THIS CHANGES EVERYTHING

The economy is currently booming, with capital good orders up 3.3% on Fed day, GDP holding at 2% in Q1 despite challenges, and continuing claims at a 50-year low. This strong performance, coupled with dominating earnings, has led to a significant stock market rally, which some find frustrating. However, the current economic climate could intensify, driven by factors like government spending, tariffs, and geopolitical events. Bank of America's "boom loop" theory suggests that to counteract deglobalization, populism, and inequality, government spending is projected to increase by 15% in fiscal year 2027 and continue rising. This isn't limited to the United States; global governments, including Germany and the UK, are expected to invest heavily in their own infrastructure, such as ports, nuclear power, and manufacturing capabilities. This push for self-sufficiency is partly fueled by a desire for national security, as seen with countries like Iran seeking nuclear weapons, and the lessons learned from conflicts like the Russia-Ukraine invasion. The argument is that countries with nuclear weapons are less likely to be invaded, prompting a global interest in developing independent defense and energy capabilities. This trend towards localized manufacturing and infrastructure, while creating inefficiencies, also acts as a significant stimulus. For instance, the lack of investment in American energy infrastructure over the past decade, partly due to the boom in LED light bulbs and subsequent flat energy usage, has left the country behind. The post-COVID surge in remote work, increased AC usage, and the proliferation of data centers has exacerbated this. Data centers, largely relying on natural gas turbines due to insufficient grid capacity, are often built outside established grids in areas less resistant to AI development. This necessitates massive government spending on energy infrastructure, not just in the US but globally. Donald Trump's tariffs and the situation in Iran are further pushing governments to spend heavily on defense and infrastructure. Government spending has a high velocity effect, leading to more jobs, increased corporate profits, and a form of corporate welfare where the government selects and supports certain companies. This deglobalization, in the long term, leads to inefficiencies like duplicate infrastructure and defense industries, reducing specialization. For example, while China excels at drone manufacturing, countries like the US are now investing billions in domestic drone production to mitigate national security risks, despite the higher cost. This drive for secure supply chains in critical sectors is expected to boost GDP. Market flows show a fifth consecutive week of inflows into US equities. Despite this, Bank of America private clients' allocation to stocks is at its highest since December 2021, a period that preceded a market top and a painful year for investors. Financials, however, are currently at one of their lowest positioning levels since 2022, and the bear markets of 2018-2019. This low positioning in financials is likely due to private credit headwinds and a slowdown in crypto trading, which was a significant revenue generator for institutions like Robinhood. Brokers earn more from thinly traded assets like crypto and options than from highly liquid stocks, so a reduction in crypto activity impacts their revenue growth. Discretionary positioning by retail investors is up but not as high as implied by current earnings, suggesting the market could justify substantially higher levels based on strong corporate performance. This, combined with aggressive fiscal spending globally (including countries like the UAE increasing oil output outside of OPEC due to geopolitical tensions), creates a scenario of "too much stimulus." The Economist predicts that once oil risks peak, there will be a boom in oil production and a glut in availability, further driving consumer spending and economic growth. This abundance of stimulus is leading many companies, including Berkshire Hathaway and various software firms, to increase stock buybacks. However, tech giants like Google, Meta, and Amazon are doing the opposite, investing heavily in capital expenditures, particularly in artificial intelligence. Weekly token consumption for AI quadrupled between January and March, driven by advanced coding tools. This highlights the value of AI in producing tangible products and services, which users are more willing to pay for, compared to AI-generated memes. Companies like OpenAI, Anthropic, and Grok are currently subsidizing token usage, indicating the massive investment in this sector. SpaceX is another key player, with mutual funds and investors reportedly selling other MAG7 stocks (Tesla, Apple, Meta) to fund SpaceX purchases. While SpaceX is seen as a long-term fantastic company, it's anticipated to experience a "meme boom and bust" cycle first, especially given its significant losses, including $4.9 billion last year, mostly from rocket work. XAI, Elon Musk's AI venture, is also incurring losses, and the recent Cursor deal is seen as an attempt to utilize XAI's chips, although its long-term success is questioned due to existing competition and the maturity of other AI products. The expectation is that early investors and venture capitalists will eventually sell SpaceX shares to raise capital, which will then be reinvested into other AI-related companies and infrastructure, perpetuating the capex cycle. The top five hyperscalers (Amazon, Microsoft, Meta, Google, Oracle) are projected to spend $750 billion this year, showcasing the immense investment in technology. Companies like TSM and Nvidia continue to demonstrate incredibly high gross margins. There's also a growing trend towards developing custom chips, which can be half the cost of Nvidia's due to avoiding their gross profit. However, scaling custom chip production is challenging, with Google being a notable exception due to a decade of development. This difficulty suggests that Elon Musk's ambitious plans to manufacture custom chips for Dojo 3.0 in Austin, Texas, face significant hurdles, though his partnership with Intel is viewed positively. The demand for CPU compute, as noted by Houseack/Reinvest, remains strong, further underscoring the ongoing technological boom.