The Heretic’s Guide to AI’s Stars Part V, with CU Universe Rankings, the All Map
https://michaeljburry.substack.com/
The Heretic’s Guide to AI’s Stars Part V, with CU Universe Rankings, the All Map
Where are we in the capital cycle? Every investor should know about this, even if it is not folded into one’s analysis of stocks or other investments.
The capital cycle explains a tremendous amount about the biggest moves in asset prices over the last 3 decades.
Value investing has been abandoned almost wholesale by the market, they say. This is not your father’s market, they say.
But it really is. We are just smack dab in the middle of the capital cycle.
If you have been around since the beginning of Cassandra Unchained, you may know what being in the middle of the capital cycle actually means.
That is a bit busy, but let’s go through it. Blow it up. The above chart charts the percentage of net capital investment to GDP in green bars. Those green bars happen to reveal a pattern that we call the capital cycle.
The white horizontal line up there is the current net investment (Capital Expenditures less Depreciation) of the S&P 500 companies divided by Nominal GDP. It comes to about 2.07%.
2.07% is higher net investment to GDP than at any time in any prior capital cycle over the last nearly four decades, but for the tech-media-telecom bubble aka dot com bubble of the late 1990s.
Trump should be all over this.
But actually, I have not been precise. Today’s level is higher than any prior time save for the aftermath of the massive NASDAQ market peak in March 2000, from which it did not fully recover for a decade and a half.
Ah, that’s why Trump is instead all over anyone calling the AI phenomenon a bubble.
Consider that aftermath, when capital expenditures kept growing well past the market peak. Looking at the area under an imaginary curve there, it seems the NASDAQ peaked almost smack dab in the middle of that massive capital cycle.
Later, it turns out the S&P 500 and all its financials and real estate businesses peaked in November 2007. But look at the green bars.
That market peak in late 2007, which was also a last hurrah for the NASDAQ for a good number more years, occurred well below the bulk of net capital investment in that housing-dominated capital cycle.
Believe it or not, investment continued to ramp right through 2009, as banks failed and markets fell apart.
We also see in violet the trace left by EQT, a major gas and shale company, as it peaked with the S&P Energy Index a couple quarters before investment peaked. Once again, the shale boom-led capital cycle of the 2010s saw energy stocks peak in the middle of that boom’s net investment curve.
As of June 30th, the last data available, we are at that 2.07%. This coincided with a new all-time high for the NASDAQ. Not much to celebrate, as that June all-time high was the 94th over the prior three years.
Another day at the office, though here we are in September and no all-time high in the NASDAQ since June.
I have little doubt the next few quarters will set still higher and higher net investment/GDP marks, possibly even eclipsing that aftermath of the 2000 tech stock peak.
Let’s look at the same chart, stripped down.
Let’s take a moment to note those 12 quarters from the middle of 2003 to the middle of 2006 where net investment was negative.
What does that mean? Well, it means depreciation absolutely overloaded and overwhelmed capital expenditures for those twelve straight quarters.
Why do I look at depreciation? Because of this. Hold that thought, as this will be relevant later here.
The hangover from the TMT buildout, in the form of absolutely massive depreciation expense and ongoing write-downs of capital equipment, was so significantly negative that it dragged the S&P 500’s aggregate net investment negative during the rise of a housing bubble in the US so very great that it would take down and/or see the disappearance of names such as Merrill Lynch, Lehman, Bear Stearns, Washington Mutual, Countrywide, AIG, Wachovia, New Century, IndyMac, and, almost, Goldman Sachs.
That is how bad the bust before the housing bust was.
So, are we again in the middle of a capital cycle? Yes.
Will I continue on this idea that depreciation expense is being understated and write-downs are the future? Yes.
Why? Because of the capital cycle.
But I need more info, always.
We have already started, of course.
In Part IV, we looked at some scary aggregate numbers emanating from the Big 5 public hyperscalers - Microsoft, Amazon, Alphabet, Meta, and Oracle.
That $3 trillion in aggregate purchase commitments, future leases and guarantees backing third-party debt, construction-in-progress and various SPVs - these all point to epic levels of spending over the next few years.
The most profitable companies in the world, except Apple, are betting everything on this as their free cash flow turns negative and the borrowing pace increases.
There are signs of strain at each of the big hyperscalers, and recent earnings reports, filings and conference calls provide clues as to how stressed each one really is.
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The Hyperscalers, a Forensic Check-Up
When the write-offs come, perhaps in 2028 or 2029, these commitments discussed in Part IV may be so large that a relatively small write-off has a bigger impact than we can now imagine. After all, the growth rate of these off-balance sheet commitments and exposures is eye-watering.
But there is more to these companies. Let’s take a forensic look at what the filings, earnings releases and earnings calls revealed for each.
There is so much more! To read visit https://michaeljburry.substack.com/
A forensic deep dive through the Big 5's regulatory filings, with valuations, rankings of all stocks in the CU covered universe, and more.
