Below are some of the most interesting things I came across this week. Click here to subscribe to our free weekly newsletter and get this post delivered to your inbox each Saturday morning.
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Reuters reports that there is a lot riding on the AI Bubble: “Tech and AI stocks now comprise over 40% of the S&P 500’s market cap.
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Much of it is leveraged to the two frontier AI labs. As Jared Bernstein writes, “If one or both of the labs gets their lunch eaten by the much-cheaper open source models, then not only will the demand for the hyperscalers’ compute shrink, but their non-operating income from their stakes in the labs will fall meaningfully.”
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And while the hyperscalers have already gone free cash flow negative, even the biggest beneficiary of the AI Bubble may not be benefiting as much as is widely believed. “For the first half of this fiscal year… Nvidia reported free cash flow of $69.9 billion… All told, Nvidia’s free cash flow would have been about $21.7 billion for the period if those cash flows [related to equity option costs] were factored in along with the cash flows related to equity investments,” reports The Wall Street Journal.
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Meanwhile, fixed income is posing the greatest threat to the TINA trade in a very long time. Jim Paulsen writes, “By the end of the 1960s, most everyone believed that stocks would always beat bonds and investors really needed to allocate more toward stocks. Confidence and complacency surrounding the superiority of stocks was extremely high! However, by 1968, despite beating bonds handily for more than two decades, the 10-year bond yield breached 5% for the first time and stock returns would only match long-term bond returns during the next forty years! Is it a bad omen again today for stocks relative to bonds, that after a long absence, the 10-year bond yield has once again recently risen above 5%? Hmmm?”
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In this context, Eric Cinnamond argues, “With interest rates rising across the yield curve and capital needs increasing, we believe policymakers will eventually be forced to choose between inflation and other unattractive alternatives, such as deflation, declining GDP, or default. Based on their past actions during crises, we’re confident they’ll choose inflation. With this cycle’s end game in mind, we are interested in owning hard assets. And with timberland REITs currently shunned by investors, we find the value and inflation-fighting capability of their land compelling.”
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