More Credit Problems, Mag 7 AI CapEX Continues, and Money Market Stress | Jack & Max
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
This episode of Monetary Matters explores the massive AI capital expenditure boom driving markets to all-time highs, with the Magnificent Seven companies spending over $100 billion quarterly on AI infrastructure. (12:00) Hosts Jack Farley and Max Wiethe examine whether this unprecedented CapEx surge represents sound investment or bubble territory, analyzing earnings from Microsoft, Meta, Google, and Amazon.
- Core themes include AI infrastructure investment sustainability, emerging credit market stress signals, and Federal Reserve balance sheet expansion amid money market pressures
Speakers
Jack Farley
Jack Farley is a financial analyst and host of Monetary Matters podcast, specializing in Federal Reserve policy and credit markets. He has previously worked with Real Vision and is known for his detailed analysis of monetary policy and alternative investments including precious metals.
Max Wiethe
Max Wiethe is co-host of Monetary Matters and provides market analysis with a focus on corporate earnings and investment trends. He brings a critical perspective to evaluating market cycles and bubble formations in technology sectors.
Key Takeaways
AI CapEx Boom is Fundamentally Reshaping Big Tech Business Models
The Magnificent Seven companies are transitioning from asset-light to capital-intensive businesses, fundamentally altering their investment profiles. (34:37) Microsoft, Meta, Google, and Amazon combined spent over $100 billion in a single quarter on AI infrastructure, with Microsoft's CFO indicating growth rates will be even higher in 2026. This represents a shift from businesses that required minimal capital to grow to ones that must continuously invest heavily in chips and data centers, potentially warranting lower valuation multiples similar to traditional capital-intensive industries like airlines versus asset-light businesses like Visa.
Demand for AI Compute is Outpacing Supply Across the Entire Chain
Microsoft's management reported actual chip shortages for the first time, with demand from cloud customers exceeding their ability to supply compute capacity. (19:43) The shortage has moved beyond NVIDIA's chip design to actual fabrication and memory production, evidenced by strong earnings from companies like SK Hynix and even legacy hardware company Seagate Technology. This supply-demand imbalance suggests the AI investment cycle may continue longer than bears anticipate, though it also raises questions about returns on invested capital as chip prices potentially increase.
Private Credit "Cockroaches" Signal Broader Market Stress
Multiple fraud cases in asset-backed lending, including the $430 million Broadcom Telecom/BridgeVoice scandal affecting BlackRock and BNP Paribas, reveal systemic issues in private credit markets. (01:00) While private credit executives claim these are isolated incidents unrelated to market conditions, the pattern of "cockroaches" emerging suggests deeper problems. The blurred lines between syndicated loans and private credit make it difficult to isolate risk, especially as private credit has grown by refinancing covenant-light syndicated deals.
Federal Reserve Balance Sheet Expansion is Imminent
Money market stress indicators show the Federal Reserve is losing perfect control over interest rates, with federal funds trading 3-4 basis points above target levels in mid-quarter. (43:34) This unusual stress outside of typical quarter-end periods signals reserve shortages that will force the Fed to end quantitative tightening in December 2025 and likely begin expanding the balance sheet by 2026. Analysts expect monthly treasury purchases of $35 billion starting in 2026, representing a significant shift in monetary policy.
AI Investment Cycle Timing Matters More Than Bubble Concerns
While the massive AI CapEx spending may constitute a bubble, the timing of any potential collapse remains uncertain and could be years away. (32:01) The revenue growth supporting these investments - with companies like Microsoft reporting 51% growth in commercial performance obligations and 110% growth in bookings - suggests current demand justifies the spending. However, the sustainability depends on downstream customers eventually showing massive cost improvements and productivity gains from AI implementation, which has not yet materialized at scale.
Statistics & Facts
- Meta spent $19.4 billion in quarterly CapEx (up 111% year-over-year), Microsoft spent $35 billion (up 75%), Google spent $24 billion (up 81%), and Amazon spent $34 billion (up 61%), totaling over $100 billion in a single quarter. (12:37)
- Microsoft's commercial remaining performance obligations grew 51% year-over-year, with bookings up 110% according to the CFO, indicating strong future revenue pipeline. (15:20)
- Federal funds rate is trading at 3.87% compared to the target midpoint of 3.83%, indicating 3-4 basis points of stress in money markets during mid-quarter period when such stress is unusual. (45:00)
