Some Strains in the AI Capex Spending Binge...
- Marc Bentin
- Oct 13
- 7 min read
BentinPartner Weekly
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Marc Bentin,
Bentinpartner GmbH
US stocks suffered a 2% to 3% selloff last week with concerns of the past couple weeks crystalizing that the AI world is moving to a new era of corporate entanglement with Open AI investing tens of billions in AMD in exchange for promises to buy mountains of AMD chips, after Nvidia invested billions in Open AI as well…
Some increasingly view it as an ecosystem. Others like a shell game… ” Either way, the AI business is beginning to function like one giant dollar eating, energy sucking entity that makes chips, trains models and sketches utopias to justify its runaway costs”, Axios wrote.
As we noted last Wednesday, there was no small paradox in seeing Banks and Private Equity companies or funds that are supposed to keep the liquidity spigots open to fund the AI craze, underperform, while the AI infrastructure stocks witnessed another day of stellar performance in particular AMD (+10%). Nvidia also added 2% that day.
The same issues and paradox were again in full display on Thursday with the tech sector and some AI names holding reasonably well while the funding machines for the related capex spending continued to suffer the aftershock of the Tricolor and First Brand fiasco, which we can only hope are not the “canaries in the mine” of something more ominous.
It has to be said that some weakness in tech had already occurred early last week with ORCL shedding -7% on Tuesday after the company reported a disappointingly slim profit margin (14cents to the dollar comparable to many non-tech retail companies commanding a much smaller valuation) in its cloud business.
The financing of the AI Capex spending binge, comes primarily from venture capital (equity and debt), not from the (largely) inexistent cash flows of the AI Wunder kids…
Last week’s sudden correction also occurred as M&A activity roared back globally (with IPO’s posting their best year since 2021) and several mega deals in Q3 building on momentum from earlier this year.
“The Fed remains likely not only to cut rates but to resort to QE if there is a crash in risk assets”, former GIC Chief Investment Officer, J. Jaensubhakij said. “Is the Fed actually going to do QE to the power of X again? I think there is a strong likelihood of that happening”, he opined.
This has been our view for a while and it has become more of a consensus view as well which explains the “risk on” attitude that is engulfing precious metals along with AI tech, irrespective of stocks, rates or the dollar going up or down.
On the economic front, US mortgage demand weakened again last week (-0.2%) despite interest rates dropping slightly with those who are borrowing preferring lower but more dangerous adjustable short-term financing.
US consumer borrowing still rose in August but at the slowest pace in 6 months.
Recent economic data (from prior to the government shutdown) also showed that US economic growth remained resilient despite mounting threats to the US economy.
As the FT recently reported, part of the US economic optimism has been self-fulfilling prophecy as the hundreds of billions of CAPEX investments companies have been pouring on AI now account for an astounding 40% of US GDP growth this year. AI companies have also accounted for 80% of US stock markets performance in 2025, also contributing to fuel US GDP growth.
What would happen to the US economy in case the AI music would stop is easy to fathom…
On the policy front, Federal Reserve Governor M. Barr called for a cautious approach toward further interest rate cuts, emphasizing the risk that tariffs will create inflation. Federal Reserve Bank of Minneapolis President Kashkari conveyed a similar message last week. It was also reported in the latest Fed minutes that some top Fed officials would have preferred to keep interest rates unchanged last month for the same reason because progress towards the 2% inflation target has stalled.
Expectations for inflation by US consumers themselves in the year ahead also jumped to 3.4% in September (from 3.2% the previous month). For 5 years ahead, this inflation forecast also ticked higher to 3% (from 2.9%).
Economic data in Japan proved resilient with Japan’s household spending rising for a fourth month despite signs of persistent inflation and as the Central Bank continued to mull the timing of its next interest rate hike which has been made more difficult following Sanae Takaichi winning the leadership of the ruling party (LDP) as she is widely seen as a dove, susceptible to seek more sway over the BoJ policy making going forward. JPY weakened sharply as a result with yields on 30Y JGB’s also pressing higher.
