A Bifurcated U.S. Economy,
Equites vs. Bonds & the AI Trade of Value by Deception
By the Curmudgeon with Victor Sperandeo
U.S. Economic Weekly
Update:
·
The Institute for Supply Management (ISM) Services Purchasing Managers
Index ticked down from 55.4% to 54.9% as high costs continue to weigh on
businesses.
·
The University of Michigan Consumer Sentiment dropped from 48.1 to
46.3 landing at a five-month low and flirting with the historic floor of 44.8
set earlier in the year.
·
The Current Economic Conditions sub-index, plunged from 50.9 to an all-time record low of 44.7, proving that while
macroeconomic indicators like headline GDP might look stable, everyday
Americans feel like they are financially treading water.
·
Analysis cited by the New York Fed indicated that tariffs
have added 2.9% to consumer goods prices this year, with full structural
impacts projected to ripple further through 2027.
·
A Federal Reserve survey revealed that U.S. household debt delinquencies and financial stress have climbed
to their highest levels since 2010, matching increases in overall household
income strain.
·
Consumers now expect
inflation to reach 4.7% over the next year (mostly due to the Iran war
increasing gas and diesel prices. Thats up sharply from 3.4% in February.
The Bifurcated U.S.
Economy:
The U.S. economy is experiencing a structural decoupling,
where the traditional engine of domestic growthconsumer spendingis being
actively eclipsed by an unprecedented mega
tech-sector AI arms race. Driven by the relentless AI infrastructure
demands, especially construction of new data centers, capital expenditures by
tech hyperscalers have grown so massive that they are
effectively keeping the broader economy afloat, masking systemic
macroeconomic weaknesses.
AI data center spending accounts for a staggering 39% of
total U.S. economic growth
through the first three quarters of 2025. The dollar
value contributed by this infrastructure now surpasses the aggregate impact of
all domestic consumer spendinga historical
first. Total AI infrastructure and data
center spending is projected to reach $10.3 trillion through 2032, averaging
roughly 3.6% of annual U.S. GDP.
Victor on the Global
Economy & Equity Markets:
Like the United States, the global economy is increasingly defined by divergence: some
countries are expanding, while others face stagnation or contraction. The
composition and volume of cross-border trade remain important determinants of
national economic performance. The experience of the Great Depression (1929-1939) underscores the risks of protectionism: tariffs and
retaliatory trade restrictions compounded the downturn by constraining
international commerce.
The nations that are doing
well have corporate earnings growth which generally support their
equity valuations. However, stock-market performance can diverge substantially from
domestic economic conditions. Historically,
most global equity markets have moved in the same direction, but with
materially different returns.
Equities favored over
bonds: In the United States, monetary and fiscal policies
since the last recession ended (June 2009) have favored risk assets
over savers and fixed income investors. That has reinforced investor preference
for equities over Treasury securities, municipal
or corporate bonds, and other
debt. The differences in total returns
between stocks and bonds is almost surreal as per this
chart (note the spike in Treasury yields since 2022 while the S&P 500
soared:
Looking Ahead: The concern now is that global economic and equity-market
performance may become increasingly uneven, with technology- and AI-related investments (much more
below) supporting a relatively narrow group of stocks. If overseas weakness
broadens, the United States could face spillovers through weaker export demand,
pressure on multinational earnings, and tighter financial conditions. That
potential transmission of that weakness represents an additional risk to U.S.
equitiesone that may not be adequately reflected in prevailing market
expectations.
FT - AI Trade Dominates Global
Financial System:
From Katie Martin in the Financial
Times
[paywall]:
"The AI trade is no longer new and it is no
longer a theme. Instead it has morphed into the
theme a vast, suffocating blob slathered on top of the global financial
system, starving everything else of oxygen, distorting market reactions and
leaving every portfolio, everywhere, alarmingly reliant on the fortunes of just
one bet."
