One week / one topic: Up and to the right

What happened?

More and more money, everywhere.

• More AI-fuelled extravaganza, with a growing web of mutual investments and infrastructure deals among Nvidia, OpenAI, Oracle, Microsoft, Google…and more!

• More deals and IPOs: the $55bn LBO of Electronic Arts is the largest leveraged buy-out ever. Plus, Figma, Klarna, StubHub and others just went public to healthy demand from investors

• More deficits and debt: France just won’t do without 5% deficits until there is a bond riot, and Japan keeps drifting more and more towards fiscal dominance (plus the US, of course)

Want to capture the mood in one single chart?

Advanced Micro Devices (AMD) added $115 of market capitalization in three days after announcing a deal with OpenAI.

For context, that’s equivalent to the total value of Unilever.

Maybe there’s a bubble in AI stocks, maybe runaway debt has reached truly unstainable levels, maybe the experiment in liberal democracies has run its course.

Who knows?

However, we can observe a few things.

While the recent run has been remarkable and I find the comparison vs the dot com bubble wildly misleading, we need to remember that 1) trends can last longer than you think, 2) leaving money on the table is a real risk, 3) we are nowhere near the same levels of appreciation seen in the late 90s (see below), and 4) in any case, bubbles are only obvious in hindsight.

When it comes to deficits, debt and unruly democracies – there just seems to be no political will whatsoever for anything resembling such old-fashioned ideas as ‘fiscal discipline’.

Realistically speaking, the next downturn could bring about deficits of 20% plus of GDP… And yes, Gold has noticed.

So, what’s there to do when facing such an environment?

Double-down? Run for the hills? Freeze and hope for the best?

Our observations

• Fundamentals: One is increasingly tempted to think that the meaning of the word ‘fundamentals’ is changing before our very eyes. ‘This time is different’ is a potentially dangerous assessment, but – on the other hand – every time actually is different. The rate of change everywhere seems to be accelerating, so draw your conclusions…

• Price action: Up and to the right for pretty much anything that governments can’t print.

• Investor beliefs: As memories of the tariffs shock fade (until Friday, that is!), the price action is getting harder and harder to ignore. That said, tone and positioning are not redolent of outright euphoria… yet?

So what?

While the discomfort – which, arguably, is part of the job – is growing, we remain invested across asset classes.

Diversification remains key across equity sectors and regions, sovereign bond issuers in both developed and emerging markets, and nominal vs inflation-linked bonds.

With the notable exception of credit – which we deem very expensive, and where cracks are starting to show (First Brands, Tricolor) – we retain constructive positioning in portfolios.

After all – using a global 50/50 equities/bonds portfolio as a rough-and-ready (but not totally unreasonable) gauge – we are barely above the 2021 highs…

More room to go?

Mood music: Dire Straits – Money For Nothing