JD Straight Up - 17Aug26 - Minsky Meet von Mises
Minsky Meet von Mises
Drulard Family Capital Fund
Fortnightly Macro View
JD Straight Up:
S&P 500 at 7777 – up 1% from 7500 two weeks ago - all-time high
VIX at 15 – down 7% from 16 two weeks ago
10yr Treasury yielding 4.71% (flat from 4.69% two weeks ago)
Agg (US Aggregate Bond Index) at 97.40 – flat from 97.22 two weeks ago
Gold at 4443 per oz (up 8% from 4095 two weeks ago)
Silver at 65.49 per ounce (up 12% from 57.81 two weeks ago)
Crude Oil (WTI) at 83 per barrel (up 4% from 80 two weeks ago)
Bitcoin at 64k (flat from 64k two weeks ago)
JPM shares at 365 (up 4% from 352 two weeks ago) - all-time high; up 20% in two months
Deutsche Bank shares at 38.21 (up 4% from 36.86 two weeks ago)
Truist shares at 53.26 (up 3% from 51.47 two weeks ago)
Blackstone shares at 141.66 (up 7% from 131.24 two weeks ago)
Magnificent 7 Index at 436.88 (up 3% from 425 two weeks ago)
US unemployment: at 209,000 in latest claims – up 6% from 197,000 two weeks ago
EUR at 1.16 USD (up 1% from 1.15 two weeks ago)
GBP at 1.36 USD (up 1% from 1.34 two weeks ago)
Macro Environment
US inflation is 3.4% while Core CPI growth is 2.5%. US GDP growth rate is 1.5%. EU inflation is 2.8% and GDP growth is 0.5%. War continues in Ukraine and intermittent ceasefires persist in Iran and Gaza. US deficit is $1.8trn and interest on $40trn of national debt is $1.1trn (2.75% implied rate). US debt to GDP is at 123% (versus 57% in 2000). EU debt to GDP is at 89%. US equity market reaches another all-time high.
Macro View
Multiple research papers, including one from van Nieuwerburgh at Columbia referenced below, suggest the US is in recession except for the significant boost to GDP from AI investment. A focus of capital resources on a major innovation and revolutionary technology is not a problem in itself. This is how transformational things like railroads, automobiles, and telecoms get built. Without the flow of attention, capital and excitement they would never attract sufficient capital to emerge and become widespread. Such is transpiring at the moment with regards to AI. The problem is the cyclical and human nature of capital markets and investment. Hyram Minsky explained this through stages building to a Minsky Moment where capital deployment became fevered and non-sensical until it crashed. Ludwig von Mises explained the business cycle as one where prolonged low interest rates and credit expansion caused the misallocation of capital. The convergence of the ideas of Minsky and von Mises describes a process where excitement is created around a new and potentially world-improving or world-altering innovation. Capital flows to this opportunity. Initially from excess cash flow from operations from companies best positioned to develop the innovation. Then others sense the opportunity and direct capital to it and the competitive landscape accelerates capital deployment. Operating cash flow is insufficient to compete so financing kicks in and companies sell equity to fund investment. They then move on to debt financing. Governments contribute by keeping rates artificially low to facilitate the investment. Eventually too much money is in the system and inflation results. Investors also begin to question the concentration of resources into a single component of the economy and less capable entrants are washed out.
Relevance
It is arguably positive that the structure and spirit of capitalism allows for floods of capital to innovative opportunities in a way that central planning is not likely to achieve. However, there is no real control of the throttle or a governor to slow the engine of capital formation once it kicks into high gear. The first chart shows that the giants of the tech industry are well past being able to finance their AI buildout through excess operating cash flow. Hence they are into capital structure alterations to facilitate delivery of compute. This is all with the promise that this compute will be required to run AI models and engines and those models will provide considerable net gains in productivity and ultimately profit.
The second chart shows the scale of the investment relative to the rest of the economy on a historical and relative basis. Von Mises expressed concern that capital would concentrate in the hot new field and deprive other core parts of industry and economy of the capital it required to continue to develop and grow. Until of course a reset would sweep through and redirect capital. This disruptive process would bring about loss to investors and to the economy as a whole.
Head Scratchers
1 - What is the timing? How will we know when the broader economy is materially benefitting from all of this AI expenditure and the benefit does not all just roll to the hyperscalers and labs? Will it be a widespread boon across industries or will it just be a few tech providers gaining from first mover advantage and scale and reaping massive margins and rewards? Will we all be buying and consuming enough tokens to repay this investment? Is our token budget the next line in our household expenditures after electricity, mobile phone, and streaming services?
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#49 - 17Aug26
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