'COLOSSAL SHIFT': Something big is happening with oil

Key Concepts

• Hard Assets: Gold, silver, platinum, palladium, oil, uranium, and commodities – seen as safe havens during economic uncertainty and benefiting from global spending.
• AI Data Centers: Rapidly expanding infrastructure facing potential headwinds due to NIMBYism (Not In My Backyard) and potential loan defaults.
• Private Credit: A growing sector (currently $1.8 trillion, with $300 billion promised to financial advisors) facing liquidity concerns and potential for a credit crisis.
• Macroeconomic Outlook: Divergent views on GDP growth, with some predicting 5% growth driven by trade and onshoring, while others foresee a slowdown due to AI-related loan defaults.
• Bank Exposure: Concerns about bank exposure to AI data center financing and potential defaults in auto lending.
• NIMBYism: Local opposition to the construction of facilities, particularly AI data centers, hindering growth expectations.
• Onshoring: The trend of bringing manufacturing and production back to domestic locations, contributing to economic growth.

Positive Note Ending 2025: Market Expectations and Macroeconomic Analysis

The discussion centers around optimistic market expectations for 2025, fueled by President Trump’s agenda and enthusiasm surrounding Artificial Intelligence (AI). The year is projected to see a third consecutive year of double-digit gains. Jenson Huang’s unveiling of next-generation chips underscores the technological momentum. However, the conversation quickly pivots to potential risks and macroeconomic factors that could impact this outlook. Two key policy decisions are being closely watched: the Supreme Court’s ruling on President Trump’s use of tariffs in emergency situations and the President’s choice for the next Chairman of the Federal Reserve. Goldman Sachs anticipates economic acceleration with GDP growth around 2.6%, with some forecasts even higher.

Macroeconomic Shifts and the Rise of Hard Assets

Larry McDonald, founder of Bear Traps Report, highlights a significant macroeconomic shift since 2022. He points to substantial government spending globally – in countries like Japan, the United Kingdom, the United States, and Italy – leading to losses in government bonds and a corresponding influx of capital into “hard assets.” He specifically notes the increase in gold and silver holdings from $19 trillion to $35 trillion in the past year. This trend, he argues, follows a pattern: gold and silver are typically followed by increased investment in platinum and palladium, then into industrial companies owning metals and commodities. Global value industrials outperformed the S&P last year by a factor of two, a move he believes will continue for five to seven years.

Sector-Specific Opportunities: Oil, Uranium, and AI Data Centers

Beyond precious metals, McDonald identifies opportunities in oil services. He notes the underperformance of companies like Schlumberger relative to the broader energy complex, but observes a recent “colossal shift” into oil services stocks, mirroring the situation with uranium stocks in 2021. He suggests buying Schlumberger below or near its 200-month moving average, describing it as a “viciously bombed-out village” after a long bear market.

Concerns Regarding AI Data Center Financing and Bank Exposure

A significant portion of the discussion focuses on potential risks within the AI sector, specifically concerning the financing of data centers. McDonald expresses concern that the street’s expectation of 830 new data centers in the next five years is overly optimistic, citing increasing NIMBYism (Not In My Backyard) opposition to data center construction. He estimates that around 200 data center projects could be blocked due to local resistance, leading to a downward revision of AI implementation growth expectations. This, in turn, could result in a “mini-credit crisis” due to bad loans related to data center financing. He points to Coreweave financing vehicles already yielding 11%, indicating potential stress. He further warns that banks are heavily exposed to AI data centers and face defaults in auto lending, creating a “two-punch” effect.

Divergent Views on GDP Growth and the Role of Onshoring

The conversation features contrasting perspectives on macroeconomic growth. While Louis Navellier predicts 5% GDP growth, citing low trade deficits, record exports, low oil prices, and the impact of onshoring, McDonald remains skeptical. Navellier highlights a 20% quarter-over-quarter increase in data center order backlogs. McDonald, however, believes that credit crises often emerge from periods of economic exuberance and excessive lending. He emphasizes the risks associated with the $1.8 trillion private credit market, with $300 billion promised to financial advisors, and the potential for liquidity issues and a repeat of the Genesis credit crisis. He references Charlie Munger’s advice to “mark to market, mark to model, mark to MIFT 100” when assessing private credit.

Bank Stock Strategy and IPO Potential

Despite the concerns about bank exposure to AI and auto loans, McDonald suggests a selective strategy within the banking sector. He recommends being long on JPMorgan Chase (JPM), noting its trading at 2.3 times book value and Jamie Dimon’s aggressive selling of personal shares. He anticipates a potential IPO boom in the first quarter of the year, which could benefit JPMorgan. He notes the unusual situation of a bank CEO (Jamie Dimon) selling shares rapidly.

Technical Analysis and Market Leadership

The discussion briefly touches on technical analysis, with McDonald referencing Jensen Huang (Nvidia CEO) and the tendency to “overpump the high.” He points out the dramatic increase in market capitalization on the NASDAQ, from $12 trillion three years ago to $32 trillion currently. He acknowledges the market leadership that has driven these gains.

Conclusion

The conversation presents a nuanced outlook for 2025. While initial conditions suggest continued market gains driven by AI and favorable macroeconomic factors, significant risks loom, particularly related to AI data center financing, the private credit market, and potential bank exposure. The discussion highlights the importance of focusing on hard assets as a hedge against economic uncertainty and adopting a selective approach to investing in the banking sector. The divergent views on GDP growth underscore the inherent uncertainty in forecasting economic performance. The overall takeaway is a call for cautious optimism and a keen awareness of potential vulnerabilities within the rapidly evolving economic landscape.