Is Capitalism Under Threat?
It’s good to be back in rhythm after a week on the road visiting clients on the West Coast. Let’s start with the big news over the weekend, where it looks like Congress is coming to its senses and finding a way to end the longest government shutdown on record. I'm sure we all have a lot we can say on the matter, myself included, but what’s the point? U.S. leadership has been in some form of dysfunction since we pulled ourselves out of the GFC back in 2010. From what we know at the moment, the House is expected to vote on the bill on Wednesday, and then it will make its way to the President’s desk, putting the government on track to open by the end of the week. Keep in mind, this is a stopgap funding measure with an expiration date of January 30th, where maybe we get to do this dance all over again (ugh).
Ending the shutdown will restore visibility into critical economic data like the two missing Jobs Reports, September PCE, and October CPI (due this Thursday). This may or may not provide clarity for the Fed to take action at its next meeting on December 10th. Investors should note that resumed data releases may expose compromised data quality after the Bureau of Labor Statistics halted in-person collection. Making sense of the upcoming macro data will prove challenging and is likely to yield less-than-desirable signals, given the generally weak trends we’ve seen in much of the private-sector data. The one glaring exception — and this is an important one — has been Q3 earnings results, where corporate profits are expanding at their fastest pace in four years as S&P 500 companies deliver roughly 13% profit growth.
As for markets, equities are coming off a rough week where the Dow slid -1.2%, the S&P 500 declined -1.6%, and the Nasdaq tumbled -3.0% (its worst week since early April). The declines would have been steeper if whispers didn’t make the rounds on Friday afternoon that momentum was building to end the shutdown – the Nasdaq was down as much as -2.1% mid-day Friday, but closed with a modest -0.2% dip.
A lot of narratives have been swirling of late, be it the lack of economic data being released (allowing imagination to take over) or mixed messages out of the internals of the stock market with cyclical areas under pressure, but it’s the recent questioning of the AI theme that has been carrying the entire market that is causing the most consternation. Coming into today, mega-cap Tech and other AI-centric names have collectively lost more than $1.1 trillion of market value over the past week, led by Nvidia, Meta, Palantir, Oracle, Tesla, and Microsoft. Palantir stands out in this group, a stock that has doubled this year while recently reporting very strong earnings results, but with an insane 185x forward P/E multiple, it's no wonder the stock got clobbered (-11% last week) with investors reevaluating the AI theme. Other notable declines were Oracle down nearly -9% on the week, Nvidia off by -7%, Tesla -6%, Microsoft -4%, and Meta slipped an additional -4% on the week after already falling -13% following its earnings report, with investors getting nervous about its elevated capex plans.
This AI arms race, where all the mega-cap Tech players are spending like mad as though it's going to be a winner-take-all outcome, has investors evaluating the setup with much more scrutiny of late. I’m not suggesting investors are abandoning the theme or even risking not having exposure to it, but my financial feed is littered with much more skepticism and models questioning the numbers than I recall 3 and 6 months ago. There is this gnawing sense that the boom in AI-related capex may have gone too far. It does seem as though we are at a tipping point, where the expenditures are surpassing the internally generated cash flows, conjuring up the memory of what happened as we exited 1999 to the early 2000 bubble peak.
Alphabet, Amazon, Meta, and Google reported a combined total of $112 billion of capital expenditures in the third quarter. Google reported capex of $24 billion in its September quarter, which is up by a resounding +83% from a year earlier; Microsoft with a $35 billion expenditure, which represents a +74% surge (and plans for a steeper spending increase for next year); Amazon stated that its capex spend was $34.2 billion in Q3, bringing the YTD tally to nearly $90 billion (and reporting that by the end of the year, the annual tally will reach $125 billion); and Meta with a $19.4 billion capex spend this past quarter — more than double what it was a year ago (and announcing that its total AI spending will top $100 billion in 2026). The aggregate estimates coming out of all of Silicon Valley to fund this epic AI expansion are coming in at $400 billion this year, with the budgets calling for a number even bigger than that in 2026.
