Big
Tech, Risky AI Debt Investments, and the Fed in 2026
By Victor Sperandeo with the
Curmudgeon
Markets Week in Review:
Global financial markets rebounded
strongly during the holiday-shortened week ending on
November 28th. Optimism surrounding a potential December interest
rate cut by the Federal Reserve and robust consumer spending during Black
Friday helped to boost market sentiment.
The S&P 500 rose 3.73%, the NASDAQ advanced 4.91%, and the small cap
Russell 2000 leaped 5.82%, as investors seek higher returns by taking on more
risk.
U.S. notes and bonds were mostly higher (yields lower) last week. The key 10-year T-Note yield closed the week
at 4.02% while the 5 year was at 3.59%.
The U.S. dollar index (DXY) was down -0.72%, closing at 99.42 on
November 30th. That was its worst weekly decline in the last four
months. The dollar dropped mostly because
foreign exchange traders concluded that weakening jobs data will lead to more Fed
rate cuts, even as many Fed policymakers express concern about still-elevated
levels of inflation.
Gold prices surged about $150 to $4,220/ounce this week,
while Silver skyrocketed to an all-time high on Friday closing at
$56.67/ounce spot price with a COMEX futures settlement price of $57.163/ounce
and a final trading price of $57.085/ounce.
The last day of the month, with
most everyone gone for the Thanksgiving holiday, resulted in a very thin market
which is subject to manipulation. Rumors attributed Friday’s Silver price jump
to one large hedge fund, which was buying everything including options on
futures to drive up the price. Whoever it was did a very good job, as it caught
everyone by surprise. Next week it will be interesting to watch Silver’s price
action to tell if this was based on anything fundamental or purely technical
trading.
Big Tech and AI Investments
Continue to Propel the U.S. Stock Market:
There seems to be no end to the
steep rise of U.S. mega-cap tech stocks.
That despite everyone and his brother realizing it is being fueled by
spending on AI data centers, debt and circular deals.
Tech sector valuations have soared
to dot-com era levels - and, based on price-to-sales ratios, are well beyond
them. Some of AI’s biggest proponents acknowledge the fact that valuations are
overinflated, including OpenAI chairman Bret Taylor:
“AI will transform the economy…
and create huge amounts of economic value in the future,” Taylor told The
Verge. “I think we’re also in a bubble, and a lot of people will lose a lot of
money,” he added.
Global AI-related investments
(mostly massive data centers) are projected to exceed $4 trillion by 2030,
reflecting investor zeal to capitalize on a technology that surged in
popularity after ChatGPT was launched three years ago. Record spending by big
tech companies persists despite skepticism about a near-term payoff as many
organizations report zero measurable return
from billions in capital investment.
The top five hyperscalers have
raised a record $108B worth of debt in 2025 - more than 3x the average
over the past nine years, according to data compiled by Bloomberg
Intelligence.
Meta, Google, Microsoft,
Amazon and xAI (Elon Musk’s company) are all using off-balance-sheet vehicles,
including special-purpose vehicles (SPVs) to fund part of their AI
investments. A slowdown in AI demand
could render the debt tied to these SPVs worthless, potentially triggering
another financial crisis.
Alphabet’s (Google’s parent
company) Sundar Pichai sees “elements of irrationality” in the current scale of
AI investing which is much more than excessive investments during the dot-com/fiber optic built-out boom of the late 1990s. If the
AI bubble bursts, Pichai said that no company will be immune, including
Alphabet, despite its breakthrough technology, Gemini, fueling gains in the
company’s stock price.
What to Expect from the Fed
in 2026:
The key to future Fed monetary
policy will be the Supreme Court’s decision on whether President Trump has
legal authority to fire Fed Governor Lisa Cook. The court is scheduled to hear
oral arguments on Jan 21, 2026, with a decision by late Spring. In my opinion,
the court will rule in Trump’s favor to fire her as she did
commit fraud and never denied it. That will enable Trump to control the
majority (4 of 7) appointees on the FOMC.
