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Macro Monday
1. Last week’s selloff looks like a healthy reset of crowded positioning and excessive leverage. Painful for those on the wrong side, but it removes the froth and sets up a sustainable next leg. A market correction is not an economic downturn.
2. Data center delays may be a blessing in disguise. Too much capital chasing too many projects strains financing, power, equipment and construction capacity. A more measured buildout could improve capital allocation and project economics. Slow, steady and strong wins this race.
3. At $50 billion per gigawatt of AI compute, the 20 GW 2026 build is about $1T of investment and 30 GW in 2027 is $1.5T. Tell me how many GW power up next year, and I’ll tell you how many chips are needed. Not emotion, straight math.
4. Is AI a bubble? No, but pockets of speculative excess have popped, and more will, notably the least capitalized neoclouds. Some sectors are strained and select baskets got destroyed, but this is not the dot-com Nasdaq 100 or Japan’s Nikkei collapse, when both fell 80%!
5. October payrolls rose 165,000, beating expectations by roughly 100,000, and unemployment edged down to 4.1%. Q3 real GDP grew 3.4% annualized, and the Atlanta Fed’s GDPNow for Q4 is also 3.4%. The economy and jobs are robust.
6. Earnings: Q3 is as strong as we have seen, with EPS growth above 30%, but markets are focused on 2027 guidance. What matters is delivery relative to the price investors pay. When uncertainty rises, investors sell until they have clarity, and selling begets selling as weak hands, especially leveraged ones, are forced out.
7. Higher for longer is a risk for equities and a benefit for lenders, unless it causes a significant slowdown, when credit also feels the pinch. Right now the economy and earnings are strong, so higher rates benefit lenders; only the weakest obligors are strained.
8. The BoE raised rates 25 bp to 4% last week. My base case is another 25 bp Fed hike on December 9, with this week’s CPI and PPI shaping the outcome. The ECB is likely to hike at its December 17 meeting.
9. Private credit looks attractive, but selectivity is everything: favor cash-paying income, conservative leverage, strong documentation and managers who can work through problems. Avoid funds burdened with too many legacy positions, PIK, non-accruals or defaults. Clean and Lean.
10. Elections matter, but markets like divided government, since major legislation struggles to pass given the veto. An override requires two-thirds of members voting in each chamber, with a quorum present, not a two-thirds Democratic majority. Policy unrelated to spending will likely come via executive order.
Bottom line: Last week reset risk appetite but is not yet a reason to abandon the growth thesis. Expect less leverage, more disciplined capital allocation and a sharper focus on cash flow as quality and durability separate from the rest and speculation and the poorly positioned are flushed out.
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