These numbers are staggering to say the least, and there is an added issue coming to light, which is that the internally-generated cash flows and the liquid assets on the balance sheets are no longer sufficient to fund this next leg of the capex boom. This was a point defensive bulls would always bring up as a key difference between now and the late-1990s bubble – in that the current capex spending bulge is being funded by operating income. For the most part, this has been true, but such a claim doesn’t look to be as valid going forward. Year-to-date, there have been more than $200 billion of bonds issued to finance the AI investment boom — an estimated 90% of that coming from Meta, Alphabet, and Oracle. Three tech giants — and the debt flood has reportedly accounted for over one-quarter of all the net new supply of corporate bonds to hit the market this year. Bank of America’s Chief Strategist, Michael Hartnett, put out the following table in his weekly ‘Flow Show’ report cataloging the trend in capex, cash flow, capex as a % of cash flow, and debt issuance over the past decade.
Suffice it to say, without a meaningful return on these investments over the ensuing years, investors are looking at a dramatic margin squeeze, lower earnings growth, and with that comes lower valuation multiples. Not a prediction, but rather an objective observation to juxtapose against a consensus narrative that is pricing nirvana. Now I don’t want to come off as a hypocrite or as an investor talking out of both sides of his mouth – it's almost impossible to have exposure to US stocks and not have exposure to these names and this theme. For our clients, we own several of the mega-cap Tech hyper-scalers, energy/power/industrial companies tied to the AI theme, and even broad-based ETFs with exposure. So, it's not as though we all don’t have a vested interest in seeing these companies and these themes succeed; all I’m trying to bring to light is that it's not a slam dunk nor a forgone conclusion that it will. At this point, it's priced in and investors are fully loaded in positioning for a good outcome. I’m just suggesting it’s a worthwhile exercise to evaluate the other side, so you're not completely blindsided if the bullish-priced outcome doesn’t play out as expected.
Moving on, another thing that caught my attention last week was the following comment from Treasury Secretary Scott Bessant:
“I think there are sectors of the economy that are in recession.”
Rare is the occasion, if ever, that you will hear a senior White House official utter the “R” word unless they are blaming it on someone else or denying its existence. While I wish I could disagree with Mr. Bessent, I can’t as numerous areas of the economy are either stagnating or in recession: low-income retail spending, housing, manufacturing, trade, and commercial construction are a few that come to mind.
Sure, some might push back on that assertion, claiming this is blasphemy – just have a look at the stock market, Corey, it's at an all-time high. Yes, the stock market is at an all-time high, but the S&P 500 is not the economy, and vice versa. The economy and the capital markets are more detached today than at any other time I can reconcile in the post-WWII era. Take the labor market as an example, as job growth has been decelerating at a rapid pace over the past six months: +185k March, +177k April, +19k May, -13k June, +79k July, +22k August, which is concerning considering that 70% of GDP is driven by consumer spending. But Corey, didn’t you just get done typing that the stock market is not the economy? Yes, but the internals of the stock market are confirming what has been transpiring in the labor market. The stocks that make up the Employment Services subindex in the S&P 500 have plunged more than 20% since early June (PAYX – 31%, ADP -23%, RHI -69%...) and is at its lowest level in fifteen years.
Housing is another cyclical area of the economy that has close ties to both the consumer and the economy, and it too is in a recession. According to St. Louis Fed data, the volume of completed but unsold homes now stands at the highest level since the summer of 2009, when the Great Recession was hitting its nadir (+18% higher today compared to a year ago). Since mid-September, mortgage applications for home purchases have declined by 6.5%, and pending home sales are lower today than they were in the months following the Lehman collapse in the fall of 2008. We learned on earnings calls from D.R. Horton and Lennar that mortgage-rate buydowns, hefty price discounts, and sweeteners like free appliances are falling short of luring potential buyers back into the market. As we all gaze day in and day out as to what the AI universe is doing, it’s as if residential real estate doesn’t matter or even exist anymore — meanwhile, the S&P 500 Homebuilder stocks have sagged by a sharp -18% from the nearby September peak with scant attention being paid.
