James Aitken: It Pays To Shave With Occam's Razor

CoreWeave

Across the shows: 25 speakers in other episodes, 6 bullish and 18 bearish calls, past 30 days

• James Aitken · Aitken AdvisorsBearish

  CoreWeave's debt stress and neocloud multiples are being rightly reassessed, though it remains a useful business.

  Investors are differentiating between neoclouds and hyperscalers because of their different debt profiles and cash flows, and people are no longer willing to pay the same multiple for a neocloud. CoreWeave's debt has collapsed to a yield to maturity of about 15%, which makes everyone question every moving part of neoclouds. He still considers CoreWeave a useful business. He calls this a healthy market reassessment of AI exposure, which is different from projects being cancelled; he is not seeing cancellations yet, but major project pullbacks would hurt consumption and GDP.

  “I still think [CoreWeave's] a useful business, to say the least, but you see the price of the debt collapse and yield to maturity of 15%”at 20:25

AI bubble & tech valuations

• James Aitken · Aitken Advisors

  AI capex boom is a private bubble underwritten by government; may last longer than expected.

  Unlike past railroad, automobile or subprime bubbles, which were private-sector sponsored, this AI cycle is a private-sector bubble underwritten by government. Spending is framed as national resilience and an AI arms race, with massive defence spending and governments building capacity they previously outsourced, because the US has determined it cannot afford to lose. Circular financing and the frothiness are obvious and it will eventually come unstuck, but because it is a government-sponsored national imperative it could continue a little longer than people expect, so positioning needs to be balanced and proportionate.

  “This is a private sector bubble underwritten by government. And The United States has determined they cannot afford to lose.”at 8:46

• James Aitken · Aitken Advisors

  GPU-backed AI lending resembles subprime CDO lending; circular AI financing has a whiff of Ponzi.

  Circular AI financing has a whiff of Ponzi, but it continues because funding liquidity keeps coming in. Lenders such as those in the mega deal announced by BlackRock and Blackstone take GPUs as collateral, and because compute demand is huge, even older GPUs' values still seem to be rising, which gives lenders comfort. He sees flashbacks to lending against AAA tranches of subprime CDOs. The AI cycle must stop at some point, though it can last a long time.

  “And you look at this circular financing and everything else that we observe and you think so much of this just has a whiff of Ponzi something, but it continues.”at 16:45

• James Aitken · Aitken Advisors

  Global equities are rotating from richly valued AI winners toward predictable free-cash-flow companies, which is healthy but painful.

  He sees a nascent rotation in global equity markets away from heretofore highly valued AI plays and toward greater dispersion, with more diligence applied even to AI winners. Investors are repricing many assets and preferring predictable free cash flow today over nebulous future cash flow. He calls this healthy, but says it cannot happen without some market pain because AI has dominated markets for so long.

  “a nascent rotation underway in global equity markets from heretofore very highly valued AI plays ... people rotating back ... to companies that have predictable free cash flow ... But it's happening and it's healthy.”at 37:34

US Treasuries & yields

• James Aitken · Aitken Advisors

  Bonds offer attractive risk-reward at current yields, with TIPS especially attractive for inflation-benchmarked investors.

  At current yield levels, bond losses if prices fall further are smaller than the gains if bonds rally a bit, so there is a right price and a right risk-reward for bonds again. Parts of the Treasury curve look attractive, and 10-year TIPS yielding about 3% with 30-year TIPS well above that are a no-brainer for inflation-benchmarked investors. Other disciplined government bond markets such as Australia also offer opportunities. Caveats: this is not buy-and-hold for levered investors, and in a higher realized inflation world bonds' elasticity to a growth surprise is lower, so bonds will not be the reliable hedge they were; risk parity may not work as well this time. His stance is cautious nibbling, watching carefully, and it may become structural.

  “And at current levels, depending on the duration of the bonds you're looking at, you lose less if bonds keep going down than you make if bonds rally a bit for any reason.”at 4:14

• James Aitken · Aitken Advisors

  Bessent is buying time; Treasury auctions clearing suspiciously well, possibly with allied support.

  Bessent's 'I am the house' and asymmetric information remarks were a bluff and he is backpedalling; his aim is to slow the move in bonds. Treasury auctions are still clearing well, and some are clearing suspiciously well around a South Korean visit to Washington, possibly with friendly buyers stepping in. Treasuries have outperformed gilts, JGBs and others by a few basis points, which is not great but is a decent result from a poor hand. The 3-3-3 target has gone to the woodshed. With global pressure on rates and no fiscal probity from either party, slowing things down is all he can do.

