This Still Looks Too Much Like 1999
Market divergence
I just do not see why everything is rallying as if nothing can go wrong, while people keep telling me this is not 1999.
You have massive CapEx, massive depreciation extension, lots of SBC concerns, and lots of accounting gimmicks. I get it. You are saying this is an AI supercycle, but if you think about the potential pillars supporting the current economy, they look extremely fragile.
You have an oil market that could potentially get short squeezed after SPR releases drain the buffer within one to two months. You have a potential hiking cycle from the Federal Reserve, and possibly by other central banks across the world. You have very shaky earnings expectations and momentum, while consumer sentiment has dropped to historically low levels. So where is the cash going to come from? Who is going to consume? Who is going to push the economy forward?
A narrow labor market
We have a labor market that is mostly about healthcare and shelter-related services. There is nothing else. Everything else is saturating, while we are also facing the structural pressure of a massive aging population.
I get it. You have tax refunds. I get it. You have the TGA. I get it. You have potential stimulus checks during the midterm election. I get it. You have animal spirits. But I just do not understand the divergence between the equity market and the rest of the asset classes in the world. I just do not see how this is going to happen. In every aspect of it, I do not see how this differs from the dot-com bubble.
Neocloud and memory risk
Neocloud is essentially selling its electricity deal. It is never about the service it provides or how well it manages GPUs. It is just a pure electricity deal they have for mining Bitcoin. In 2000, memory stocks had a similar run, or maybe not exactly in 2000, where they fell into something like a commodity cycle. When memory chips are in high demand, companies announce massive expansions in CapEx spending. This means that if you are a data center or AI company, you are buying this raw material at the highest price, because after a year or two, once that capacity has expanded, the price will be lower.
Yet I see Micron and SanDisk share prices already reflecting a full-year expectation of strong momentum in earnings growth. This is getting out of hand, because every memory company is now announcing that it will expand capacity by spending more on CapEx. So why are people paying so much for earnings expectations already? I do not know.
AI economics
AI itself is not a sustainable business model. Every query you send costs money. The cost to generate it exceeds the revenue it generates, unless they switch from a subscription-based model to a token consumption model. But once they switch to that, corporations may not use it because the expense would be too high.
I do not know which phase we are really in right now. I just see everything rallying. Again, like I said, I get it. We had two to three cuts last year. We have tax refunds. We have OBBBA. We have lots and lots of stimulus policies. But unfortunately, I do not think the economy can be sustained just by healthcare and shelter-related services growth in the labor market, while financial conditions remain tight. You cannot live through this by just printing a ton more money.
Eventually, if this continues with the oil crisis, we are going to see a massive short squeeze. We are going to see lots of volatility. We are going to see a bond market crash. I hate to say it because it goes against my previous trade, where I was really long ZQ as a short-term rate bet, but I just do not see how the long end of the debt market is going to see yields move lower.
Adjusted everything
The midterm election is going to be an inflection point. I do not see how this is going to end. Everything now, when you look at earnings, is all about adjusted EPS and adjusted EBITDA. Everything is adjusted. When you look at neocloud cash flows, they recognize deferred revenue as current cash flow. That makes it seem like they are able to sustain and repay their debt. But when you look under the hood, you see the interest rate they are paying, the amount of debt they have, and the amount of dilution they are putting into the market.
I get it. This is a very resilient economy. I get it. You are not going to have a high unemployment breakeven because of population shifts and mass deportation. I get it. Passive investing now dominates the market through the 401(k) system. However, I think when we reach the point where stimulus policy no longer works for the equity market, that is where the market could break, and it could break hard.
Trigger points
Essentially, I think the trigger point will be consumer sentiment continuing to go extremely low, and either a hiking cycle or a bond market crash. I think if any two of these three conditions are met, we are going to see a big correction.
We already live in an economy where, if you exclude healthcare, shelter-related services, and AI CapEx, GDP has been in negative growth for more than one year. We are technically in a recession if not for this AI CapEx boom. Yet we still have not seen revenue being realized. We still have not seen major improvement in these AI models at the application level. Everyone is chasing the supply side of it, from copper to materials to everything else.
I just cannot see it. And if you look at the rest of the stock market, excluding AI and high-growth names, they are getting beaten badly. I think this is really toxic. This could go on longer than anyone expects, but I think a lot of the characteristics now resemble the 2000 dot-com bubble.