Great post! Perhaps this is a bit forward looking but regarding section 2 & 3 (AI capex and credit demand, specifically IG), do you think we'll face a bit of a 'crowded exit' problem in credit markets, especially in/around tech later this year (a lá silver + gold liquidity events)?
Edit: mainly asking as you spoke on bifurcation of tech valuations - which I also highlighted in my latest (very long) piece on AI inference and who will capture value as inference costs drop.
It's hard to see something similar happening in credit, simply because there has been no wave of "buying in" by credit investors. Most of the AI names have limited debt, particularly relative to their overall enterprise value. And where they have issued, names such as MSFT/ GOOGL/ META/ AMZN were generally well recieved because there are relatively few, well rated non-financial issuers. This is unlike equity where investors have ended up with very concentrated exposure to AI megacaps by default.
Historically problems in credit build up gradually over time, followed by a sharp re-pricing when credit risk was re-racked. This is what happened with REITs - years of supply, then a sharp move in interest rates that fundamentally changed their credit risk. The odd thing about the AI cycle, is that Tech credit has started widening before the issuance - in anticipation of supply. So there aren't really many positions that need to be exited.
ORCL is the notable exception in the sense that it was already a large issuer and there has been concern about a possible downgrade to High Yield which would force certain investors to exit (if they haven't already).
Excellent synthesis of January's chaos. The observation about rolling mini-bubbles from crypto to AI stocks to precious metals is spot-on. What's interesting is how each asset class absorbs excess liquidity untill it hits that inflection point. I watched the gold selloff and it felt like classic late-stage speculative behavior where everyone knows its overheated but nobody wants to exit first.
For me it was Silver - the thought process of "I want to chase gold, but I'm scared" was pretty tangible. Not impossible it bounces up again at some point but the volatility is higher than the expected returns in my opinion.
Great post! Perhaps this is a bit forward looking but regarding section 2 & 3 (AI capex and credit demand, specifically IG), do you think we'll face a bit of a 'crowded exit' problem in credit markets, especially in/around tech later this year (a lá silver + gold liquidity events)?
Edit: mainly asking as you spoke on bifurcation of tech valuations - which I also highlighted in my latest (very long) piece on AI inference and who will capture value as inference costs drop.
It's hard to see something similar happening in credit, simply because there has been no wave of "buying in" by credit investors. Most of the AI names have limited debt, particularly relative to their overall enterprise value. And where they have issued, names such as MSFT/ GOOGL/ META/ AMZN were generally well recieved because there are relatively few, well rated non-financial issuers. This is unlike equity where investors have ended up with very concentrated exposure to AI megacaps by default.
Historically problems in credit build up gradually over time, followed by a sharp re-pricing when credit risk was re-racked. This is what happened with REITs - years of supply, then a sharp move in interest rates that fundamentally changed their credit risk. The odd thing about the AI cycle, is that Tech credit has started widening before the issuance - in anticipation of supply. So there aren't really many positions that need to be exited.
ORCL is the notable exception in the sense that it was already a large issuer and there has been concern about a possible downgrade to High Yield which would force certain investors to exit (if they haven't already).
Excellent synthesis of January's chaos. The observation about rolling mini-bubbles from crypto to AI stocks to precious metals is spot-on. What's interesting is how each asset class absorbs excess liquidity untill it hits that inflection point. I watched the gold selloff and it felt like classic late-stage speculative behavior where everyone knows its overheated but nobody wants to exit first.
For me it was Silver - the thought process of "I want to chase gold, but I'm scared" was pretty tangible. Not impossible it bounces up again at some point but the volatility is higher than the expected returns in my opinion.