  “all he's trying to do is buy time because he knows that is all you can do amidst global pressure on interest rates and next to no probability of any fiscal probity in The United States from either party.”at 24:36

Central banks outside the US

• James Aitken · Aitken Advisors

  New Zealand's premature easing let inflation rebound to 4%; don't bet on a peak in policy rates.

  The RBNZ hiked aggressively to 5.5% by May 2023 and got the recession it forecast, with two quarters of negative growth. Year-on-year CPI returned to just above 2%, the middle of its 1-3% range, and the RBNZ declared job done and cut back to about 2.25%. Inflation then rose again to 4%. New Zealand is not a perfect metaphor, and complicating factors such as the Middle East energy shock are present, but as a small open economy it is a bellwether. Because there is unfinished business, investors should be very careful about betting on a peak in policy rates.

  “But I'd be very careful about betting on a peak in policy rates. There is unfinished business,”at 34:36

• James Aitken · Aitken Advisors

  ECB will hike if energy prices keep rising; rates traders betting on cuts were crushed.

  The ECB has been clear all year that it will hike rates if energy prices keep going up. Some rates traders at pod shops ignored this and built levered positions betting that European short-term rates would fall. Energy prices instead kept rising after the Iran conflict, and crack spreads rose too. Smarter rates traders got out, but others held on, and the resulting losses for hedge funds in European rates this summer were staggering.

  “The ECB, bless them, has been crystal clear all year, Danny, that if energy prices keep going up, we will hike rates.”at 51:57

Oil & fuels

• James Aitken · Aitken Advisors

  Refined products shortage is hitting emerging markets' gasoline, jet fuel and diesel supplies.

  A refined products crisis has been hiding in plain sight for months and is now causing huge problems in emerging markets that are struggling to obtain the gasoline, jet fuel and especially diesel they need. The Gulf conflict drives this: ships are coming through the Strait of Hormuz, but at what cost, since insurance is staggering. More barrels do not mean less cost, and the expense feeds through to global prices. Oil price dips on peace-meeting leaks are reversed when denied.

  “And we have a refined products crisis, which has been just hiding in plain sight for months, which is now causing huge problems in emerging markets who are struggling to get the gasoline, the jet fuel and especially the diesel that they need.”at 35:27

• James Aitken · Aitken Advisors

  Middle East conflict is worsening, pushing up energy and refined-product prices and inflation, with demand destruction a growth risk.

  Emerging markets are struggling to get gasoline, jet fuel and especially diesel, which he says has been hiding in plain sight for months. He says the Middle East situation is not getting better and is probably getting worse, with obvious implications for energy prices and refined products, which feed into inflation. He sees the most likely path to a growth shock as energy prices rising so high that voluntary restraint and demand destruction in refined products and oil follow, dragging down growth, earnings and AI. He says the Houthis' ability to attack Saudi Arabia at will shows the conflict is not resolving, and he says there is no incentive for Iran or Russia to settle.

  “This is not getting better at all. In fact, I think it's getting worse ... with obvious implications ... for energy prices and refined products in particular, which obviously have an impact on inflation.”at 35:59

US dollar

• Danny Moses · Moses Ventures

  Dollar's share of global reserves has fallen sharply, and US global standing as protector is being degraded.

  He says the dollar's status as the world's reserve currency and the US role as the world's protector are being degraded. He cites the dollar's reserve share falling from about 71-72% over the last twenty years to 57%, with a further move toward 52% possible, which he calls a massive move. He ties this to the US aligning with dictatorships and strains on NATO and Ukraine. He hedges that he is not saying the dollar will lose reserve status.

  “It's gone from 71, 72% in the last twenty years to 57. You go from 57 to 52 or some... That's a massive move.”at 39:21

• James Aitken · Aitken Advisors

  Dollar well supported near term by sticky inflows and Fed hikes, but a sharp, sudden collapse is possible later.

  He says a dollar bear market has started, but the dollar stays well supported near term. Global asset allocators keep buying US credit, bonds and equities out of strategic-allocation inertia, and dollar assets still offer higher expected returns on earnings growth amid the AI capex boom. He adds a nascent Fed hiking cycle makes it hard for the dollar to fall while the Fed is on a mission. He thinks a big reduction in the dollar overweight will come slowly, then all at once, like Hemingway's bankruptcy. He sees US institutional degradation as a structural negative, and expects the rest of the world to fund heavy spending partly by selling US equities eventually.

  “So we've got near term a dollar that is still well supported, but let's call them set and forget inflows from the rest of the world... So I'm pretty sanguine about the dollar.”at 43:03

US inflation

• James Aitken · Aitken Advisors

  Giant capex boom is current demand, so inflationary on the margin; AI disinflation talk is premature.

