Markets Are Entering A New Era Of AI-Driven Disruption | Weekly Roundup

You're seeing a tectonic shift in productivity coming from AI. It all hit psychologically at one point when the Claude stuff came out. If we're going from a step change of productivity growth from horse and carriage to cars, you have to start thinking about what that means out in the future.

If AI really is that productive, there are just these huge rotations and dispersions going on right now. It feels very violent even though the top level indices like S&P are down a couple percent from all-time highs, but underneath, everything is going down.

Yes, in a few years this big bet on AI data centers could turn into the next big free cash flow machine, but that's a 5-year bet. In the interim, what's happening is that we're removing buybacks at a time when everybody is long those stocks.

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All right, everybody. Welcome back to another round of edition of Ford Guidance. And what a week it's been.

Our last week's roundup became stale so quickly because literally the morning after, we got the Kevin Worsh nomination, we got the medals implosion. Now we're just having the full degrossing and deleveraging across everything. What a week.

It is crazy. Just another inning in the World Series of Macro, boys. Here we are again.

These periods are so crazy because you can have a view like even the short big tech view that's been sort of working for months if you funded other longs with that short, it's worked great. But even that trade, we kind of just chopped for nowhere for two three months and every time you would think the move's coming it's not and it bounces hard and just went nowhere.

So, it's a tough market and you need to be there's some times where you just shouldn't touch any buttons for months on end and then there's times where you kind of have to be touching buttons every day.

I think Quinn, we got to give you a little bit of a shout out here for the last few weeks because you kind of nailed that whole dispersion and just this online check out check out the factor rotations today. Just a total wipeout of anything momentum related.

Value's been up and you've been banging the drum on the long metals, short mags, and obviously the long metals one had to be taken care of pretty carefully over the last week and I know you've been in and out, but this has just been a total blow up of we've been talking about a few of the charts over the last few weeks of just how offside positioning was.

Literally everybody who wanted to be long was long. All of retail was long. Cash positions on the fund manager surveys were at like just 10 year lows. Everybody was all in and now we're sort of starting to see the impact of what happens when everybody's too far in one side of the boat.

Yeah. It's you know us macro people are usually early. So like you can say something that's like two months old but prices didn't go anywhere and then you're vindicated if you hold a position.

So it's yeah lot going on. It's fascinating. I actually think we're kind of hitting a local bottom here if I were to guess probably tomorrow.

But we'll see short term. Yeah, short term bounce for a couple weeks. I think CPI comes in late next week. I think cuts get pulled forward a bit.

Okay, while we're on the topic of price action and getting it out of the way, we're recording today and it feels like the biggest implosion has been crypto. I think, Bitcoin hit almost 62,000. What did it get down to?

Yeah, 62,300. Ethereum in the 1800s. Just a total wash out.

Tyler, I actually want to you put out a tweet and we've been talking about this all week about just this framing of what is the role of stores of value during a productivity boom. This is something I've been thinking about a lot since you brought it to my mind and it's interesting to contrast that with the price action we're seeing.

So yeah, just like I'm going to give you the floor. Walk through this thesis because I think it's quite interesting.

So my old boss and mentor Mark Hart, he was one of the few guys to short the subprime crisis, buy credit default swaps in Europe in 2010 before that all went fluky. One of the first macro investors into Bitcoin.

He came up with this framework of when to essentially own assets in different types of them. So if you have a $100 basket of goods and inflation is 3% at the end of the year that basket of goods will go from 100 to $103.

If you have a $100 basket of goods and you have say 2% productivity growth at the end of the year, that basket of goods should have been $98 since you have you've increased the productivity by 2%. So the delta between the inflation and the productivity is essentially the tax you pay by holding cash.

So if you invest in equities, generally you're getting that 2% productivity by investing in equities, right? And so, but if you hold cash, you're essentially getting eaten up by the 2% productivity on not owning equities and the 3% inflation rate.

