The author's fund experienced a healthy 4.57% gain in Q3, bringing its year-to-date performance to a positive 2.32%, although still trailing behind the S&P 500's 13.96% and the REIT index's 4.77%. Despite recent successes, the fund has adopted a defensive stance by increasing its cash reserves and implementing short positions, reflecting concerns about an overheated market. This cautious approach stems from a belief that the market is in a 'mania phase,' evidenced by phenomena such as the AI bubble and the speculative valuations of quantum computing stocks, which show high market capitalization against minimal revenues, suggesting an unsustainable trend.
A significant portion of the analysis focuses on the Artificial Intelligence sector, particularly the financial dealings between OpenAI and Nvidia. OpenAI's ambitious spending plans, exceeding a trillion dollars for chip and data center infrastructure, stand in stark contrast to its revenue projections and current financial losses. The critique extends to Nvidia's vendor financing of OpenAI, drawing parallels to the dot-com bubble and questioning the long-term viability of such 'circular relationships' within the AI space. Furthermore, the article scrutinizes the vast capital expenditures in AI, estimating that over a trillion dollars will be invested by the end of 2026. This requires an unrealistic increase in AI-generated revenues—sixteenfold just to break even—a target that seems unattainable given the recent slowdown in model improvement and the limited applicability of current AI breakthroughs outside of specialized areas like coding and video generation. The author argues that without a significant breakthrough in general artificial intelligence, which seems distant, the current investment levels are unsustainable.
Beyond the tech sector, the analysis points to broader economic vulnerabilities, particularly in the real estate market. It highlights a projected sharp decline in multifamily construction and signs of weakening in the single-family housing sector, especially in areas that experienced a boom during the pandemic. This suggests a potential contraction in the real economy, further exacerbated by manufacturing slowdowns and near-zero hiring rates in many sectors. Despite massive government deficit spending, which currently props up growth, the author fears that a combination of a bursting market bubble and real economic weakness could lead to a severe recession. The article also touches upon interest rates and inflation, noting the Federal Reserve's cautious approach to cuts amidst a rebounding core PCE and the ongoing impact of tariffs. The author expresses skepticism about a 'soft landing' scenario, anticipating a market correction similar to the 2022 downturn, possibly triggered by external factors like increased tariffs or a slowdown in AI capital expenditure in 2026.
The current market environment, characterized by speculative exuberance in sectors like AI and quantum computing, poses significant risks. While technological advancements are exciting, their economic justification must be grounded in realistic revenue generation and sustainable growth. Investors and policymakers should exercise prudence, recognizing the potential for market corrections and preparing for an economic landscape that may diverge sharply from the current optimistic projections.