“The real problem of humanity is the following: We have Paleolithic emotions, medieval institutions and godlike technology. O. ” could become “Global Thermonuclear War”; and, of course, The Matrix.
“The real problem of humanity is the following: We have Paleolithic emotions, medieval institutions and godlike technology. And it is terrifically dangerous, and it is now approaching a point of crisis overall.”- E.O. Wilson
I’m old enough to remember when The Terminator introduced us to Skynet; when War Games showed how easily “Want to play a game?” could become “Global Thermonuclear War”; and, of course, The Matrix. Not to be an alarmist, but when I read about AGI, AI agents breaking out of sandboxes, bots forming communities, developing their own languages, and working together to infiltrate supposedly “off-limits” (and often “impenetrable”) systems, well, let’s just say I get concerned.
AI is different. It can evolve, and it is much, much more than simply a tool. Whistling past the graveyard is not a long-term solution. Political, scientific, and business leaders need to recognize that “with great power comes great responsibility” applies here, and that AGI may possess enormous power without any commensurate sense of responsibility. We need to impose that responsibility from the outside, and quickly.
On the financial front, the success of AI-related names has masked some serious warts in the equity markets. I’m not going to get into how passive pools of money and day trading may be exacerbating the problem, but the problem exists.
Recency bias is a real thing. Generals fight the last war, so every dip gets bought because buying the last one worked. Investors ignore the canoe listing badly to one side because, so far, the boat has always righted itself. Fun fact: that doesn't always happen. When it doesn't, the results can be calamitous. The rapids sweep the boaters toward the waterfall, and the Maginot Line fails to stop the tanks.
I don't know if we're in that situation now. But going out without a life vest in these waters could prove disastrous.
**THE AI TRADE IS BEING REPRICED AS A FUNDING PROBLEM.**I like financed builders and high yield from the short side.I’M WRONG IF high yield prints near 290bp with the 10-year back above 5.00%.
**THE DEFENSIVE BID IS A DURATION TRADE WEARING A SAFETY VEST.**I’m short the crowd in staples and the homebuilders.I’M WRONG IF staples hold Thursday’s record while the 10-year climbs back above 5.10%.
**THE BARREL IS PRICING A REAL SHORTAGE.**I stay long Brent upside and the producer.I’M WRONG IF Brent settles back at or under $110 before 5 November.
**MY BOOK IS ONE BET ON FUNDING STRESS WITH SEVERAL TICKETS.**The credit names and the defensive shorts all need the same thing.I’M WRONG IF the next high yield print comes in under 320bp.
The big story Thursday was the AI funding gap. The hyperscalers need more money than equity investors want to hand them right now, and somebody else is going to have to write the check. The momentum selloff and the bid for staples and health care came out of the same question. Crowded AI longs got sold, and the money went to the boring stuff. Oil is a different trade on a different timeline, and I cover it separately below.
THE SETUP.
Meta’s disclosure is the hinge. Commitments that ran near $700 billion in July now run to about $825 billion through 2036, mostly data centers, power and compute, and five-year protection on its debt hit a record intraday. The protection bid is also consistent with banks hedging loans they already made, which would be housekeeping and not alarm.
The cash has to come from somewhere. Barron’s thinks Meta could raise about $40 billion of equity before year end; SpaceX is preparing a $40 billion bond deal at materially higher rates than its last one (Semafor); OpenAI is closing $30 billion at a $1.25 trillion valuation, under the $1.4 to $1.5 trillion floated two weeks ago (CNBC, FT). Josiah Waters argues a SpaceX and Tesla merger would move that compute bill onto Tesla shareholders (
Substack).The plumbing is already full. Barclays hit its internal financing limits for hedge funds trading Asian AI names and moved capital over from its rates desk in an internal auction (
Is this a bubble in the multiple? I don’t think so, and that is what makes it uncomfortable.
Forward earnings for the S&P are up far more this year than the price, so the forward multiple has shrunk while the index made highs.
Investors already stopped paying up for the earnings; what they are refusing now is the financing.
THE CASE AGAINST.
The other explanation is mechanical, and it has its own evidence. Julian Klymochko called Thursday “nothing fundamental, just a run-of-the-mill factor unwind,” and the long-short momentum factor’s 6.2% drop fits a crowded book shaking out (Morgan Stanley’s tech momentum basket has had more 5% days this year than in all of 2000). On that reading the funding headlines are the excuse, and the sellers were forced, not frightened.
The two readings are not exclusive. A prime broker short of balance sheet makes clients de-gross, and a de-gross exposes which borrowers were living on a bid.
