I’m going to say up front, in a right here right now kinda way, this is Christmas, New Years and my birthday all wrapped up into one for me. Never in my three decades on the Street they call Wall, have I seen such massive shifts in the economy, the markets, humanity, and my mental health. This is some big time shyte! If Pandora had one box to open, the contents of which he couldn’t put back in, we’ve got one of these to deal with.
Full Disclosure: Not lost on me that this is AI. But the size and scope look about right. Since This Month in the Market is written for educational purposes, gives no investment advice, in non-commercial in nature, and a bunch of other cool things, I get to be a little more liberal with charts and images I can use. Kinda like a journalistic public domain bazooka. If you have one, and don’t use, do you really have one at all? Let’s go boys, follow me!!!
Before I jump into the meat of this commentary piece, I have to first thank whoever it takes to show my lifelong appreciation for spectacular explosion of Situational Awareness. Led by AI Nostradamus, Leopold Aschenbrenner, this massively over levered ‘hedge fund’ produced returns that were truly mind blowing. I’m still trying to piece together the actual numbers and what I’ve found is a YTD 2026 return of 270% in June. Then a 67% loss in August, and a current YTD of 80%. Assets under management at the time of the implosion were $45 billion levered. I think they might be $5 billion today. Nice turtleneck, ya schmuck!
But let me tell you a little secret. An up 80% year when you are quadruple levered isn’t really a 68% Alpha return over the 12% the S&P 500 is giving you. It was 8% of Alpha, with a massive massive massive amount of risk heaped on top. To be clear, you and I could have constructed this guy’s fund of public holding over a pitcher of beers and a combo platter of BBQ, Memphis Hot and Honey Mustard wings at Buffalo Wild Wings. It’s simply not that hard. As of June, according to the SEC’s required 13F filing, the fund owned six stocks that made up 82% of the assets under management. Two stocks alone, SanDisk and Micron made up 56.5%. That is not a stock portfolio for a high flyingprivate hedge fund. It’s a PA for anyone who wanted to speculate with some spare dough in a Schwab account.
SanDisk = 28.5% Micron = 28% Bloom Energy = 9.5% Taiwan Semi = 6.4% Nebius = 6.2% Core Weave = 3.7% From the ‘Small World’ file, the guy who helped put Leopold on the map was Graham Duncan. Otherwise known as the ‘talent whisperer’. I met him on a couple of occasions when I lived in Montecito. Raised my boys right there on that beach. Oh, to have it back would be heaven.
Like many a hedge fund superhero or tech venture capitalist, he moved there during the pandemic. Doesn’t make him a bad guy, but it for sure changed the bucolic place where I raised my kids into something I didn’t recognize. At one point I tried to use my astounding pedigree to get an audience with the guy, but he blew me off. Wasn’t the first and won’t be the last. I looked him up after the meltdown and came across a glowing story on him in Colossus magazine. This picture sealed the deal for me. None of this was actually real I thought. It was a Wes Anderson movie, and a good one at that.
While nothing was illegal about what the Situational Awareness guys did, at least that anyone in the public knows about right now, it’s will be added to the Wall Street ‘cautionary tale’ Hall of Fame. I cut my teeth at one beginning in 1996. My boss, Mark Strome doubled clients’ money in 1993 and 1994.
Investors could not get in fast enough. Literally leaving sub documents and cashier’s checks under the door. Those returns, while masterful, were the product of a massive amount of leverage that the likes of Goldman, Bear, Merrill, Morgan Stanely, Lehman, etc. all provided. Everyone played, everyone won. Until they didn’t. While the money was rushing in, clients who had a 2x on their hands should have been walking out. Once a global macro guy like Mark’s pulls something like those returns off, it’s time to walk away. As in life, don’t fall in love with false prophets. The Bible says they are coming. I think the other things on the list have a chance as well.
Onward to things less biblical. This headline from the venerable Wall Street Journal, which I generally don’t doubt, paints a potentially dystopian world ahead. In this case, when the hyperbole was such that, it screamed WTF!?!?!’ I lazily lit up a Marlboro Red and yawned as if it was no big deal.