So, you're basically losing 5% by just holding cash, right? Relative. And so what's happening I think using that framework is you're seeing a tectonic shift in productivity coming from AI meaning and Leopold Ashbrer talks about this we've talked about this over the last year if we are in a massive AI productivity boom it all hit psychologically at one point when the claude stuff came out and if we're going from like a step change of productivity growth from like I said horse and carriage to cars, right?

You can do 500x the output in productivity when you moved from horse and carriage cars. If AI might even be bigger than that, theoretically speaking, now this is obviously getting discounted way in the future. It's not here yet, but you have to start thinking about what that means out in the future if AI really is that productive.

So take that equation and you're now saying okay productivity is at 20%. Rather than you know 2%. That means if you're not investing in the AI supply chain in the end you know end parts of it what Quinn was saying last week was you have to invest where the capex is going.

All the hardware companies they're massively outperforming. They're barely even selling off here because that's the the lynch pin for the next unlock of productivity. And then all the software companies that had these insane PE multiples in they're all getting waxed because it's like okay we we have to rotate back into hardware.

So it's like you're watching a bunch of different cycles happen here which is the movement from software. So you built all the infrastructure out in the 90s for hardware and then you built all the internet software components. It's like you built this this building, right, of hardware with all the silicon chips and then the the software kind of filled the building with all the, you know, was the interior designer, right, of the last, you know, 15 years.

And now you realize, oh my god, we have this whole new type of building we can build that we need to furnish it differently down the line, but we're building the building now, right? That's the AI. and and that productivity if you're not invested in it everything else gets smoked.

What I think happened this week specifically is when expectations of productivity growth go up a step change. So like say 2% to 10% or 20% or whatever the hell it is inflationary pressures start hitting. So we saw the break evens roll over. We saw the two-year yield roll over.

The hard part is if AI infrastructure eats everyone else's pie and there's massive unemployment and this Kevin Worsh like lowering rates into a productivity boom. It's kind of mind-blowing to think about, but you could get mass unemployment because it's that productive.

So I think all these things kind of hit all at once. This week specifically it's probably overdone. You know, what we saw was like, you know, a 10 standard deviation move in a lot of the a lot of these things and, you know, everyone was overinvested.

Felix, you've got a bunch of great charts on, you know, where the sentiment was previously and now it's completely adjusted. Yeah.

Yeah. I might just run through a few charts just to contextualize while we're on the topic of what you just mentioned there is just to your point like yeah, we're in the liquidation phase. Whatever we need to price in in terms of this thematic shift is probably a little overdone at this at this stage right now.

But that doesn't really change the secular story of what's going to happen over the next five years. And we're starting to see early trends of this.

So this is a chart from A16Z that Gavin Baker posted out who's just quickly become one of my favorite speakers on AI and AI commentary especially from a capital allocation lens. He really emphasizes how intuitively most of the productivity gains are going to come from those early hungry companies as opposed to like the large incumbent established companies.

So when you just look at here, it says revenue per employee up 75% for the top decel of AI/Software companies in 2025. Probably doesn't slow down in 2026 given the December revolution AI coding agents. Nothing to see here. Move along. No evidence of AI productivity anywhere.

So this just really shows. So when you when you really hone in and isolate on like where those changes are most likely to start happening, we're starting to see it happen.

This tweet I thought was just a really interesting framing of just what the market is trying to price in and digest right now, which is that AI is to digital goods what China coming into the World Trade Organization was for goods and certain industrials and materials.

It feels like this is what the market's trying to figure out right now is like what is the marginal cost and therefore revenue that I could earn and and what does that mode even look like in this age where suddenly you know if you can think about the mode with software engineers if there isn't that mode anymore what is the what is the valuation that's appropriate for that now when we just flood the market with endless software AI agents who knows what and so we saw that happen in the software business they just all absolutely smoked over the last week.

