Last Call: January 2026 | AI Capex, Private Credit Problems and the Unstable Market

Key Concepts

• Market Instability & Erosion of Trust: The market is transitioning from uncertainty to instability, fueled by unpredictable policy, geopolitics, and a breakdown in trust in institutions.
• Private Credit Concerns: The private credit market is exhibiting bubble-like characteristics and poses systemic risk due to its size and reach, including retail exposure.
• Shifting Magnificent 7 Narrative: The “Magnificent 7” are evolving from high-free-cash-flow companies to asset-heavy businesses undertaking significant capital expenditure (capex).
• Opportune Time to Raise Cash: Current stretched valuations present an ideal opportunity to trim positions and raise cash, preparing for potential market corrections.
• Capex vs. R&D: Historical data suggests companies with high capex spend tend to underperform, while those investing in research and development (R&D) historically outperform.
• Diversification Challenges: Increasing correlation between asset classes makes traditional diversification strategies less effective.

Navigating Market Instability & Private Credit Risks (Part 1)

The discussion begins by distinguishing between market uncertainty and instability. Lizanne Saunders highlights that the current environment isn’t simply about unknown outcomes, but a fundamental instability driven by unpredictable policy, geopolitics, and reactive market behavior. This instability manifests as a proliferation of “what if” scenarios and a breakdown of established narratives. A key indicator of this instability is the increasing difficulty of finding truly uncorrelated assets, as noted by Aswath Damodaran.

A significant focus is placed on the burgeoning private credit market, described by Ben Hunt as being in a “bubble reality.” The concern isn’t the asset class itself, but its systemic risk, particularly its expansion into retail investment vehicles like Business Development Companies (BDCs) and interval funds. Events like the issues with First Brands/Andricolor and Apollo/BlackRock are cited as early cracks appearing in this market. Data from Persant shows a dramatic increase in media coverage and concern surrounding private credit exposure.

Narrative tracking, utilizing Persant’s methodology and “z-scores,” reveals growing concern around private credit. Brent Kachuba’s analysis of options flows, using tools like identifying Iron Condors and analyzing implied volatility (IV), highlights market dislocations that can foreshadow movements unseen in traditional analysis. The erosion of trust in institutions, exemplified by the seizure of Russian assets, is impacting capital flows and driving demand for safe havens like gold. Grant Williams draws a historical parallel to the Suez Crisis (1956), illustrating a breakdown in trust and potential shifts in reserve currency dominance.

Shifting Dynamics & Portfolio Positioning (Part 2)

The conversation shifts to portfolio positioning, emphasizing the opportune moment to raise cash. Analogies are used – fixing a roof in good weather, picking ripe fruit – to illustrate that the easiest time to raise cash is when valuations are stretched, as they currently are. Aswath Damodaran advocates for trimming positions rather than complete liquidation.

A key theme is the changing nature of the “Magnificent 7” (M7). These companies are transitioning from asset-light, high-free-cash-flow businesses to asset-heavy entities investing heavily in capital expenditure (capex), particularly in AI infrastructure. Historical data suggests companies undertaking large capex projects often underperform, contrasting with those investing in research and development (R&D). Meta’s aggressive capex spending is presented as a case study. The capex-to-revenue ratio for the M7 has increased from 4% to around 15% since 2012.

The “Permanent Portfolio” strategy (bonds, long-term bonds, short-term bonds, gold, and stocks) experienced its third-best year ever, but increasing correlation between asset classes and US stocks presents diversification challenges. The potential resurgence of small-cap and international value stocks is discussed, driven partly by a weakening US dollar, but contingent on earnings growth. The Russell 2000 index is cautioned against as a benchmark due to its composition. Historical analysis reveals that companies with the highest capex spend historically underperform.

Technical Considerations & Data Insights

Throughout both segments, several technical terms are utilized, including Z-Score, Implied Volatility (IV), Zero DTE Options, Risk Reversal, SPX, Qs, IWM, Capex, BDC, ROIC, and FX. Data points highlighted include significant increases in options trading volume, the dramatic rise in private credit exposure, low implied volatility ranks for the S&P 500, and increasing correlation of asset classes. The Permanent Portfolio’s best year was 1979, with a 40% return driven by a 120% increase in gold prices.

Conclusion

The discussion paints a picture of a market characterized by increasing instability, driven by geopolitical factors, eroding trust, and the potential risks within the private credit market. The shift in the narrative surrounding the “Magnificent 7” and the historical underperformance of companies undertaking large capex projects suggest caution is warranted. The consensus is that current stretched valuations present an opportune moment to raise cash and re-evaluate portfolio positioning, prioritizing diversification and a focus on earnings growth. Ultimately, a data-driven approach, combined with a recognition of the difference between uncertainty and instability, is crucial for navigating the current complex market landscape.