Monday the attitude towards the Magnificent Seven was beyond giddiness proportions. On the other hand, yesterday there were warnings galore regarding the run up in anything AI related. Will the attitude again change?
At casual glance, half of the financial media believes AI is in a bubble while the other half thinks there are great strides yet to be made.
Regardless of one’s preconceived view, most of 2025 gains have been driven by announcements of AI investment spending. And if AI is indeed in a bubble, it does not just risk this year’s gains but perhaps the last three years.
Bloomberg writes that AI announced spending to date is about $500 billion, up about $360 billion from the previous year, spending primarily concentrated by four companies. Next year AI investment spending is expected to surge about $1.5 trillion.
Is this realistic? Is the infrastructure in place? Will companies’ earnings be decimated by this massive cap ex? How long will it take to generate an acceptable ROI?
Will this spending be inflationary? Will expected monetary policy unfold?
There are more questions than answers. Typically, increased technology spending increases productivity. Some have commented that if AI unfolds at announced levels, the odds of higher unemployment increase considerably.
And then there is the bond market. Spreads over Treasuries are still around historically low levels. Is this about to change given the demand for monies for AI spending? And then there are stresses in the bank funding markets where liquidity is evaporating. Is this just temporary?
Is this stress partially from the Treasury announcing the funding of the country’s massive deficit will be by short-term bonds? As noted yesterday, 26% of the nation’s debt is expected to be funded with short term liabilities, a percentage considerably higher than the recommended range.
Perhaps one of the first lessons that is taught in Finance 101 is not to fund long-term obligations with short term liabilities. It is riddled with risk as the interest expense is unquantified.
Annual interest expense on the country’s debt is now over $1.2 trillion, up from about $350 billion five years ago. Ouch!
How will this all unfold? There are always more questions than answers.
Last night the foreign markets were down. London was up 0.06%, Paris down 0.08%, and Frankfurt down 0.38%.. China was up 0.23%, Japan down 2.50% and Hang Seng down 0.07%.
Futures are flat. The outcome of the VA, NJ and NYC elections were widely as expected and within the margins forecasted. Some may make broad based conclusions from the results however are any of these conclusions valid given there were no surprises. The 10-year is up 1/32 to yield 4.09%.
