Galloping Forward

Not investment advice.

The tattered campaigners surged on, some now holding aloft cups that had been pressed upon them, waving to the ladies clustered on the balconies in their putrescent hats and elevating the bobbing heads with those strange half-lidded looks of ennui into which the features had dried…

Blood Meridian, McCarthy, 1992

In the last week, the themes have not changed. They remain the tech boom, oil shortage and erosion of institutions. The data points that caught my eye all fit into this schema.

Regarding the tech boom,

1. A firehose of money is being directed to companies that make the guts of AI. In the last few months, many of their stocks have jumped by 50% or so. I show one here that I don’t own now but I have owned, ENTG. They make the chemicals that go in the chips.

2. The companies that are spending the money, like Meta, are not benefiting.

3. In recent earnings announcements, AI capital spending was revised up yet again. In essence, the companies at the center of this must feel that they are fighting a war and need to fund it to win it. I notice in my own behavior that I am using AI more and more, AI is a constant companion that has transformed Kate Capital. People at the epicenter of the spending say it has 10 more years to go. Could that be?

4. Regarding oil, Brent prices are hovering where they were after Putin invaded Ukraine. Storage is now dropping precipitously globally. Even if a deal is announced the moment this article is posted, we will already get a wave of inflation this summer. Last week, Brent and WTI broke out of the broad, post invasion ranges they have held to. If a deal is not imminent, prices are going to vault yet higher. Given that the stock market is buoyant, I suspect we will get a protracted negotiation because the White House will sense less urgency. In the Suez crisis that accelerated the decline of the British Empire, the closure lasted six months.

5. Regarding the breakdown of institutions, the United Arab Emirates withdrawal from OPEC is significant. The lattice work that has stitched together global governance, from disease monitoring to security treaties to OPEC, is giving way. It is more every nation for themselves. In the US, the government announced a second attempted prosecution of James Comey, alleging an image he posted was criminal. This is similar to the tactics that Russia and China use against adversaries. Amid the tech boom and the oil disruption, few notice.

6. Going forward, investors must “pick a side” in terms of outcomes. I think the most likely is higher oil prices and a continued tech boom followed, once the Capex boom ebbs and oil has risen enough to destroy demand, by a significant deflationary downdraft. That’s not now though, not today. An oil squeeze creates a dollar squeeze, but that will also reverse down the line.

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