On top of that is this whole capex buyback narrative that I've been talking about for the last couple weeks. Just a few minutes ago, managed to get some of the Amazon numbers that just came out about like half an hour ago. Again, just showing how absurd Claude and all these agents are is that literally at, you know, we've been recording for like 10 minutes.

Earnings came out half an hour ago. I didn't I wouldn't have had time to personally go find this chart and build it out and get the data. But instead, I just went into cloud and XL and I was like, "Hey, Amazon earnings just came out five minutes ago. Build me the chart. Here it is within five minutes." It's just it's just absurd.

So, you can see $200 billion in buy in a capex is coming. That's like I think the market expectation was like 146 billion or something like that. Then you have Google this week as well. Huge beat on capex coming versus street ex consensus of just over hundred billion dollars. They're they're looking at more like $180 billion. What does that do to buybacks? Buybacks are going away for Google.

You put that all together and I I wish I had time to actually also include Amazon in here, but they don't really do buybacks anyway recently. So, but overall, you can just see that that there's some really big things changing in markets right now.

It's just so interesting like when you look at just top level indices like S&P, you know, down a couple percent from all-time highs, but you go a couple ratchets beneath the surface and there's just these huge rotations and dispersions going on right now and it just it feels very violent. Even though the top level it's kind of like a duck, you know, swimming and on the surface they look very calm, but underneath everything is going down.

On the buyback thing, I do want to state this because, you know, I I'm on the front lines of trading, right? And you know, I I've said this throughout the years, but I don't think people have really added it up. 20 years ago when I started, you could be like 30% of the trading volume.

If I wanted to buy a 100,000 shares of stock, I would find usually like the opposite counterparty was like a human on the other side and we'd be crossing stock against each other. Right now, all the stock trading, I'd say like 70% of it is fake. Like it's just HFTTS going back and forth.

So it if you're say three to five percent of the trading volume throughout the day, you can move a stock with a lot less capital. I think buybacks, if you talk about a trillion dollars plus of buybacks per year from the fangs, they're the largest weights in in the indices.

They were buying back that that much stock. They didn't have to buy that much to just keep a bid in the market relative to all the HFT volume. So they were and so you had the inflows from from ETFs along with their buybacks that kind of stult divide volatility for about 10 years.

I mean this is a real micro structure of you know the larger market structure and if that's going away you have increased debt right less cash flow maybe even increased supply of equity you know look at Oracle now now raising equity along with their debt so the lot of the market dynamics you go from sucking you know sucking liquidity out of your floats your share floats from the large caps to almost now the bidder goes the way the incremental bidder goes away from all the cash flow and I mean we could be looking at like a massive you got a concentration of 15 20 years in these names every 41k is forced into it and now the micro structure is changing a little bit so it actually for the first time ever shorting these things might make sense just because previously like they would just keep that little bid and when the buyback blackout period you know subsided and they could buy back their stock, you'd see that you'd see the VIX fall.

You'd see volatility. This open also opens up what happened. Mike Green's thesis of every incremental buyback dollar created this convex price movement because every incremental dollar into the stock was like 7x what it should have been because of the float dynamics and the passive dynamics and the buyback dynamics. Now, these things are all switching here, right?

I'm watching this specifically because if you get a reversal, you know, like if people start picking this up and then you get the demographic shift of like, oh, boomers might actually have to sell assets here, that concentration that's built up is really scary. Like really scary.

The one thing that's holding it back is we haven't seen bond volatility and and FX volatility pick up. So number one, you haven't seen bond volatility, meaning bond is still low. Even though you're seeing rotations in the equity market, that's that's just in the equity market. There's nothing really. I mean, credit's starting to tighten a little bit.

If that credit really shuts off this that's got like crash, there's crash crash risk there. Check check this chart just for what you're talking about of looking at the 10-year yield versus gross surprises and inflation surprises. like it the 10 year should be higher.

