What next in the global financial markets?

The bloodbath in Bitcoin is symbolic of the risk aversion spasm that has now hit risk assets as varied as Japan’s Nikkei Dow, Nasdaq’s Mag-7, gold and even the EM carry trade. The AI infrastructure trade that was the high octane fuel for the most frenzied bubble in Silicon Valley history has lost its luster (price momentum is the mandate of heaven on Wall Street), though the proof of the pudding will ultimately be hostage to what Nvidia says after Jensen Huang speaks at Wednesday’s earnings release.

The world’s first and only $5 trillion corporate colossus is now the harbinger of the stock market’s next big move. Bain Capital estimates that data centers need to generate $2 trillion in revenue to justify the sheer scale of current investments by 2030. The rational probability of this scenario playing out as per the hyperventilating projections of AI bulls is precisely zero since the current revenue run-rate of data centers is $20 billion. A 100X expansion in AI revenues in less than 4-years does not correlate at all with my view of objective reality, even under the most benign of macro assumptions.

For now, I am most worried about the cross coefficients of correlation that spell asset market contagion on a global scale in an era of hyper networked, hyper volatile asset markets where panic and fear spreads at the speed of light. So is it any coincidence that Bitcoin’s plunge to below 90,000 today coincided with a 3.5% free fall in the Japanese stock market amid a 6% hit on Nasdaq? Notice the creeping stealth bear market in global bonds? Little Red riding hood is getting mighty nervous!

Moore’s Law warned us that the rise of technological obsolescence rises exponentially even as the capacity of chips doubles on a transmitter and then doubles again. Could this cosmic truth about the nature of computing also spell doom for the best laid plans of mice, men and VCs (sorry Robbie Burns!) as a trillion dollar capex cycle du jour in the Valley goes suicidally astray?

How can we forget the fiber optic cable boom and bust of 1999 and its deflationary lost decades in telecom hardware? Where are Lucent, Alcatel, Global Crossing and the CLEC’s now when we so badly need to relearn the lessons of their passing? Whenever I go to a party and meet the ra ra chest beating AI bull, I remember Marcus Tullius Cicero’s immortal words – Not to know history is to forever remain a child but not to have bought Nvidia after ChatGPT was unveiled to the human race is to be forever branded and investment Dumbkopf.

The Nasdaq was $13 trillion when the brave new world of AI was born on Mount Sinai in early 2023. It is now valued at $33 trillion and AI nemesis can easily take away $10 trillion in the mother of all bear markets if the AI bears go on a rampage. So where is the obvious fallout shelter to survive the AI nuclear winter? This is the message of the 14% rise in the S&P healthcare sector tracker after doing squat for the last two years to me. My preferred refuge is natural resource stocks that offer me 10-12% free cash flow yields and inflation/geopolitical hedge to boot, not to mention critical metals, the new AI in my playbook as Beijing and Washington lock horns in a merciless geopolitical great game.

The tsunami of passive inflows that created the Mag-7 can also trigger Armageddon in the capital markets. After all, is it rational for 80 year old baby boomers to have 16% of their net worth locked in only two stocks trading at joke valuations – Nvidia at 31X revenues and Microsoft at 15X revenues. The Baby Boom generation in the US is the biggest, richest generation in human history. What happens when they begin to liquidate their $80 trillion in assets from the US stock market now that it is trading at 1929 and 1999 epic tops? The Baby Boom generation, with $80 trillion in assets has a net worth at least 5X greater than the Millennial generation’s net assets.

When the unemployment rate goes above 5% and the inflation rate is still 3.5%, Trump and the bond bulls will learn that even a 2% Fed funds rate can coexist with a 1970’s scale bond bear market that will vaporize nest eggs worldwide. Bonds are capital markets cancer when the US Treasury pivots to financial repression, as the Bank of Japan did in Dai Nippon’s two lost decades.

Two dark omens that tell me that I am not being a Cassandra in my macro outlook. One, the Powell Fed has cut the Funds rate from 5.25% to 3.75% and yet every Treasury coupon bond beyond the two year is trading at a higher yield now than when it first started its latest rate cut cycle in Sep 2024.

The bond market’s smart money sniffs the stench of rising inflation risk even though don’t worry, be happy private bankerjis in Dubai do not as they dish out cross currency leverage risk to their clients. Bitcoin was euphoric when Trump was elected as the first crypto POTUS in the White House. Now, Bitcoin is negative for 2025. The old cliche is still true. Risk is a four letter word. So is ruin.