NVIDIA's trillion-dollar milestone whilst ignoring the deflationary forces already undermining GPU economics. They shrugged off tariff threats that could reshape global trade patterns. Most tellingly, they embraced risk assets whilst Treasury yields tumbled—a combination that typically signals either supreme confidence or supreme delusion.

The challenge ahead lies in distinguishing between genuine transformation and mere speculation. NVIDIA's achievement is undeniably impressive, yet markets have a curious habit of making heroes out of companies just as their best days pass. Whether $4 trillion represents a foundation or a peak may depend less on artificial intelligence and more on the human intelligence of knowing when enough is enough.

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