Yeah. And so, but I mean like there's lots of funky things and I think what's going to happen here is credit's going to shut off. The Fed's going to be forced to just lower, you know, and and Pomp actually said this last week and I didn't see what he was seeing until a day later, but he said, you know, they should do an emergency to give him credit, emergency 50 bips rate cut. he said it a little bit early but I think it's actually playing out where you're getting the break evens rolling over you know the future growth might get actually dinged here a little bit besides certain sectors you know if you look at certain sectors they're doing great right like it's it's all rotating to different look at consumer staples breaking out so I I don't know but what the main thing to watch here for you know the fangs is does credit shut off and uh do we get like some sort of, you know, bonv cuz that could really cause some some funky things in in the indices.

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Everyone's ballparking their analysis to the previous PTE multiples of and valuation comps for these companies and they're fundamentally changing their business models. So, not only is it this one-time flows hit to to buybacks and and you know selling securities to raise financing, but it's also a long run valuation because the the arms race for compute, energy, and power isn't isn't going to slow down.

I saw someone saying, "Oh, I'm investing in Mag 7 because they're now moving into energy and that's where things are headed." I was like, "You don't want to look at energy companies multiples, dude." Like that's like that's like when people said, "Oh, I'm I'm long Coinbase because they're going to be they're going to become a bank and take over." I was like, you don't want to compare your 30x price to revenue co company to a bank. Like that's a horrible setup.

So, I I think there's a little bit of a rude awakening for people there, too. It's not just the one time. Yeah. You know, the earning stuff.

I have a couple other charts I just want to show in terms of how you can see the market trying to digest that. Like, I think you're right, Tyler, that something happened in the last week where suddenly everybody started to digest all of this. You can see like tax underperformance relative to the broader market over the past five days was the most severe since 2009.

This is just looking at different factor rotations and you can see this complete change happening right now. This is why the topline indices are still holding up somewhat okay is because the value factor is actually ripping right now. Just the growth factor is falling apart.

This is getting back to that point of market structure and just this air pocket that's happening with tech is that yes in a few years this big bet on AI data centers could turn into the next big free cash flow machine. But that's a 5-year bet. In the interim, what's happening is that we're removing buybacks at a time when everybody is long those stocks.

You have to underwrite that with a credit risk, too, right? Like not all of that AI capex is coming from free cash flow. They've tapped that out. They max it out. Now, you know, each of these MAG7s each are doing about, you know, 40 to$45 billion a year in corporate bond issuance. So, they're going to lever up.

They need to see a payoff profile. It's not as cleancut as before. Felix on the maybe I think what does just dovtales into the macro setup why also MAG7 is is is unattractive. If you just want to touch on the labor data we got this week well some of it because of the partial shutdown but this chart here the the point you made Tyler of Fed of rate cuts which I agree with you is going to be the reaction function.

There's clearly a shift which everyone's kind of up in arms about wars but the duration reduction of the balance sheet already began last quarter under Powell. This is what we were pounding the table on in November October November after the October Fed meeting saying this is a hawkish policy shift and some people called it QT 2.0 I know it's duration tightening Barry Nap calls it like and the impact on the market of of the duration reduction is was more in October Fed meeting more negative than the benefit of ending QT alto together and then obviously we got the Q you know QE light with the bills purchases in December.

This is super powerful because when they do go to cut rates on the front end to support growth and support the economy without supporting the back end and in fact putting additional duration pressure on the back end. That's a massive steepener, which is the exact opposite of what policy has been since the bottom in 2022 when they purposely flattened the curve and kept the long end suppressed which kept markets floating and allowed them to keep the federal funds rate too high.

That's the whole argument here that Warsh and Bessant have been saying is this imbalanced transmission of monetary policy that's benefited the large caps and hurts. The where it gets funky is the solution of rate cuts is actually not really a solution for the mag seven part of the market. It is a solution for the main street part.

This chart Felix you had up. Sorry, I was rambling, but to the the preamble was this chart shows you so since 2024 basically small businesses which is the gray box have have largely like been in a recession in terms of job job creation. Small business has been in manufacturing for example has been negative since August 2024.

