Written by: plur daddy
Compiled by: AididiaoJP, Foresight News
We are facing a fundamental shift in the market landscape, driven by a shortage of financial capital due to the capital expenditure cycle in the artificial intelligence sector.
This will have profound implications for asset prices, especially after a long period of capital abundance. The Web 2.0 and SaaS models that fueled the market boom of the 2010s had extremely low capital requirements, which allowed a massive surplus of funds to flow into various speculative assets.
While discussing the current market situation yesterday, I suddenly had a realization. This might be one of the most insightful articles I've written in a long time. I will now break down the underlying logic step by step.
There is a comparable mechanism between AI capital expenditure and government fiscal stimulus, which helps in understanding how it operates.
In fiscal stimulus, the government issues treasury bonds, which are absorbed by the private sector. The government then obtains funds and deploys them. This money circulates within the real economy, creating a multiplier effect. Due to this multiplier, the ultimate impact on financial asset prices is positive.
In AI capital expenditure, hyperscale tech companies raise funds by issuing debt or selling treasury bonds (and other assets), similarly absorbed by the private sector as duration. The companies then invest the proceeds into projects. These funds also circulate in the real economy and create a multiplier, positively impacting financial asset prices.
As long as there is idle money in the economy, this process runs smoothly. It is highly effective and boosts the market broadly. This has been the case for the past few years, where AI capex acted like an additional economic stimulus, boosting both the economy and the markets. However, the problem is: once the idle money is exhausted, every dollar invested in AI must be pulled from other areas. This will trigger an intense battle for capital. When capital becomes scarce, people are forced to rigorously assess its most efficient use, and the cost of capital (i.e., market interest rates) rises accordingly.
I emphasize again: when funds are scarce, a clear divergence will appear among assets. The most speculative assets will suffer disproportionate losses, just as they gained disproportionate returns during times of capital surplus but a lack of productive investment opportunities. From this perspective, AI capital expenditure is effectively acting as a form of 'reverse quantitative easing,' creating a negative rebalancing effect on portfolios.
Fiscal stimulus rarely faces this dilemma because the Federal Reserve typically becomes the ultimate buyer of treasury bonds, thus avoiding a crowding-out effect on other uses of capital.
The term 'funds' here can be used interchangeably with 'liquidity.' The word 'liquidity' is easily confused because it has many different interpretations.
I'll use an analogy: funds or liquidity are like water. You need the water level in the bathtub to be higher to make the financial assets (those floating rubber ducks) rise. There are several ways to do this: either increase the total amount of water (interest rate cuts or quantitative easing), unclog the inlet pipe (such as the current reverse repo operations, a form of 'plumbing'), or reduce the amount of water draining from the tub.
Most current discussions about liquidity in the economy focus only on the money supply. However, the demand for money is equally crucial. What we are facing now is excessively high demand, leading to a crowding-out effect.
There are media reports that the world's wealthiest investors—such as the Saudi sovereign fund and SoftBank Group—are nearly running out of cash. Over the past decade, global investors have 'feasted,' accumulating large holdings of assets. Let's deduce what this means: when [Sam] Altman reaches out asking them to fulfill their previous capital commitments, unlike in the past when funds were abundant, now they must first sell some assets to raise the money. What will they sell? Likely those holdings they are less confident in: selling some recently underperforming Bitcoin, some SaaS software stocks facing industry challenges, redeeming shares from some underperforming hedge funds. And these hedge funds, to meet redemptions, are also forced to sell assets. Falling asset prices damage market confidence, tighten financing conditions, and trigger further selling across more areas... This effect will ripple through the financial markets.
Complicating matters further, Trump has chosen [Kevin] Warsh. This is particularly concerning because he believes the current problem is too much money, when the opposite is true. This is also why a series of market movements have been accelerating since his nomination.
I have been trying to understand why memory chip (DRAM / HBM / NAND) manufacturers like SNDK, MU have significantly outperformed other stocks. Of course, soaring product prices are one reason. But more importantly, the current and near-term earnings of these companies are very strong, even though everyone knows earnings are cyclical and will eventually decline. When the cost of capital rises, the discount rate also increases. Speculative assets with long-duration, future cash flows are pressured, while assets generating cash flows in the near term are favored.
In this environment, cryptocurrency, as a sensitive indicator of liquidity, is naturally hit hard. This is why its recent decline seems bottomless.
Highly speculative retail favorite stocks struggle to maintain gains, and even sectors with improving fundamentals find it difficult to advance.
As the demand for funds exceeds supply, yields on sovereign bonds and credit debt are rising.
Blind optimism and simply being long is no longer viable.