  Any giant capex boom equals actual demand while it is underway, as we buy, ship, dig and build the stuff, but it only equals actual supply in the future. The AI and national resilience build-out is currently only a sketch of potential supply, so on the margin it has to be somewhat more inflationary. He hears people talking about AI-driven disinflation and understands the argument, but in the first instance the spending pushes up demand.

  “But in the first instance, any giant CapEx boom represents actual demand, which on the margin has to be somewhat more inflationary.”at 7:41

US deficit & government debt

• James Aitken · Aitken Advisors

  Private sector may relever, shifting debt off sovereign balance sheets; a theory, but possible.

  Since 2008 the private sector delevered from 2009 onwards and its balance sheets were in good shape until recently, while the public sector stepped in to avoid a bust. Debt could rotate back to the private sector: the private sector could relever unevenly and remove some of the pressure from sovereign balance sheets. He acknowledges this is a theory, but it is an economic possibility, with potential for another rotation back to the private sector to take up more of the slack.

  “and remove some of the pressure from the sovereign balance sheets. Now, that's a theory, Danny. That's a theory. But it's also an economic possibility.”at 13:00

AI infrastructure & data centers

• James Aitken · Aitken Advisors

  Levered bets on AI bottlenecks worked, but downstream data-centre economics will now matter to investors.

  Everyone rightly and profitably went levered long the obvious bottlenecks, such as connecting cables, batteries, fuel cells and copper, the components that go into data centres. That worked because it did not require a view on the economics downstream; with funding liquidity flooding in, investors just plugged into picks-and-shovels trades. Now that the build-out has become so leveraged and financed on borrowed money, the downstream economics and cash flows the build-out must deliver will become really material for every investor. He suspects markets are only barely starting to respond to that.

  “people have gone levered long all the obvious bottlenecks, the connecting cables, the batteries, the fuel cells, this, that and the other, all the components that go into the data centers in particular”at 18:20

US rates & the Fed

• James Aitken · Aitken Advisors

  Warsh will keep hiking, lifting Fed funds toward 5-5.5% because inflation is unanchored.

  Scott Bessent is firmly in charge, though Kevin Warsh nominally chairs the Fed; Warsh is on a mission and giving the market nothing. Inflation is not anchored and sticky, with bottlenecks that can only be resolved by lower consumption, which in the absence of fiscal tightening requires much tighter monetary policy. Voters are upset about the level of the cost of living. Tightening financial conditions is the surefire way to pull core PCE toward 2%, because the wealth effect drives consumption. Trump has not come down on Warsh, so hikes will continue, not every month but in the direction of travel. He does not expect 150-200bp, just roughly another percent.

  “Now not every month per se, but I think he's gonna have to continue hiking rates because inflation is not anchored.”at 28:13

Middle East & Iran

• James Aitken · Aitken Advisors

  Arabian Peninsula conflict is spiraling out of control and not getting better.

  What is happening in the Arabian Peninsula is spiralling out of control and he does not think it is getting any better. Leaks about meetings, such as Pakistan arranging talks, briefly push oil prices down before they are denied and rise again, which someone is trading. The conflict is now metastasising: the Houthis can attack Saudi Arabia at will, and the Iranians may be stuck. Shipping through Hormuz comes at a staggering insurance cost, which feeds into global energy prices.

  “what is now happening in the Arabian Peninsula, I think, is spiraling out of control. I don't think it's getting any better.”at 34:42

Market sentiment, positioning & volatility

• James Aitken · Aitken Advisors

  Quant algorithms are systematically hunting crowded positions, which is why markets are so jumpy.

  He is convinced an algorithm operates across global markets every day trying to find and hunt down every crowded position, scanning areas like palm oil futures, crack spreads, European rates, Nikkei futures and Korean AI stocks. Traders who spot pain trades early and move first make a lot of money, and he says this is why markets are so jumpy now. He describes this as legal, though the evidence is his own conviction and examples.

  “I am convinced that there's an algorithm out there every day operating global markets that is literally trying to hunt down every single crowded position.”at 53:44

Canada, Australia & other developed economies

• James Aitken · Aitken Advisors

  Carney's reforms and rising capital inflows will help Canada over time, but housing and labor remain weak.

  Carney is a ruthless pragmatist who has cut public-service friction in Ottawa, cut across-province trade barriers, changed tax rules, and pushed pipelines and infrastructure. Global capital is slowly flowing into Canada for specific opportunities, mainly resources. Aitken says this helps the Canadian economy over time. He cautions that the housing market and labor market are both difficult and that monetary policy has bitten, so the full benefits will take time to show.

  “All of that's great, and it helps the Canadian economy through time. But you've got a difficult housing market, to say the least.”at 57:20