Just now we're seeing the green box, the green here is the large business sector and that just turned negative in this month's ADP reading. So the funny thing is is it's all fun and games for the policy makers who can tout AI productivity and you know the booming economy for the 1% and you know Paul would always kind of ask us oh except for main street you know there's some parts of the economy that aren't doing well but now that the white collar jobs the large business jobs are now joining in the the job loss don't be surprised if they change their tune in terms of coming to the rescue of the labor market which is just classic why another reason why you know they they want the admin wants change at the Fed because it's it's been it hasn't been a a fair and objective policy strategy for for many years now.

You know what what's interesting is you're seeing the capital rotations like check out regional banks. They've they've actually they're actually breaking out to almost new highs here. Like IWM perfect retest to the 50-day. like there's that rotation's happening like 2000201 out of tech into smaller caps and then like like old school businesses have you checked out like um I don't know Delta Airlines and uh cruise lines stuff like that it's actually doing quite well so this rotation is happening under the surface part of it is there's just so much capital moving out of tech and it's compiled there doesn't take much to move other parts of the the sectors of the economy so I I think the the regional bank one is is really interesting to me because that that actually perfectly represents what I think is the playbook of nominating Worsh and his actions of what he wants to do of okay AI productivity boom we just talked about that all of that the reaction function is is lower Fed funds rate but at the same time they're they're not going to be as forgiving on the long end what does that do steepens the curve like we we just saw the two stance curves break out it's the highest level since I think 2018 I think that's going to continue.

What does that do for banks? It makes them a lot more profitable. That allows them to, if you do that, if you steepen the curve and you deregulate things like SLR and and risk based ratios like that and allow them to actually create loans, you get the Fed out of the game of marginal liquidity creation. You pass it on to the banks. You get them to start to get moving things. You know, what's better for Main Street than if than if regional banks are doing well? Like that's where the loans come for small businesses is from regional banks.

I think we're starting to see the playbook and the playbook is yeah like if I want to describe it easily it's like long regional bank short max 7.

I would say yes except though there's one gorilla in the room which is like when when that yield curve kind of steepens fast you get credit tightening. You're seeing high yield credit spreads widen a little bit here which makes me a little nervous. You're seeing a lot of like the private equity guys are rolling over. They have a lot of debt. There could be a there could be some zombies in here before like I don't I wouldn't just say it's going to be game on because there's a lot of funky bad credits in the economy that might float to the surface.

That that's my one caveat there is I'm watching credit real close. There was there was also a buyer of 700 I think it's 75,000 HY tail puts which makes me like really I'm like what you know low delta cover your ass you know type of type of position that's out in the market and I'm like what are they you know what are they worried about type of thing.

So I don't there's there's stuff that that's happening there that's a little bit kind of funky. I mean, when you say that, I kind of there's a case to be made where you have like Pal who's sort of like not wanting to play ball and and and like, you know, playing this hold out game on on easing the front end and, you know, maybe for he optically he doesn't want to do any anything before his his term is up.

So, he could walk away and say he didn't, you know, give into the the Trump pressure. So maybe there's this purgatory area and then you know you have Bessin and you know he wants to kind of rebalance things like there is a there could be a pocket here where like the Fed isn't working so closely with the Treasury to manage it and it gets a little out of hand cuz because what where do they step in right it's like uh I don't know because the the Yelanomics policy was would have been to tweak the QR this week and and reduce duration on the long end and support the market and just the same old And and now I'm not I'm not it's it's scary.

Yeah. Actually, can I hit me with these couple charts, too? Yeah. Your charts. Yeah. Go to 35. So, this is um this is a kind of interesting one from Goldman who does really great great work on you know, V market structure. So this is um the S&P average stock volatility verse index stock volatility and and essentially what I think that this is saying it's in this was last week it was in the 99th percentile another way say another way average S&P stock is swimming 7x the index.

