Late-Cycle Reckoning:

The AI capital-spending boom is creating the conditions for a combined credit crisis and recession that could produce a lost decade for US and global equities.

• The S&P 500 trades at a Shiller CAPE above 40, a level reached only briefly before 2000, while its earnings yield is about 2.5% versus more than 3% real yield on long-dated Treasuries, making the equity risk premium negative.
• Hyperscaler capital expenditure is heading toward $1 trillion annually and is increasingly debt-funded, while long-term rates have moved above 5% and the Fed has resumed tightening; if financing stops, orders could fall faster than underlying demand.
• Market fragility is already visible beneath the index: 40% of S&P 500 stocks are in bear markets and the median stock is down almost 20%, while passive strategies, multi-manager platforms and zero-haircut repo have concentrated leverage and could drive correlations toward 1.0.
• The author expects a period of simultaneous recession and inflation, or “recflation”, because central banks would be unable to cut aggressively while inflation remains above target; fiscal deficits are already 6% of GDP at full employment, US debt exceeds $40 trillion and interest costs are above defense spending.
• Earlier speculative episodes in meme stocks, crypto treasury companies, the Metaverse, ARKK and SPACs typically lost about two-thirds of their value, while the AI complex is presented as the final and largest bubble; MicroStrategy lost 90% after trading at a 400% premium to its Bitcoin holdings, and Amazon fell 92% after 2000 before later dominating retail.

Takeaway: The recommended response is an extreme underweight to US equities, global technology and high yield, with Treasuries, Brazilian bonds, commodities, gold miners, catastrophe bonds, Japan and hedgeable event-driven special situations used as preferred diversifiers, although the thesis depends on the AI financing cycle deteriorating into a broader credit event.