The AI Diets and What Peace in Ukraine Could Mean for Markets
Exploring two major global financial themes as the year comes to a close.
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There are two main themes developing for me in AI.
The AI Debt Diet
This is where companies try and address growing concerns in the credit markets.
The company that has had the most press on this is Oracle (ORCL) . While ORCL CDS at around 150 BPS is not particularly scary (if we start getting into the high 300s, that would indicate more serious credit concerns), but it does mean the company is paying significantly more to borrow now then they would have in the summer, when their CDS was around 40 BPS.
I believe companies will do a better job of explaining their spend strategy. Any shift to “spend if the opportunity is there” rather than “spend no matter what” will be helpful. I believe the debt diet would help the stocks, as credit has weighed on some stocks in the sector.
The AI Spend Diet
This is where companies decide to spend less on AI.
Companies decide that maybe they aren’t getting enough in a cost/benefit analysis to warrant current levels of spending.
Yes, companies will spend on AI. No company can afford to be left behind, but is the urgency still there? Do CEOs really believe that they are getting payback on their AI spend?
Some certainly do, but more and more discussions I’m having are far from conclusive. To some extent, AI seems to have replaced management consultants, where someone else’s junior hires tell you what to do rather than using your own resources (including junior hires) to figure out what to do. I’m not sure this AI spend diet will happen, there are still enough success stories out there from implementing AI, but if it does happen, it will be a drag on markets!
What a 'Peaceful' Ukraine/Russia Will Look Like
The consensus of the Geopolitical Intelligence Group at Academy Securities is that we aren’t headed toward peace any time soon, but that Vladimir Putin has the capability to outlast Ukraine, and Ukraine will ultimately come to the table.
Without the seizure of Russia’s reserves, I think Ukraine has to come to the table faster than they would otherwise.
They may not like what the U.S. is proposing, but it is “reasonably” concrete. If you were Ukraine, you could try and keep some of the U.S. proposals at bay, while waiting for Europe to come through.
Whatever machinations Europe goes through, if I’m Ukraine, I’m more skeptical about any sort of game changing help from Europe.
When headlines read Belgium and Putin win, you have to be nervous ("The Weakest Link" was almost more popular in the U.K. than in the U.S., maybe because it is the politics of the EU — the U.K. was part of the EU when that show was at peak popularity). Unanimous decisions within the EU are hard to reach, so appeasing every country makes it difficult to do much. And that is ignoring the hard truth that many European nations have their own economic concerns to deal with.
So, time to think a little bit more about what “peace” might look like:
- Stronger security guarantees by the U.S. for Ukraine:
- These will be given because Ukraine will give the U.S. (and its corporations) extremely favorable deals for years. The administration will not provide security guarantees so much to protect Ukraine, but to protect the business interests that will be generated.
- The business deals with Russia will be even better for U.S. corporations:
- Whatever Ukraine may have to give up, as it realizes it cannot get enough support from Europe to continue, will be big for the U.S. Russia will give up even more since Europe clearly had no interest in giving them anything and they are being pushed to the brink by the U.S. It will be interesting to see what China and maybe even India have to say about any favorable treatment given to the U.S. and U.S. businesses.
- Look for Poland and even Romania to thrive:
- Whatever the prognosis is for lasting peace, many companies will want to stage their operations outside of Russia, and even outside of Ukraine. When deciding where to launch your expansion into Russia and/or Ukraine, both Poland and, increasingly, Romania make sense. Poland has proven itself to be resilient and extremely competent during the war. Romania, in my understanding, and I’m learning more, has also played a key role and has some advantages in terms of its borders.
Much of what the administration is looking for in the region fits our "production for security" narrative, and I think we are one step further towards seeing the administration achieve those goals.
