Give n’ take

The current market concentration phenomenon has been discussed extensively. Concentration at company level, with the mag 7 wonder, at sector level, with the AI related companies responsible of 75% of the S&P500 gains since the introduction of chatGPT on November 2022, and concentration at country level, where the U.S. dominance has been exceptional over the last 15 years. These companies have created an unprecedented level of dependency for the world. To the point that the world looks at them today as the solution for almost all the problems, with extreme expectations. But they also have their demands: the need energy, lost of it, to power their data centers. In the US we’re starting to see the consumer electrical bill going up, because there is not enough installed capacity to feed the current infrastructure, which will be dwarfed by the one that is being planned. And they need money, even though they are cash flow rich, because the competition is so fierce, that organic financing comes short. About 50% short, according to the chart below. So, they’re tapping the credit markets, both public and private. And they are creating concentration in the fixed income market as well. In other words, the world is levering up. Some of these companies have low levels of debt compared to their stretched equities, but that will be fixed in the next correction, since debt will not come down; it can only be repaid, restructured or refinanced. The half full glass view tells us productivity gains will be exponential, and they sure will, but there is a path that needs to be walked to get there, and there is a half-empty glass view, where not all the players will win, and some of that debt will be written off. Concentration and leverage are not good partners for the trip.

Want to know more? You can find all our posts at https://www.myfundamental.net/insights

#iamfundamental #soyfundamental #wealthmanagement #familyoffice #financialadvisor #financialplanning #policymistake #ratecut #stagflation