Juggling Dynamite

Different cycle, similar Enron-esque financial tricks and behaviours have compounded financial and contagion risks. The segment below connects some important dots.

AI infrastructure is being financed by some of the world’s most conservative pools of capital, including life insurance companies and pension funds. In this video, I examine the risks of AI data center debt, rapidly depreciating GPUs, and whether this could create a financial crisis reminiscent of the 2008 “Big Short.” Here is a direct video link.

Many good observations in this segment. If you have money in the stock market, you should understand what you are betting on.

AI-linked stocks account for a record 45% of the S&P 500’s total market capitalization and drive nearly all of the gains it’s had for the year so far. Note that’s the S&P, the general market. These companies make up an even higher percentage — nearly 70% — of the NASDAQ 100’s market cap. Here is a direct video link.

Also, this one:

There are fresh signs that the AI boom is wobbling. Again. In recent weeks, a much-vaunted AI focused hedge fund run by Valley wunderkind Leopold Aschenbrenner lost $35 billion dollars. South Korea saw its largest-ever stock market collapse as investors pulled bets on AI chips. Due to a fresh series of moratoria and political opposition, the future of the massive data center buildout has never looked more uncertain. The US markets have dipped and boomed, dipped and boomed. Where does all of this leave us? Everybody agrees we are in some kind of a bubble. How big? When will it burst? How? This week, I dive into all these questions with noted AI skeptic, analyst, and industry scapegoat Ed Zitron, the author of the Where’s Your Ed At newsletter and CEO of EZ PR. Here is a direct video link.

Equity valuations are the most inflated since the infamous bubble tops in 2000 and 1929 before that, and far beyond the 2007 and 2022 cycle tops. This is evident below in one of the most historically insightful valuation metrics, the Shiller Price-to-Earnings Ratio (below since 1860).

No one knows how long bubbles will last, and this one has gone on longer than most. But bubbles have always ended in a violent bust that evaporates years and even decades of prior market gains. It has been wisely noted that those who don’t learn from history tend to repeat it, and people at or nearing retirement have much shorter time horizons than widely imagined.

The question for every capital allocator today is: what did you learn from past bear cycles, and how are those insights incorporated into your capital management choices today? Those without evidence of how they have integrated past loss-cycle lessons into their approach are basically flying blind.

Today, retail investors have a record 73% of their financial assets in equities and a record low 7% in bonds. Few have meaningful levels of cash. When the masses are all in on one thesis, something else is bound to happen.

The discussion below is worth a listen, particularly the second half.

Remember, correlations between global equity and credit markets typically go to one during bear markets. They all go down together; it’s a question of how much each drops and how long they take to recover.  Avoiding portfolio losses requires more than a bunch of different marketing wrappers around the same high-risk assets from different countries and sectors.

Richard Bernstein and David Rosenberg reunite to debate the Federal Reserve, inflation, the AI investment boom, market bubbles, gold and the case for international diversification. The former Merrill Lynch colleagues examine whether the Fed should raise rates, how AI CapEx is reshaping the U.S. economy, why credit markets may lead the AI trade, what is driving gold, and where investors may find opportunities outside the mega-cap U.S. market. Here is a direct video link.