White House economic
adviser Kevin Hassett is the odds-on favorite to be appointed Fed Chairman when
Jerome Powell term ends on May 15, 2026. He has emerged as the leading
candidate due to his close relationship with Trump and will bring the
administration's preference for interest rate cuts to the Fed. On Sunday’s Fox
News' "Fox and Friends" program, he said he’d be happy to serve as
the next Fed Chair.
What will happen then? The answer
is given in a song titled, “MONEY FOR NOTHING,” by the well-known
British rock band “Dire Straits.”
Released as a single on June 28, 1985, the song’s theme has been
designated the best in history by one DJ (I would put it in the top 5). The
song is about the perceived gap between the working-class life and the glamorous
rock-star lifestyle, told from the perspective of a delivery man watching MTV.
It is also the title of a book by Thomas Levenson about the South Sea Bubble,
a 1720s financial scandal and speculative mania.
….……………………………………………………………………………………………..
Here's Mark Knopfler playing the
intro of Money for Nothing for about 15 seconds. I think it’s a fair
representation of what Money for Nothing would make you feel like.
….……………………………………………………………………………………………..
Victor’s Market Outlook:
The 5-year March T-Note futures
hit a two-year high last Tuesday (low in yield). This has more to go next year
with Trump in control of the Fed. He has continuously pushed for lower short-term
interest rates. Of course, negative real
rates (Fed Funds below the inflation rate) will increase inflation, but it will
be hidden in the beginning in terms of headline BLS reports.
A 25-bps rate cut by the Fed on
December 10th won’t help the economy. Therefore, the U.S. equity
market will be vulnerable to a decline in the 1st quarter of 2026.
Shorting stocks with rate cuts
coming is very risky, as I’ve previously suggested. Positive momentum and some
outlandish earning projections make it much better to go long short-term dated
U.S. debt. The US debt market is the heart of the U.S. economic system. Without it, the world would descend into
turmoil.
Victor on Trump and the
Decline of the Republican Party:
Trump is doing everything he can
to anger his MAGA voter base.
Republicans are emphasizing “affordability “as an important economic
goal. However, they haven’t addressed
how such initiatives would be paid for or address structural issues.
Trump’s Gallop approval poll
rating dropped 6 points last week to stand at 36%. Mark Mitchell, the head
pollster at Rasmussen Reports (the most conservative pollster) says the
Republican Party has lost more support than the Democratic Party. Mitchell’s
projection for Republicans sounds dire for the mid-term elections next
November.
GOP leaders are feckless
and the Republican party is declining rapidly in popularity, much like Bitcoin
recently did. It’s my view that the GOP is going the way of
the Tory Party in the UK.
The highly respected U.S. General
Michael Flynn has reportedly stated that the U.S. is "involved" in an
"undeclared war" against what he calls the "axis of
autocracy" (Russia and China) and refers to what’s going on as a “coordinated
color revolution.” He has appealed to President Trump to fire Attorney General Pam Bondi and appoint
Sidney Powell to replace her. That demand was made on social media platform X
in late November 2025. To date, Trump has not yet made a public statement
addressing Flynn's explicit request. Finally,
the Department of Justice is in
shambles as FBI Director Kash Patel is a huge disappointment and is also on the
chopping block.
….………………………………………………………………………………………….
End Quote:
Mae West a unique character in American life had this to
say about money:
“Money is of value for what it
buys, and in love it buys time, place, intimacy, comfort, and a private corner
alone.”
Mae West was a celebrated American actress,
playwright, screenwriter, and sex symbol known for her provocative humor and
distinctive persona. Her career spanned seven decades, beginning in vaudeville
and moving to Broadway, where she wrote and starred in her own scandalous plays
like Sex and Diamond Lil. After making a successful transition to Hollywood,
she became a major star in the 1930s, known for her famous one-liners.
….……………………………………………………………………………
Wishing you good health,
peace of mind, 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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