"Stocks, real estate,
infrastructure, energy, emerging markets, some vintages of private equity . . . theyre
all, to a large extent, the same trade...Three-quarters of the stocks in the
S&P fell last month tech stocks and the energy stocks that reflect the
data centre build-out really are doing all the work.
Who cares? A lot of people dont, as long as the line
on the index goes up. The problem is that professional investors are struggling
to figure out how to diversify properly, how to shield themselves if something
goes wrong a crucial part of their task in managing other peoples money.
Many are spooked by just how correlated portfolios turn out to be across a
range of supposedly diverse asset classes."
"Were left with a strikingly
two-speed U.S. stock market beloved of pretty much every investor on the
planet, dominated by an AI build-out that is, in practical terms, nearly
impossible to hedge or avoid. We dont really understand the long-term economic
implications, but the underlying commercial assumptions seem rather heroic. And
weve all, deliberately or otherwise, hitched our fortunes to the idea that it
will work out just fine. Wed better be right."
Another point of view from the IEEE (the
worlds largest tech non-profit organization):
OpenAI, Anthropic, and Their Hyperscaler
Partners: Huge Financial Risks and Open-Weight Competition
Cartoon
courtesy of Hedgeye
Victor - Will AI
Subscriptions Increase (as pundits predict) or Be Cancelled?
The frontier AI model
developers (Open AI/Chat GPT, Anthropic/Claude, SpaceXAI
(formerly known as xAI)/Grok, Perplexity.AI, etc.) sell
their services as subscriptions which are expected to significantly increase.
The forecast compound annual growth rate (CAGR)
for the global AI subscription market is projected to be 20.6% from 2026 through 2034, according to recent TrendX Insights market metrics. Driven by
both consumer adoption and enterprise demand, this specific subscription sector
is expected to expand from $1.74 billion in 2025 to $9.37 billion by 2034.
But wait
when prices rise too steeply or businesses/people come under
financial stress, they cancel their
subscriptions. In fact, that has
happened this year with Netflix (NFLX
stock is -22.74% YTD). Netflix
subscribers have cancelled their monthly subscriptions and even organized
intermittent cancellation campaigns driven by rising costs, specific content
releases (such as controversial documentaries), and public calls to boycott the
platform.
Netflix charges $19.99/month for the no add
subscription. Victor asks, Would people pay $19.99/month to ask questions to an
AI assistant running on a cloud resident computer?
ΰ He thinks not and
refers to the AI trade as value by deception.
Victors Conclusions:
The world is closely watching the U.S.-Iran war and with
further threats by President Trump to use troops (boots on the ground) after
the mid-term elections on November
3rd. Due to high uncertainty, new U.S. business formation and non-AI
related spending is on hold till after those elections. Victor believes many
things will change if the Democrats win (they are currently odds- on
favorites). For example, policies on
tariffs, the Iran war, oil prices, and even interest rate policy may change
after (Congress new term starts January 3, 2027).
Victor stands by his forecast of a down GDP number, e.g. -2%
In the 4th quarter of 2026. The risks to
economic growth will show themselves as we get closer to the election. As such, risks for equities are very high
this quarter.
End Quote:
One of the most PROFOUND quotes ever made, that Victor says
is perfect for the incredible ignorant leaders of the western world is from a
political pamphlet titled The Law
by Frederic Bastiat in 1850. The Delusion of the Day:
The delusion of the day is to enrich all classes at the
expense of each other; it is to generalize plunder under pretense of organizing
it. Now, legal plunder may be exercised in an infinite
multitude of ways. Hence, come an infinite multitude of plans for organization:
tariffs, protection, perquisites, gratuities, encouragements, progressive
taxation, free public education, right to work, right to profit, right to
wages, right to assistance, right to instruments of labor, gratuity of credit,
etc. And it is all these plans taken as a whole, with what they have in common,
Legal Plunder, that takes the name of socialism.
.
Wishing you good health,
success, and good luck. Till next time
The Curmudgeon
ajwdct@gmail.com
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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