The political situation in Japan remained tense however after Japan’s governing coalition abruptly collapsed on Friday weakening the LDP leader’s position before she could become Prime Minister. The Nikkei future which had closed the week sharply higher (+3%) lost this advance today.
French President Macron reappointed Sebastien Lecornu last week for a second trial at forming a government (which was announced overnight) after the government announced last week failed to last more than 1 day, leaving the French political situation in turmoil and E. Macron significantly weakened but with a chance to pass the 2026 Budget, a prerequisite to avoid more financial pressure (well contained so far…).
China tech stumbled -8% on Friday, following D. Trump’s rage access where he promised a (further?) 100% fresh tariff on Chinese exports, following China’s decision to take restrictions, on rare earth exports in a vein that remembered the export restrictions imposed on US chips exports to China.
Chinese stocks will likely recover but investors should now consider to only own Chinese stocks in Hong Kong (and not in the form of ADR’s trading in New York) as the expected further deterioration in Sino-US relationship will likely lead over time to forced or voluntary delisting (if not worse) of these entities from US exchanges. The playbook for this cautionary stance should be what happened to Russian ADRs (repriced at ‘0’) while the entities trading on Moscow’s exchange recovered their losses to trade above their pre-war level (see Lukoil, Rosnev), only wiping out US and European investors.
Reflecting on the broad nature of Friday’s risk off posture, cryptos also suffered record liquidations (precipitating a -12% selloff in bitcoin) just days after bitcoin hit a fresh all time high, following D. Trump’s inflammatory comments on China.
New Zealand cut interest rate by a larger than expected 50bps last week (to 2.5%) as growth worries loomed.
Over the past week, the S&P500 sold off by -2,4% (11,4% YTD, Z-score -2,3) while the Nasdaq100 sold off by -2,3% (15,3% YTD). The US small cap index sold off by -3,3% (7,6% YTD). AAPL sold off by -4,9% (-2,1%).
The Equally Weighed SP500 sold off by -3,2% (5,6% YTD, Z-score -2,7), underperforming the S&P500 by-0,8%.. The median SP500 YTD return closed the week at 3,9%.
Cboe Volatility Index rallied 30,1% (24,8% YTD, Z-score 4,1) to 21,66.
The Eurostoxx50 sold off by -2,2% (15,6%), outperforming the S&P500 by 0,3%.
Diversified EM equities (VWO) sold off by -4,1% (19,3%, Z-score -3,0), underperforming the S&P500 by-1,7%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 1,5% (-5,2%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,4% (6,4%).
10Y US Treasuries rallied -9bps (-54bps) to 4,03%. 10Y Bunds dropped -5bps (28bps, Z-score -2,3) to 2,64%. 10Y Italian BTPs dropped -5bps (-6bps) to 3,46%, matching Bunds.
10Y French OAT's rallied -3bps (28bps ) to 3,48%, underperforming Bunds by 2bps.
US High Yield (HY) Average Spread over Treasuries climbed 36bps (17bps, Z-score 3,7) to 3,04%. US Investment Grade Average OAS climbed 8bps (-1bps , Z-score 3,6) to 0,86%.
Gold rallied 3,4% (53,1%) while Silver rallied 4,5% (73,5%). Major Gold Mines (GDX) dropped -1,7% (123,5%).
Goldman Sachs Commodity Index dropped -1,5% (3,2%, Z-score -2,4). WTI Crude sold off by -3,3% (-17,9%, Z-score -2,4).
Overnight in Asia…
S&P future +82 points; Hong Kong -2.0%; China -0.9%
As could be expected following the comedy show from last Friday which did not cause but exacerbated the stock market selloff, D. Trump downplayed the rift with China saying that China’s situation “will all be fine”, enabling the SP500 and the Nasdaq to recover overnight by respectively 1.2% and 1.6%, or half so far of Friday’s losses, caused by the AI financing turmoil and a general widening in credit spreads.
D. Trump is set to travel to Israel and Egypt today. He declared the war in Gaza “over” and will speak to the Knesset today. “People are tired of it”, he said…”it has been centuries”. 200 US soldiers are expected to be dispatched to Gaza with other countries likely to send military contingents to “secure” the cease-fire.
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