I think what you know largely if you go on to the next chart this is retail is just getting absolutely rinsed. This is why you know during periods of like these imbalances build up in retail options volume you can see this is from Monday from Citadel. Monday marks a historic inflection point for single stock options. For the first time, new Monday and Wednesday listings on the Mag 7, Avago and IBIT will trade as zero days till X-ray options.

So, the market structure is changing on option side. They're opening up new options for for retail to play. Then if you go to the next chart that you can see the the software ETF volume call option volume. I think this is a reckoning of I think that's slide 37. IGV call volume. You can see a 10-year look back on on how many people are playing, you know, from a retail perspective.

V was so low, but now it's so stretched on a single stock basis. It's why the index isn't really moving, but you know, all the single stocks underneath are moving 7x normal is because the market structure is largely driven by retail. Now we're watching Robin Hood roll over, Coinbase roll over, crypto roll over, and I think people are going to stop trading as much on the retail side because they're just getting absolutely worked.

That's partly like it's really hard to manage money fundamentally when you have it's essentially gambling. It's the same thing that happened Kalshi and I think what's happened is part of what's ruined crypto is you created just essentially gambling markets across everything you had and and that that whole financial nihilism thing it works when the government is behind it but then there's this moment when it gets pushed to an extreme where it it goes in reverse and I I think that's largely what we're seeing here is just a complete wash out like if Think about it psychologically.

Oh, I'm long call options of XYZ high beta stock and then when the delta the strike gets away from the delta and the delta keeps going down, the dealers have to sell deltas to hedge out their short call position s call position. So, they're selling deltas on the way down and then retails got to sell their calls and it just keeps it's this self-fulfilling, you know, suck of liquidity on on calls.

The hard part about the whole thing is it's really structural because the government has incentivized this by making it just bailing out capital owners. So retail finally caught on. Oh, the government's backing, you know, capital owners. At the exact same moment, you know, they're pulling the plug from capital owners.

I think all these and and rotating back to actually labor in in a weird way. So all all these things, it's such a macro, you know, irony, they they come and collide at the same time. I have to bring this up because it's it's not a coincidence, but the Epstein stuff is is correlated to you're watching large power structures fall. That's what's going on.

It all these things collide into like a a social soup where that causes change when they all all these incentives just collide. We're seeing it from a market structure standpoint. We're seeing it from a social standpoint. It's making me really scared. We're seeing gold signaling something's off. you know, the fact that we're we actually got to see what's in the Epstein, some of some of what's in the Epstein stuff and it's deplorable and it's everything we ever we always thought, but like now it's there and we know it and everyone's been complicit at it and every now we're all like now what?

Well, you know what pisses me off the most about it? I'm just going to get on a a soap box here is, you know, everyone makes these companies and these leaders, corporate leaders, they make all these comments when it's just some, you know, some trivial social issue. They'll get on a soap box. But when it comes to like child trafficking and sexual abuse, they're radio silent. It's just like it actually gets me really angry because you should, this is the most sacred thing on the planet. and everyone's quiet about it. It's it's absolutely mind-blowing.

I mean, I I it's and it's I just have to say my piece on that and I'm getting red and sweaty and I want to fight somebody, but like this that's really like it's it's so and all the it's all generational too. Like we we let our system get co-opted by these creeps and then and it's all it's crashing down all at the same time as the market structure is too centralized, right? like this stuff is not it it happens because because of all the politics and the weird it sent it.

So I'm not trying to like you know it's not a conspiracy theory. It's all how it's built. It's it's built this way. So, I mean, yeah, that should be the realization is that like it's like here we are and it's and it's bipartisan like you can, you know, we've been we've been fighting blue versus red like yeah, you know, one nation versus another and whatever other like identity politics or or conflict when in reality like those we should all be coming together right now and being like, "Hey, like this is this is what's actually happening."

Yeah. Get all the bozo politicians gone. like get them