What caused the market "correction"?

[dan_s]

Notes below are from one of our super smart EPG members. My comments are in blue.
I believe the recent stock market "correction" had more to do with the AI tech stock bubble bursting than a coming recession. When the tech sector got hammered, fund managers were forced to sell very profitable energy companies to cover their cash calls.
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The Mag 7 experienced some wild volatility, losing trillions of dollars in a matter of days. It lost the equivalent of double Tesla's market cap in 48 hours.

Hate to Burst your Bubble

Does big tech have a cash flow problem? If you take a peek behind the curtain, it certainly seems like it.

Even though Google reported double digit earnings growth, their shares sold off by 5%. This caused a bit of a domino effect and was a major contributor to big tech's trillion dollar losses over the last week or so.

Additionally, Google's free cash flow dipped 40% to $13.5B. That's significantly below its reported net income of $24.3B.

What kind of accounting shenanigans are happening behind the scenes? Two words: data centers.

Four out of the seven companies that make up the Mag 7 spend $200B a year on data center infrastructure, including Google. < Without having enough electricity to run the data centers.

In 2021, big tech started revising their depreciation methodology for data center servers and networking equipment. These are their two largest sources of capex spending.

Google first extended the "estimated useful life" of their servers from three years to five years. That led to operating results experiencing a "favorable impact" to the tune of $2.1B in 2021.

In 2023, they did this again, extending the depreciation schedule from five years to six. The favorable impact there? Approximately $3.4B.

These changes allowed Google to cut annualized depreciation expenses by a whopping $5.5B. But here's where it gets tricky.

Big tech giants have massively increased their capex spending since 2020. Google doubled theirs from $22B to $44B. What's left is a huge gap between what's spent on capex and depreciation expenses.

This mismatch increases the risk of some major investor backlash. Pouring billions into these data centers without the cash flow to show for it could spell disaster. < These big data centers require a lot of reliable electricity. They cannot run on wind & solar. The only "near-term" solution is a lot more natural gas fired power plants and even those can't be built over-night. In my opinion, this "reality" is going to put a lot of AI companies in big trouble.

We could be looking at the pin that pops the bubble.

[Orindakid]

I follow a guy named Adam Taggart who runs a program called "Thoughtful Money" he publishes a few hours of interviews a week about 1 hour long with some pretty savy people.
They published one today which talked about the "Carry Trade" in relationship to the Japanese Yen, which I knew/know absolutely nothing about!!
In short, they say people borrowed yen at zero percent, then invested it in Dollar markets as the yen weakened. Now the Yen has now reversed and strengthened, and these folks got caught, creating margin calls and mayhem as they had to sell stocks to cover margin.

Here is today's talk
https://www.youtube.com/watch?v=ES5FH48tqQ8
Enjoy

[Orindakid]

I follow a guy named Adam Taggart who runs a program called "Thoughtful Money" he publishes a few hours of interviews a week about 1 hour long with some pretty savy people.
They published one today which talked about the "Carry Trade" in relationship to the Japanese Yen, which I knew/know absolutely nothing about!!
In short, they say people borrowed yen at zero percent, then invested it in Dollar markets as the yen weakened. Now the Yen has now reversed and strengthened, and these folks got caught, creating margin calls and mayhem as they had to sell stocks to cover margin.

Here is today's talk
https://www.youtube.com/watch?v=ES5FH48tqQ8
Enjoy

[Orindakid]

Sorry Folks, somehow I posted this twice.

[ChuckGeb]

David Hay has been forecasting the carry trade unwind for some time based upon BOJ support for the yen by increasing the interest rate in Japan. His work is published on Substack some of which is behind a paywall. Very reasonably priced and over several recent months he has been promoting half off. Very insightful twice a week Making Hay newsletter. Incidentally oil stocks is now top of his list. Search Haymaker on substack. He is a frequent guest on Thoughtful Money’s podcast(Adam Taggart). Google YouTube David Hay for several recent appearances on various podcasts. All worthwhile imho.

Good start here: https://youtu.be/zfZRUIztXWc?si=2IQJoVJ1mc3vLiUp