First off, follow the dough. There has been a 40% rise in private investment in AI spending in the last two years. And we aren’t talking about $100 billion to $140 billion. We are talking trillions, with an ‘s’.
What sits at the absolute center, is the much-vilified data centers that are being proposed and built everywhere. You’ve seen pics of the outside, now look at the inside.
And here is what orders for equipment to outfit them look like. Keep in mind, this is just Taiwan we are talking about here. This image applies to many, if not all, Asian countries with exposure to hardware exports.
So as to be clear as crystal, this is the magnitude of the rise as described by the Journal. That’s $90 billion in technology hardware imports from Taiwan in the first five months of the year. In 2024, that number was $20 billion. That’s knocking on a fivefold increase in two years.
All of this was hitting a big nerve for me until the news that NVIDIA and a bunch of private equity guys like KKR, Apollo, Blackstone etc, were going to setup a $500 billion vender financing program. That’s when those nerves blew the hell up.
I ran a decently sized short book in 1999 when the fiber optic ecosystem first really boomed, and then of course really busted. It was like shooting fish in a barrel when the CLECs went BK and the world then realized that Lucent was the one handing out ungodly sums to money to anyone building the networks. Rivers of really cheap money the size of the Mississippi opened up and those building out the networks took in as much as they could. Gotta love the old school digital chart showing the dismantling of LU.
If this thing busts at some point, and massive debt come due, the wipeout is going to be ten times bigger than any of the previous bubbles we’ve seen. Housing being theoutlier, but it’s still going to be at least four times bigger than that. Those are not scientific numbers, simply something I pulled out of the air. But I bet my air is better than most.
And ready for the painful kick in the stones for all those, present company included, who came into this thing less long stocks than they should have been. Net worth is through the roof, and that has created an uncomfortable layer of insulation. People are on edge about the economy and world affairs, but their stocks and bonds keep pumping out more and more income and wealth. Spend it while you got it? I guess, I don’t have firsthand knowledge of such circumstance.
With that as prelude, please come join me as we dive down deep into the rabbit hole of intellectual curiosity and the quest for knowledge. Too much? Not even close given the world we are dealing with today. As the man who taught me how to fly fish in the late 80s would say when things started to go upside down, ‘Life isn’t all popcorn and beer farts!’ And that was just one of John Tubbesing’s many a great saying.
In fixed income and government bonds, a funny thing happened to ‘lower for longer’ in the market. Yield on the 10-year treasury just traded to 4.70%. I didn’t think much of it because it had traded 4.88% three years ago in 2023. Then I realized that these levels are the ones we were trading at almost 20 years ago.
So why is this time more important? Because newly seated Fed Chair Kevin Warsh is getting a quick face slapping. If he had any intention of lowering the fed funds rate anytime soon, the case isn’t there now. And the WSJ went with the headline ‘Kevin Warsh asked the market to speak. And it did.’ That being said, he looks good in a suit.
And now hawks are outnumbering doves, and they are not backing off anytime soon. In fact, if the three that dissented and are for a rate hike get joined by a one more, it will enter the ‘unprecedented’ column. Again, from the Wall Street Journal.
Let me say once more, you myopians at the Fed are holding too close to the 2% target for inflation. That’s all fine and good in normal times, but normal times these are not. You simply can’t do it coming off three years of CPI north of 5%. With a fat 12 months above 8%. Inflation needs to go negative, otherwise it’s just growing at a lower rate. Why do you think the squeeze is on from the gas pump to the checkout line?
My call, though it’s creeping into consensus, is the Fed raises rates at least 50 basis points, and probably 100 like they should. That puts a further gun to the head of consumers and corporations. Confidence by the consumer isn’t going the right way. Keep in mind, we are now at levels in consumer confidence as published by the Conference Board not seen these levels since the outbreak of the pandemic and close to where they were when the economy was slipping into the Global Financial Crisis. Those were both dark days.
