Hype Eventually Meets Reality and Fluctuating Fortunes Versus Stability in Uncertainty

Good Morning Ladies and Gentlemen

”Rapid revenue growth tomorrow is the only reason investors are willing to look past falling free cash flows today.”

Jesse Felder

While market sentiment and market valuations are essential considerations, one can also quantify price movements themselves and their potential implications. A recent study from Harvard revealed that when a sector surpasses the overall stock market by 150% over two years, the likelihood of experiencing a 40% crash increases to as much as 80%.

Is AI the Definition of a Bubble?

Recently, I came across a projection stating that total AI capital expenditures in the U.S. are expected to surpass USD 500 billion in 2026 and 2027, comparable to Singapore’s annual GDP. In contrast, The Wall Street Journal has reported that American consumers currently spend only USD12 billion annually on AI services, roughly equivalent to Somalia’s GDP. When you consider the stark economic differences between Singapore and Somalia, it becomes clear just how vast the divide is between the ambitious vision for AI and its current reality. Quite intriguing, is it not? Oh, yes, Bloomberg coined this a “buy first, ask questions later“ rally.

Probably, But Not Only

Independent power producers and the semiconductor sector, in particular, have emerged as significant beneficiaries of the ongoing AI capital expenditure bubble. However, eventually, results will need to align with expectations, which could lead to a rude awakening. This will affect not only AI stocks, AI-ETFs, and AI options but also many other risk assets, including cryptocurrencies. The current level of leverage surpasses anything we’ve witnessed in the past. Based on my experiences over the last 38 years in my professional career, this situation appears unsustainable.

Is there a Safe Heaven

Yes, absolutely, short-term government bonds in your reference currency are an option. However, in all major currency regions, inflation is exceeding the interest rates on those government bonds, which means that in real terms, such an investment is losing value, albeit less than what we might anticipate during a market downturn. There is no free lunch!

Crude Oil

I am frequently asked about the crude oil sector, which can generate impressive cash flows and appears to be free from a bubble. However, it may be premature to make significant investments at this time. U.S. shale drillers, for example, are currently facing rising tungsten prices, a rare and exceptionally hard metal crucial for industrial tools like drill bits. This increase is largely due to Chinese export controls that have restricted supply, presenting a potential risk to U.S. fossil fuel production. Tungsten accounts for up to 75% of the drill bits used in oil fields, and China dominates global production, controlling over two-thirds of the supply. Additionally, as a result of the current U.S. administration’s tariff policies, China has become reluctant to increase tungsten sales or offer it at reduced prices. The elevated tariffs on other commodities, such as steel, which is also widely used in U.S. oil fields, further strain the profit margins of suppliers in the energy sector.
Moreover, crude oil prices remain suppressed due to the ongoing conflict between Russia and Ukraine. The low prices for oil and gas are adversely affecting the Russian economy, compelling oil-producing nations to politically motivated levels of production that exceed what would be sustainable at current price points. The certainly not entirely unintended consequence of this „tactical intervention“ is lower energy prices for both households and industries.

Conclusion

I am surprised that markets hold up so well. If the market crashes, there are not many safe havens. Last but not least, one should always remember what Bernard Baruch, one of the few who avoided the 1929 stock market crash, famously said: “I made my money by selling too soon”.

Ladies and Gentlemen

Feel free to send your messages to smk@incrementum.li. Many thanks, indeed!

I wish you an excellent start to the day and weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 153
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li