I have been looking at markets, and wondering why something like GLD/TLT looks like the SOX. GLT/TLT below.
And here is the SOX.
I know that the macro guys are super bearish. And they are bearish because of credit. We have French CDS.
And we have Coreweave CDS
So the macro view, and why markets are getting pummelled is that the markets are telling France to cut spending or raise taxes, and the market are telling Coreweave to raise equity and cut capex. This signal is so clear, we assume it must happen. So markets look at this signal, and assume deflation/depression. The final nail in the coffin is comparing AI to other build outs.
And this then becomes a no brainer short. AI makes no logical sense, so sell sell sell. And from a macro point of view, it is VERY hard to argue with.
But from a political point of view, I think the railway or dot com comparison is wrong. What we have seen in the Ukraine-Russia war is that AI and Starlink are strategic assets. Modern war, and modern power is build on satellites and compute. I think the better comparison is the build out of nuclear warheads after World War II. At that point, it was not question of how many warheads do we need? But whether we had more than the other guy. In fact Reagan explicitly increased spending to successful bankrupt the USSR.
What markets are saying, in my mind, is the AI spend, and government spend is so much, we would like you to stop. So we are going to raise the cost of capital. But what I see, looking at politics, and reading SpaceX and Meta quarterly results, they are like, we don’t really care what you think - we are going to keep spending. If you like, you can think of AI as defence spending. From that perspective, there is way more spending that could be done. Defence spending used to be 10% of GDP.
From a political point of view, arguing for a AI bust, and deflationary outlook seems mad to me. Now I could be wrong, and this month is saying I am wrong, but my favourite lead indicator, JGBs has tended to move earlier than treasuries for both inflation (yellow circles) and deflation (red circles). It was showing no signs of concern.
Of course bond markets can be stupid, so I also look at Japanese banks, which are extremely sensitive to inflation/deflation pulses. Japanese banks rolling over on a relative basis tends to mark a strong deflation cycle. You could argue maybe there was a topping signal, but hard to see a rollover.
In essence, we are entering a “war period” which means growth is good, and wasteful investment abounds, and capital gets destroyed. This reasoning also explains why copper has not been bothered by AI shenanigans.
If you accept this political reason - then what is going to happen to Coreweave? Well either the US government steps in, or someone buys it. The US still needs more compute, just like it needed that extra nuke. And what about France? Well as the only truly independent nuclear arsenal in Western Europe, I am pretty sure a deal will get cut at some point. I must say I find the political argument far more convincing than the macro argument.