Big prediction, though I promise to not make many of them. With the curve inverted, the economy is on the rocks by the end of 2026. And in early 2027 we slide into recession. Shallow sure maybe. But we are long overdue.
The wildcard in all of this comes from the Department of Treasury where Scott Bessent, the current Treasury Secretary, just unleashed the almost unthinkable. He announced a plan to start buying treasury securities to drive interest rates lower. That’s the program. It’s not about liquidity; it’s about putting a firehose on a rising rates dumpster fire. Donald Trump needs lower interest rates for the next three months. He has already intimated that Treasury has almost unlimited power to spend. If there was ever a bond market fight, this is of the heavyweight kind the likes of which have not been seen since Ali v. Foreman. Remember, everyone has a plan until they get punched in the mouth.
And while I choose to stay apolitical, doing so allows me to tee off on those currently running this clown show. There is one guy who sometime in the future will find out what happens when you eff-around with an economy too long. He’s turned into Jaba the Hut, and we are all being held hostage like Han Solo being stuck in frozen carbonate. The little creepy thing next to Jaba is Howard Lutnick, the bald guy with the snake ears is Scott Bessent, and Boba Fett is Pete Hegseth. The Jawa and upright hippo are a dealer’s choice. Good news for us, Han busted out and took down the Empire with a little combo of Like, Leah, Chewy, the Force and band of angry Ewoks.
To keep it fair and balanced, to you Democrats I say this shattering of what we thought was at least a decently stable triumvirate of power sharing between the Executive, Judicial, and Legislative branches was based in large part on the arrogant view of yourselves. And to be brutally honest, when your nomination process broke down, and a small group of Biden’s inner circle decided to ‘run him’, it lit the fuse. Jill Biden, you are a traitor to the American people. Elder abuse this was, but we were the ones who got our asses kicked for it. Good luck with the library.
Onward to the wonderful world of stocks and the markets. I want to once again point out that the S&P 500 is not the economy. In fact, 28% of it is a giant AI/technology trade. So, when you hear the breathless panting about how we have set new records on the market, keep in mind of what that underlying market looks like. . NVIDIA = 8% Apple = 7% Alhphabet/Google = 6% Microsoft = 5% Amazon = 4% Broadcom = 3% Meta = 3% Tesla = 2% Total Weighing = 38% And here is what that absolute beast of combination of stocks has done over the past ten years. A near quadrupling of your money over a single decade. Great trade, assuming you never sold.
Past five years haven’t been bad either, assuming a doubling of your dough is considered ‘not bad’. But keep in mind you perma bulls, the S&P 500 did trade sideways for three of those five years. I’m just sayin!
Let me tell you one thing that may not look great for some, but could be good for the rest of us, is that the fever might have finally broke on the white-hot rally in semiconductors. This is Micron, a memory chip maker tied to the AI data center buildout. Previous to this it was a boring producer of chips for personal computers. That’s how bubbles, if this is one, pop. While I am no technician, I can see myself a little head and shoulders in there on the right side.
I think it’s a good thing for the overall market because it lets some steam off. When other companies can pick up the slack and the leadership broadens out, it can suggest we are good in other places as well. This is the Russell 1000 value index. While it’s trailing, up 50% is still a solid return.
In my mind the pressure is building in terms of global theatrics and the United States is leading the charge. I don't think the vast unwashed masses in this country can take more rounds of higher fuel prices. Prices that are elevated due to a ‘war’ that doesn’t seem very ‘warlike’. And that’s just the start of it all. I don’t think any of us signed up for this. An almost 45% year to date rise in the world’s most important commodity is not something that was expected going in. And now the Iranian’s have control of Hormuz? Ouch!
People get elected and sometimes peace follows, and sometimes chaos does. About a week ago when my mother and I were marinating ice cubes in the backyard I said this….’I think people could take AI, or they could take the chaos in D.C., but they couldn’t take both.’ That’s a lot for the comfort blanket of assets and portfolio values to absorb. May you all feel that warm swaddle from time to time. Let it take you back to an easier time in life. Just make sure to wear a proper diaper.
