There’s Something Happening Here

Where is the market heading, and what does this mean for me?

It’s been a minute since I’ve shared with you a market update, and now’s the time.

Over the past few weeks, we’ve talked about how I invest, discussed how modern markets are unfolding, and what happens when you are at the tail end of bad financial advice.

This is all important stuff, but right now we’re all asking the same questions.

Is the market about to drive off a cliff? Is the AI rally finally buckling? Where does the market go after it’s third year of great returns?

Yes, Nvidia’s earnings results last night were a huge win, but these questions are hard to ignore because these are the headlines that are floating around:

• “Gold’s move in ‘lockstep’ with U.S. stocks could point to a brewing market danger”

• “Stocks are caught up in a powerful rotation. Here’s what could deliver a shock.”

• “Bitcoin drops below $92k.”

• “Investors Dump Tech Shares as Shutdown Relief Evaporates.”

  
  

Furthermore, when you have a legendary investor such as Peter Thiel completely exit his position in Nvidia, it makes you wonder.

Markets are at all time highs. We’ve never been here before.

This is the third year in a row the market has risen, there’s massive multi-year momentum, but with Bitcoin’s 75% correlation to stocks this year and it’s 30% sell-off since October, along with the longest U.S. Government shut down, people are looking around wondering what’s next.

Is the market going to continue its run higher, or should we all run for the hills?

People need cash to invest. People need to feel confident to invest.

It technical terms, the markets need liquidity to breathe, and investors need confidence buy, hold and sell.

Let’s push through the noise and look at the facts.

Follow the money.

In the midst of the questions surrounding the markets right now, there’s what people say and what they do.

Talk is cheap, it’s even cheaper in the world of AI. Here are the three major suppliers of liquidity in our economy:

1. The Government

2. Corporations

3. People

If these three suppliers are healthy, confident, and spending, we’re good. If not, watch out.

Here’s what each of them are doing at the moment.

The Government

As you know, our federal government has been running massive deficits since 2020. We’re spending money as a country like it’s going out of style. While the long term ramifications of this are unknown, in the short term, if the U.S. government is spending money, that will, in some form, make it into the broader economy and lift things up. Here’s a chart of the correlation between the S&P and U.S. government debt. Remember, correlation does not necessarily mean causation, but the correlation here is striking.

U.S. Corporations

Our country is filled with humanities best companies, ever. Period. We thankfully have hundreds of companies that make billions in profits every single year. Just think about this, what if you ran a company with $250m in profits every quarter and you needed to figure out the best way to use that money. Invest in AI, ship a dividend to shareholders, invest in a new business line, buy a company, or buy shares back? Our country is full of these economic miracles, and right now, literally right now, companies are laying off people to create more cash flow to invest in AI. Corporate balance sheets are strong right now. Companies are aggressively managing their cash flow and spending it on AI. Here’s a chart of Capex for the big AI players right now. You can tell that at the start of 2024, they all hit the gas pedal. (Note, I put NVDA in here to show they don’t have Capex but rather a larger R&D budget. They are the recipients of this spending.)

U.S. Investors

Put simply, the average person you see at the grocery store is likely significantly richer than they were four years ago. Inflation still stings and housing is expensive, but the health of U.S. balance sheets is strong. There are trillions of dollars of cash on the sidelines ready to be deployed. Yes, we American’s love spending money, but we’re also pretty good at making it and growing it too. Here’s a chart of the S&P’s rise along with Vanguard’s money market fund AUM. The markets are ripping higher while investors hoard more and more cash.

The sources of liquidity in the markets right now are strong.

The U.S. Government, after a failed DOGE experiment this year, is still spending. Companies are largely flush with profits and cash and are using that cash to invest in AI, and regular people, like you and me, have money to invest.

Must be good out there?

Honestly, it is pretty good, it just doesn’t feel that way.

“There’s something happening here, what it is ain’t exactly clear.”

Buffalo Springfield penned these lyrics in November 1966 in Hollywood. Fast forward 59 years, those lyrics sum up what people are feeling as they exit their investing apps to check the news.

While the previous section painted a clear picture of the health and habits of the three sources of liquidity, the next logical question is this: what could sour the mood of the three major sources of cash in markets?

Let’s break it down:

The U.S. Government

Earlier this year, before President Trump even took office, the Department of Government Efficiency was formed, led originally by Elon Musk and Vivek Ramaswamy. As you know, the project fell far short of expectations and we’re still spending. Tariffs were introduced to generate revenue for the U.S. government to offset the deficit, but revenue from the tariffs looks to be far less than originally proposed by the administration. So the U.S. government appears, after much effort, to remain on the same spending trajectory. There has been strong correlation between government spending and equity markets since 2020.

U.S. Corporations

This is the area of the market to watch. The massive capital expenditures in AI infrastructure have been the story this year. The huge spending from large U.S. tech companies, and the waterfall effects to small and medium size businesses, have created an economic boom. But once the compute is built, then what? You only build the data centers once, and spend twenty years paying them off. The rush for compute will ultimately be either overshot or undershot. There will be corporate casualties along the way. This could be the story of 2026 or 2027. But for now, the spending and the growth prospects are in line.

U.S. Investors

What will make us, the people, stop spending? This is a more complicated issue than the other two because each of our financial lives is completely unique. Remember, there are 503 companies in the S&P 500 right now and 258 million U.S. adults. At a high level, it will be layoffs from a recession, or a wealth destruction event that pulls people to safer parts of the markets. It is always this way.

On one hand, the backdrop of investing is clear. AI is the storyline of this decade, coming off the liquidity boom from Covid. The U.S. government is spending, corporations are spending massively, and the people have gotten richer because of it.

But this happened in the 1990s with the internet, and we saw how that ended. This happened in the 2000s with the housing boom, and we saw how that ended.

The markets are fidgety right now. People want rate cuts to buy houses. People intuitively know that what goes up fast often goes down fast. The dearth of daily articles on layoffs is stressful. Will we really not have to work one day with AI?

I believe that really is the story. On one hand, the AI boom is fascinating. It is a once in a lifetime transformation into something new. There is money to be made.

But what if you fall on the wrong side of history?

That is the scary part. And that is what I believe is driving some of the market volatility right now.

It is the human behind the machine, not just the machine.

And while the backdrop of the markets is good, I’ve been talking with a lot of clients, readers, friends, and family members about AI, and the consensus from my vantage point is this: it’s amazing, but are we just going to sell our souls to this thing?

Here is how this is unfolding. People love the profits and growth in the AI storyline and are highly skeptical of the societal impacts of AI, particularly on the younger generations.

To wrap this up, Peter Thiel sold his entire stake in Nvidia, a bold move in his hedge fund, but he didn’t run for the hills. He still owns massive stakes in Tesla, Microsoft, and Apple.

So yes, he sold a huge stake in the biggest company in the world. We should pay attention. He didn’t exit the AI story. Not even close.

He repositioned and took some profit on the way up.

AI’s impact on markets, our economy, our families, friends, and communities is already being felt.

Love it or hate it, this will be the storyline for the back half of the 2020s. Your money needs to last decades, not days. The storyline is getting clearer, even though the end outcome is not. You have to invest through this change.

There is no other way. No shortcuts. Just diligent investing.

Count on me to be giving you the play by play as it unfolds.

Tom