Capex

An acute shortage of AI hardware will support tech stocks into year-end. However, AI companies may need to ultimately generate $10 trillion per year in revenue to justify their capex. Barring a massive increase in productivity growth, this will be very difficult to achieve. Despite today’s Treasury announcement of upsized buyback operations, bond yields are likely to remain elevated over the coming months. Rising crack spreads have reduced the demand for crude, which is not encouraging for global growth. On the FX front, recent intervention to support the yen will probably be insufficient, but there is significant long-term upside for the currency.

China does not produce too much. It spends too little. The only viable way for China to reduce investment without raising unemployment is by lowering national savings. Doing so is likely to be politically challenging, however. This suggests that China will suffer from subpar growth and deflationary pressures for the foreseeable future.

Investors have remained very skeptical about the profitability of the AI buildout. However, this earnings season the ROI has begun to show up, giving the bull market a green light to go higher. Remain overweight equities and continue to favor the hyperscalers.

The AI boom will increase inflation in the near term and could also raise it over the long term. The Fed’s reluctance to hike rates is understandable, but it risks amplifying what may already be a brewing stock market bubble. 

The global economy has weathered the oil shock reasonably well so far. However, the risk of a recession will increase meaningfully if the Strait of Hormuz remains closed into June.