Ruseel, when you say stablecoins help people to get away from treasuries, can you walk through the logic. i mean, by law, it is required to be backed by USTs, one to one.
Russell, Excellent Note. My question: Would not short US equities be the best play given the following factors:
1) According to the BBG Terminal, if one looks at the combination of forward looking P/E, trailing P/E, FWD EV/EBITDA, P/B, CAPE, P/S, Q Ratio, and Market Cap to GDP, the overall stock market is at the 100th percentile in valuation (higher than 1929, 1965 and 1999.
2) Credit spreads have never been tighter. In addition, the hyperscalers FCF yields have fallen so low it is limiting their ability to maintain their share buyback rate and they are now even turning to Private Credit/Equity to aid in financing the Data Center buildout. META, while not a pure hyperscaler has seen their cash on the balance sheet shrink by 40% ($30 Billion) in the last two quarters.) According a recent Bloomberg article, the amount of CMBS backed by AI infrastructure is already up 30%, and accelerating. While still smaller and perhaps early - The CDO's of the GFC??
4) I total agree with you that Treasury Rates are going much higher.
5) Combine, 3) & 4) and you have the WACC spiking at a time of all-time high historical valuations (see 1) above), record profit margins and the D,D & A and compensation expenses related to the AI just starting to run though the income statement without a corresponding income impact.
He has been an AI Skeptic (with regard to LLMs/LRM's - which every single AI player is betting the farm on for AI) for the 2.5 years I have read him. While a tad arrogant, Gary has been absolutely dead right at every turn. He is a former professor of computer science and has written some well known books on AI. He is hated by the industry becase he is a loud skeptic who has been completely correct on AI. If you can read anything on Substack regarding AI, IMHO, this is the note to read. It will make you think more about the legitimacy of AI as a business model than anything you have ever read or heard before. I could not more strongly recommend you read Gary Marcus Substack Note. Perhaps you get it for free given you are an author on Substack? If not, it is only an $80 annual fee and this one Substack note is worth the entire price. I posted the entire note in my OneNote folder it was that good and perhaps I can just send
7) While fully recognizing the risk associated with timing, given 1) - 7), how could short equities not be the best overall way to play your thesis which I am in full agreement with?
I think there will be excellent single stock opportunities - but a generalised fall in the S&P500 will be difficult to get as I see the Trump administration being very happy to tank the US dollar and spend as much as it needs to do get growth going. That is why I showed what the Turkish index. In an inflationary environment money flows from bonds to equities and hard assets. In REAL terms, US equities look very bad. In nominal terms - might be okay.
Let me give you a real life example. Back in 2008, I was very bearish on the Baltic states - I thought they would break their currency pegs, and have a Asian financial crisis style meltdown. I shorted Swedish banks to get exposure - and they tanked. One day I was looking at my fund NAV as the Swedish banks collapsed, and my dollar NAV was not going up. I asked the CFO and he said the problem was that the Swedish Krona was falling as fast as the banks, and my profits from shorting were in Swedish Krona. I was losing on currency as quick as I was making in shorting. Does that make sense?
So if the US is toast, and its currency is also toast, exporters to the US make more sense. This has played out already to a degree - see European luxury stocks, Orsted or Novo Nordisk.
In essence, I am saying the US dollar is a better short than S&P 500... when you look at gold or Swiss Franc - has proven to be the case.
Another problem I have with US equities is that they are not following earnings as closely as they used to. Look at Tesla for example. Market is in a very forgiving mood if they can see future opportunities - even if the financials make no sense
Russell thanks for the reply and I do understand where you are coming from, and your points are obviously quite valid and appreciated. Currency analysis has always been a weak spot of mine.
I guess I simplistically see it as the determinants of an investment value are (earnings (FCF is a better measure), growth in earnings/FCF, the risk free rate of capital and the risk premium to get to the discount rate. We are already starting at the highest valuation level in history of markets with rising risk free rates, credit spreads that I have a hard time envisioning going any lower and probably headed significantly higher. With record margins and my strong belief that AI is a failed and negative ROIC business model along with a tapped out consumer and I see EPS plateuing relatively soon and potentially trending down. Apply a higher discount rate on lower absolute earnings and slower or even negative EPS growth at never been higher valuations and the downside in prices are enormous.
