This year began with the high hopes of an everlasting AI revolution- one which will change the way humans lived and conducted their lives. Half-way through the year and we have seen the great capex buildup- promise of infinite compute, historic IPOs- Space X being the biggest, almost record revenue and profitability numbers for the AI and related players and yet, something doesn’t feel right.
We have been warning about a great unravelling since the beginning of this year when we gave the clarion call- Sell, Regret and Get Rich. A lot of things which we had a premonition did come true, in strangest of the ways possible. We last wrote that we expect a significant correction in the global markets and that the Indian decoupling is a myth. Here is how things have stacked as we speak.
A. The high beta asset classes are all in deep bear markets- Bitcoin, Silver and as we speak, Kospi is down 30% from its recent peak of 9300.
B. The Global Central Banks have begun to raise rates, even as the hopes of a Fed Put fades away. BoJ, RBA, ECB have all blinked and its widely expected that the Fed is more likely to raise twice in the next 6-9 months with ECB and RBI following suit.
C. The AI mania has now ticked all boxes of a market topping formation. Space X IPO at close to 300x revenue, even when Elon Musk is an idol to me, coupled with a $20B debt offering indicates that the large players are taking money home as fast as possible. Alphabet and Nvidia raising debt is almost incomprehensible except for the fact that they all know that the liquidity is available now, it may not be available next year. Closer home, Jio raising fresh equity instead of an OFS in its upcoming IPO confirms the same. When the richest man in Asia wants to take money home rather than allowing its existing shareholders to exit, we take serious notice.
D. The Strait of Hormuz remains shut in its fifth month and we did not believe in the ceasefire for a second. The war may or may not get over but the significant damage to oil routes as well as production will take a large toll on global economies.
E. The private credit continues to face serious redemption pressure in the US as the AI story gets questioned increasingly. Apollo has joined Blacktstone and the likes to freeze redemptions and this is eerily like the 2007-08 build up.
So what do we think is going on!
We have identified in our previous blogs that the world is now facing three significant challenges- the three bear scenario as we had named. The first bear is reminiscent of the 2000 dot com era wherein the AI companies are now trading at such valuations and the mania in Korea, US and Japan is so strong that its almost a sin to question their valuations because AI is going to change the world. Well, internet also did change the world but NASDAQ fell 80% in 2000-2002 and it took 15 years for it to come back to 2000 levels! Kospi has already shown signs of cracking and just like it happened in Silver in January, it fell slowly and then suddenly!
The second bear is regarding inflation. The global west is facing structural inflation after close to 35-40 years. Ever major economy- US, UK, Germany, France, Japan, Korea, Australia and the likes have their 10y bond yields at multi-decade highs. The war in West Asia has only accentuated the pace and due to extreme price hikes in fuel and memory and shortage of critical minerals and gases such as Helium, the inflation is now getting sticky. Japan has just burnt close to $75 Billion in first week of May to try to pop Yen up but to no avail. With 10Y at close to 2.9%, it is only natural that the BoJ will be forced to keep raising rates to avoid a sharp devaluation of the yen and that might kill the vaunted Yen carry trade.
We also spoke of the conundrum the RBI finds itself at closer home. Having tried every possible measure to keep the Rupee off the downward slope, including the FCNR(B) deposits and FII taxation relaxation, it is now back to 96 levels. A rate hike hasn’t been explicitly ruled out and if the Fed blinks, so will the RBI.
The US Fed was very likely to cut rates as Trump had picked Kevin Walsh in January. Well, the core CPI is now inching closer to 4% and it is now widely believed that the Fed is more likely to raise in September. The 2y is now well above 4.25%, a good 50bps above the repo and with the 10Y approaching 4.7-4.8%, no central banker will even try to cut rates and undermine its credibility.
On the third front, the private credit market is showing significant stress, and the sense is that it’s the subprime of 2026! If we combine the above three factors, we have a complete confluence of the biggest bear markets of the previous 100 years- 1973, 2008 and 2000! The only difference is that in this case, the Fed can’t cut rates to contain the damage because inflation remains high!
In the End:
We believe that the Indian decoupling is a myth. If the mother ship unloads in the US, at no point, India can remain immune and anybody saying otherwise that we should be happy that the AI story is unravelling is possibly high on a proscribed substance. The Indian mid-cap mania remains high and just that it took 15 years to make money in NASDAQ, it is not difficult to state that the Indian mid and small cap index will see diminishing returns over the next five years. You don’t believe me, right? Well, go back six years and look at the returns of the then darlings- the quality companies, the classic compounders, etc. So anyone buying a utility stock at 100 times earnings must be very conscious of what they are paying!
Are we bearish on India? Not a chance. We remain eternal bull but investing requires ability to deploy money and not buying equities as they are expensive and deploying money in droves when they are cheap is the essence of making high returns over long period of time. We believe that the winter is coming, and it will be cold and severe. We want to be the squirrels who had the food to survive and if we do, we also will thrive!
Life is all about Compounding! 