Negative beating Positive
One of the more popular charts we have noticed this past week has been different versions of unprofitable companies outperforming profitable ones. Not sure exactly how to interpret the meaning of this but we thought it was worth pointing out:
Are investors moving farther out on the risk curve?
Hard to believe professional investors would take on too much risk in search of returns.
Could it be that the “Retail” investor is driving the above divergent performance?
Citadel provided some data recently that may shed some light on this.
Those under 40 years of age are definitely getting into the game.
Some serious gross up with this demographic!
But the real heavy lifting seems to be happening here.
AI Binge
Hard to go through a week in the markets and not see something written about the amount of money being spent on CapEx to build out for the forthcoming demand created by AI.
Is it or isn’t it a bubble?
GS produced a chart that does help offer some perspective compared to other historic boom buildouts.
At just under 1% of GDP, the level of spending remains well below the 2-5% levels of past general purpose technology buildouts.
Staying with the AI theme, who seems to be garnering the largest market share?
Open AI has a commanding presence, but it does appear Gemini is sneaking up a bit.
It’s difficult to discuss AI and not somehow involve the anticipated power demand as well.
Will there be enough to go around? Where will it come from?
Thought this chart clarified where we have come from on power gen and where we are presently.
“The reason natural gas is great for AI data centers is not just because construction times are low, but also because the workforce and supply chains are already scaled. We know how to build natural gas plants (the US has brought online hundreds of GW of new natural gas generation over the last 25 years – see chart), and the supply chains/workforce are relatively mature. So 2-3 year construction time after planning approval is pretty reasonable. The piece talks about lack of workforce for solar installation, but this kind of concern comes up across a bunch of other energy sources, including geothermal and nuclear. In the US, I’d bet heavily against nuclear fission being brought online 6 years from planning approval (as the chart in the piece suggests). The last large LWR built in the US (Vogtle) was approved in 2009, and didn’t come online until 2023. Note China is way faster – since 2022 its completed 5 nuclear reactors, with the fastest built in <5 years. SMRs may end up being quicker to build in the US, but we don’t yet have any commercially operating reactors, and the supply chains and workforce would need to be scaled at a ridiculous pace to build at the scale potentially required by AI infrastructure any time over the next 10 years.”
But is AI costing jobs as so many suspect it will?
Since June 2023, the largest increase in unemployment has occurred in occupations with the lowest exposure to AI, rising by +0.8 percentage points. At the same time, professions with the highest exposure to automation from AI have seen an increase of +0.7 percentage points. This is followed by a +0.4-percentage point rise in fields with the 2nd, 3rd, and 4th lowest exposure to AI. This indicates that while AI may be contributing to the labor market slowdown, it is not the main driver. When cracks appear in the job market, new hires are often the first to feel the pain, which is the case this time. Labor market weakness is only partially due to AI.
Gold
Gold has certainly had quite the run over the past year, despite its recent pullback.
GS recently took a deeper dive on the precious metal’s performance over the last 75 years. They analyzed every major asset class since 1950, and then put them together into something they call the “World Portfolio.”
The punchline? That shiny metal everyone loves has been portfolio poison.
Gold’s volatility destroyed risk-adjusted returns for seven decades.
New York and California
According to Mark Zandi, chief economist at Moody’s Analytics, a growing number of states are struggling, with some already in recession and others close to it. He looks at the entire country state by state but concludes that if things deteriorate any more in New York and California it could be enough to drag the entire country into recession.
FRED
We noticed the Federal Reserve of St Louis recently published a chart we have presented before. Just thought it notable that they are picking up on this phenomenon as well.
Chart is self-explanatory.
Final Thought
We will leave you with this:
Have a great week!
Best,
Meraki Trading Team