If you are telling me the game has changed as investors don't utilize the concepts that drive my investment approach than I would say we are all better off at the blackjack table at a casino. I believe a large segment of the investor base might have some flawed investment concepts/beliefs because The Federal government and Federal Reserve have attempted to repeal the natural business cycle I argue as far back as Long-term Capital Management and the majority of the today's investor base has never even invested in or even lived through (as an adult) a "true" recession or bear market (Covid was a 2-week blip to the markets as the firehoses came out.) These investors have been taught and rewarded to buy each and every dip. IMHO.
The Federal Reserve and Federal Government are now out of bullets and any attempt to repeal the business cycle, large scale bailouts or prolong the bull will only be reflected by higher inflation and higher long rates (discount rates) which also kills stock prices, unless discount rates no longer apply in valuing an investment value. Once the current investor base realizes bailouts are no longer available or don't work anymore and they actually suffer some sustained, enduring pain they will be long gone from the financial markets, and the markets will return to sanity and be driven by the historical drivers (I mentioned above) that have driven markets for centuries (with minor departures.) I seriously think that half of today's investor base does not understand markets and what drives true, underlying investment value (NOT charts, YOLO, FOMO, HODL, etc.,) All they know, if that "ever since I started investing, if I bought every 10-20% dip I was handsomely rewarded."
Lastly, I do no not see AI as an economic business model and I believe you might to a degree. At some point a + ROIC will be demanded by shareholders and the first sign of the a hyperscaler even pulling back a tad on AI capex and this gets ugly really fast. Stranded assets galore, bad debts, and the capex is just starting to be expensed and will be for many years ahead pulling S&P 500 and NDX-100 EPS down and down. When close to 30% of the S&P 500 market capitalization trades at over 10x forward sales (I don't care what the profit margins are as economics will eventually erode the margin to a competitive level) the market is broken, and it will get rectified.
Ruseel, when you say stablecoins help people to get away from treasuries, can you walk through the logic. i mean, by law, it is required to be backed by USTs, one to one.
Russell, Excellent Note. My question: Would not short US equities be the best play given the following factors:
1) According to the BBG Terminal, if one looks at the combination of forward looking P/E, trailing P/E, FWD EV/EBITDA, P/B, CAPE, P/S, Q Ratio, and Market Cap to GDP, the overall stock market is at the 100th percentile in valuation (higher than 1929, 1965 and 1999.
2) Credit spreads have never been tighter. In addition, the hyperscalers FCF yields have fallen so low it is limiting their ability to maintain their share buyback rate and they are now even turning to Private Credit/Equity to aid in financing the Data Center buildout. META, while not a pure hyperscaler has seen their cash on the balance sheet shrink by 40% ($30 Billion) in the last two quarters.) According a recent Bloomberg article, the amount of CMBS backed by AI infrastructure is already up 30%, and accelerating. While still smaller and perhaps early - The CDO's of the GFC??
4) I total agree with you that Treasury Rates are going much higher.
5) Combine, 3) & 4) and you have the WACC spiking at a time of all-time high historical valuations (see 1) above), record profit margins and the D,D & A and compensation expenses related to the AI just starting to run though the income statement without a corresponding income impact.
6) 8-18-25 MIT Research paper showed that 95% of corporate AI users are not generating a positive ROIC: https://mlq.ai/media/quarterly_decks/v0.1_State_of_AI_in_Business_2025_Report.pdf
7) OpenAI's GTP-5 was a total bust. If I can recommend one read on why LLM's/LRM's and AI are a total failed business model, please read the following Substack from Gary Marcus: https://garymarcus.substack.com/p/gpt-5-overdue-overhyped-and-underwhelming?utm_source=post-email-title&publication_id=888615&post_id=170534403&utm_campaign=email-post-title&isFreemail=false&r=1ju42d&triedRedirect=true&utm_medium=email
He has been an AI Skeptic (with regard to LLMs/LRM's - which every single AI player is betting the farm on for AI) for the 2.5 years I have read him. While a tad arrogant, Gary has been absolutely dead right at every turn. He is a former professor of computer science and has written some well known books on AI. He is hated by the industry becase he is a loud skeptic who has been completely correct on AI. If you can read anything on Substack regarding AI, IMHO, this is the note to read. It will make you think more about the legitimacy of AI as a business model than anything you have ever read or heard before. I could not more strongly recommend you read Gary Marcus Substack Note. Perhaps you get it for free given you are an author on Substack? If not, it is only an $80 annual fee and this one Substack note is worth the entire price. I posted the entire note in my OneNote folder it was that good and perhaps I can just send
7) While fully recognizing the risk associated with timing, given 1) - 7), how could short equities not be the best overall way to play your thesis which I am in full agreement with?