To me these are just a couple of the many data points highlighting the glaring discrepancy in both a K-shaped economy and a K-shaped stock market. In both instances, the ‘haves’ and ‘have mores’ have been able to carry the load, but we’re kidding ourselves if we think this is sustainable. Even if it is sustainable, it's not healthy for a society as divided and fractured as we’re witnessing today. Which brings me to an X post that was circulating last week, regarding an email titled “Millennials” that was written back in 2020 from tech-mogul Peter Thiel to Facebook founder Mark Zuckerberg, another tech-mogul Marc Andreesen, and other Facebook executives:
I find this email to be one of the more revealing and profoundly thoughtful articulations of the generational chasm that has metastasized in the post-GFC era. Peter Thiel isn’t predicting socialism here, but rather diagnosing the terminal logic of late capitalism: when ownership becomes inaccessible, belief in the system dissolves. In a nutshell, he’s mapping a structural inevitability. I’m not suggesting we’ve reached an endpoint at this current point in time, but I would be a fool not to think we’ve been careening towards this destination at an accelerating pace. The last phrase in this email hits the nail on the head, “if one has no stake in the capitalist system, then one may well turn against it.”
Every economic order survives only as long as its participants believe they have a stake in its rewards. When that belief breaks, when capital accumulation is delayed beyond a generation, the feedback loop collapses. In plain terms:
Boomers owned.
Gen X still managed to buy in.
Millennials rent the world their parents own, and Gen Z is now locked out entirely.
The result isn’t ideological socialism. It’s resentful capitalism – a system where people still chase wealth but no longer trust the architecture that allocates it. That’s the precursor to all great systemic transitions – Rome, the Weimar Republic, post-Soviet Russia, even 18th-century France.
Thiel’s email is almost tragic in tone because he’s speaking to the very class – Zuckerberg, Andreessen, Sandberg – who became the gatekeepers of the new digital feudalism. They turned “ownership” into platform access, and “opportunity” into subscription. The economy was financialized, then digitized, then moralized – and in each step, capital got lighter, faster, and further removed from the people whose lives depend on it.
What he’s really saying is this: Capitalism doesn’t fail when the rich get richer. It fails when the poor stop believing they can join them – a point articulated and quantified very well in Mike Green’s Substack post over the weekend. That’s the pivot we’re living through right now. The “Millennial Socialism” he mentions is the immune response of a generation whose time horizon was stolen. The irony is that Thiel, the ultimate capitalist contrarian, saw it first. And he was right. The generation that couldn’t buy into the system will end up rewriting it.
I’m not suggesting Thiel’s perspective is the only way to look at the friction we’re seeing in society today, but I also don’t think he’s far off the mark. I don’t have a well-informed or useful opinion on Zohran Mamdani, a self-proclaimed socialist, being elected mayor of a city that epitomizes capitalism, other than to interpret it as another signpost of the times. Populism, which I would argue was kick-started when banks got bailed out during the GFC, gained traction with Trump 1.0, shifted into overdrive when Uncle Sam handed out checks to anyone who could fog a mirror during Covid, and has been picking up steam ever since. Look, I’ve purposely steered clear of politics over the last several months, and my intention with this segment of the commentary isn’t to make a political point or judgment, but rather to acknowledge issues I think are shaping politics and, therefore, impacting markets/investors.
This isn’t an issue about blue or red; both are equally deserving of praise and blame, depending on your perspective. But don’t kid yourself if you think both sides aren’t aware of what's happening and are taking actions to address it. Whether it be a 50-year mortgage or handing out money, all politicians have their version of a solution:
No wonder gold is up 275 basis points today and the entire metals complex is back in rally mode. While I’d like to think there is even the slightest interest in any politician taking our mounting debt pile seriously, I know they can never offer anything more than empty promises. You’re not going to get elected in the current era by taking something away from someone, and those are the decisions that would need to be made to have a long-term impact on our debt trajectory.
As for markets, it looks as though we’ve had a reasonable cleansing of some of the excesses that were getting built up going into mid-October. I don’t love the equity market here on a long-term basis, but I think we have a runway for a solid rally into year-end. Moreover, if the economy picks up some momentum over the next several months, as I suspect it will, and earnings continue to remain solid, it’s hard not to have exposure to equities in your portfolio. But I’d still complement that exposure with gold, select commodities, energy, and fixed income that is offering secure mid-single digit yields. Furthermore, be flexible with your framework for evaluating the road ahead. A lot can change, and it will be important how you, as an investor, separate the signal from the noise. What will be a good tell in the weeks ahead is how risk assets react to good or bad data, given the shutdown dynamics and how it may or may not alter the Fed's path on interest rate cuts.
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