What would tell the two apart: if the next high yield print comes in under 320bp and Meta’s protection falls back under 110bp inside two weeks, with the semiconductor index back above Thursday’s high, it was positioning. If high yield prints over 340bp and the SpaceX deal or a Meta raise prices wide, it was funding.
I’d put it at 60/40 for funding. I hold the timing more loosely than the direction; the next two weeks of issuance decide it, and I can’t tell you which deal prices first.
THE BARREL.
A separate thesis, and the one with a clock. The first settle above $110 started a two-week count that ends with the 5 November settle.
Iran says seven ships were hit near the strait (
Al Jazeera); Trump calls the claims fabricated to lift oil prices (CBS). The tracked attack count for October is the highest of the war either way, unless the claims turn out to be mostly mines and misreporting.Iran says it will hit Gulf airports, pipelines and other civilian targets if the air campaign resumes (WSJ). Aramco moved Dhahran headquarters staff to remote work, and the White House designated domestic refining and fuel logistics as essential to national defense under the Defense Production Act.
Diesel is where it bites. Rosneft says losses from Ukraine’s refinery strikes are unsustainable (
Kyiv Independent), and the first tanker of Russian diesel under the new US arrangement is sailing for America (Kyiv Independent). We are importing diesel from the country we are sanctioning (sanctions, it turns out, have a diesel carve-out). Fertilizer and diesel shortages are already reaching farm costs ahead of planting (S&P Global).One oil analyst I read puts it at month eight of an outage larger and longer than anything on record; the 1973 embargo ended in March 1974, after about six months, and the S&P had been cut nearly in half by that autumn.
Flash PMIs land at
9:45and the final Michigan read at10:00, the last data before Wednesday’s Fed. A firm services number keeps December priced and tells me Thursday’s bond rally was covering; a soft one makes the growth reading harder to dismiss.American Express and SLBreport before the open, and Moody’s reviews France after the close. Robin Brooks reads the French selloff as a positioning unwind spreading to Italy and Spain, with Treasuries getting the flight-to-safety bid; Thursday’s 17bp drop in the 10-year was its largest since 10 March 2023, the day Silicon Valley Bank failed (Nick Timiraos). On 4 November Treasury publishes its refunding plan, and Gillian Tett expects Bessent to keep shortening the debt, possibly by cutting 20-year sales (FT).
WHO CARRIES THE CONSUMER.
This is the channel from the AI selloff to spending, and it runs through very few households:
Since the end of 2019 the top 0.1% of households added $14.5 trillion of net worth, against $4.3 trillion owned by the entire bottom half (
Lighthouse Macro).Real weekly earnings fell in the third quarter at the 10th percentile, the median and the 90th (Mike Konczal). Wages are not doing the work; portfolios are.
A momentum crash lands on exactly the balance sheets that are spending.
Chris Arnade, walking the country with Tocqueville in his pocket, finds the other half of it: loneliness, cynicism and a loss of faith in the institutions (Epsilon Theory).
On the day the AI chain was sold, a staples company that reported nothing and an alternative manager that guided once were both bought hard.
**META.**Down 6.98% to $648.85 on Thursday. The concern was never demand; it was the bill and how it gets paid. California’s billionaire tax fight is now in the story too, with Zuckerberg having threatened to leave the state over it (CBS). Every AI basket I track finished red, the semiconductor names outside the AI leaders worst of all.
**PROCTER AND GAMBLE.**Up 5.58% with no company news, the largest staples move of the session. A low-single-digit volume grower does not rerate on a Thursday; it gets bought as a bond, or it is simply month-end money hiding where it hid in 2022. I’m short it into September headline CPI of 3.7% y/y and $114 crude, both of which land on its input costs.
**BLACKSTONE.**Up 8.4% on one forward comment: the CFO guided fourth-quarter realizations above the third quarter’s. Ares, Carlyle, TPG, Blue Owl and KKR followed. The credit those firms own widened through the month, and none of the listed lenders has marked a third-quarter book yet.
Behind the wall this morning:
THE BOOK: 13 live lines, 5 new today, each with the factor it monetizes, its size and the condition that kills it.
FLOWS AND POSITIONING: the first day since COVID that all three hedge fund styles lost more than 1%, and who has to buy back what.
FINANCIALS: the bank I’m long and the one I’m short inside the same rotation, and where nonbank stress reaches a balance sheet.
Above the line is what I see this morning; below it is where my own money sits against it. Subscribe at marketmusing.com.
Disclaimer: Opinions are mine alone and may change. It does not constitute an offer to buy or sell or a solicitation of an offer to buy or sell any security, loan or asset or to participate in any trading strategy. It is not intended to form the basis of any investment decision, should not be considered a recommendation, and does not constitute an offer or solicitation with respect to the purchase or sale of any investment, nor is it a confirmation of such terms.
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