I think there will be excellent single stock opportunities - but a generalised fall in the S&P500 will be difficult to get as I see the Trump administration being very happy to tank the US dollar and spend as much as it needs to do get growth going. That is why I showed what the Turkish index. In an inflationary environment money flows from bonds to equities and hard assets. In REAL terms, US equities look very bad. In nominal terms - might be okay.
Let me give you a real life example. Back in 2008, I was very bearish on the Baltic states - I thought they would break their currency pegs, and have a Asian financial crisis style meltdown. I shorted Swedish banks to get exposure - and they tanked. One day I was looking at my fund NAV as the Swedish banks collapsed, and my dollar NAV was not going up. I asked the CFO and he said the problem was that the Swedish Krona was falling as fast as the banks, and my profits from shorting were in Swedish Krona. I was losing on currency as quick as I was making in shorting. Does that make sense?
So if the US is toast, and its currency is also toast, exporters to the US make more sense. This has played out already to a degree - see European luxury stocks, Orsted or Novo Nordisk.
In essence, I am saying the US dollar is a better short than S&P 500... when you look at gold or Swiss Franc - has proven to be the case.
Another problem I have with US equities is that they are not following earnings as closely as they used to. Look at Tesla for example. Market is in a very forgiving mood if they can see future opportunities - even if the financials make no sense
Does that make sense?
Russell
Russell thanks for the reply and I do understand where you are coming from, and your points are obviously quite valid and appreciated. Currency analysis has always been a weak spot of mine.
I guess I simplistically see it as the determinants of an investment value are (earnings (FCF is a better measure), growth in earnings/FCF, the risk free rate of capital and the risk premium to get to the discount rate. We are already starting at the highest valuation level in history of markets with rising risk free rates, credit spreads that I have a hard time envisioning going any lower and probably headed significantly higher. With record margins and my strong belief that AI is a failed and negative ROIC business model along with a tapped out consumer and I see EPS plateuing relatively soon and potentially trending down. Apply a higher discount rate on lower absolute earnings and slower or even negative EPS growth at never been higher valuations and the downside in prices are enormous.
If you are telling me the game has changed as investors don't utilize the concepts that drive my investment approach than I would say we are all better off at the blackjack table at a casino. I believe a large segment of the investor base might have some flawed investment concepts/beliefs because The Federal government and Federal Reserve have attempted to repeal the natural business cycle I argue as far back as Long-term Capital Management and the majority of the today's investor base has never even invested in or even lived through (as an adult) a "true" recession or bear market (Covid was a 2-week blip to the markets as the firehoses came out.) These investors have been taught and rewarded to buy each and every dip. IMHO.
The Federal Reserve and Federal Government are now out of bullets and any attempt to repeal the business cycle, large scale bailouts or prolong the bull will only be reflected by higher inflation and higher long rates (discount rates) which also kills stock prices, unless discount rates no longer apply in valuing an investment value. Once the current investor base realizes bailouts are no longer available or don't work anymore and they actually suffer some sustained, enduring pain they will be long gone from the financial markets, and the markets will return to sanity and be driven by the historical drivers (I mentioned above) that have driven markets for centuries (with minor departures.) I seriously think that half of today's investor base does not understand markets and what drives true, underlying investment value (NOT charts, YOLO, FOMO, HODL, etc.,) All they know, if that "ever since I started investing, if I bought every 10-20% dip I was handsomely rewarded."
Lastly, I do no not see AI as an economic business model and I believe you might to a degree. At some point a + ROIC will be demanded by shareholders and the first sign of the a hyperscaler even pulling back a tad on AI capex and this gets ugly really fast. Stranded assets galore, bad debts, and the capex is just starting to be expensed and will be for many years ahead pulling S&P 500 and NDX-100 EPS down and down. When close to 30% of the S&P 500 market capitalization trades at over 10x forward sales (I don't care what the profit margins are as economics will eventually erode the margin to a competitive level) the market is broken, and it will get rectified.
My take is that every nation is going to run it hot, we are just ahead of the curve
Yes - seems likely. Except maybe the Swiss and the Chinese....