Larry McDonald on the AI capital spending binge

Yesterday, we had an interesting chat where, it was a private conversation with a guy in the Valley [Silicon Valley] that is really good friends with all of the CFOs of the Mag 7.  He's been out to dinner with them hundreds of times, he's been in the Valley for over 30 years and he's run hedge fund money...  And we had another guy who's been trading semiconductors for 20 years professionally and they were having this conversation around artificial intelligence.  And the one thing they both said... it's like the Manhattan Project where if you're a CFO in the Valley and you're not doubling or tripling your capex the last year and a half in artificial intelligence, you're fired.  They're so terrified to be, two years from now, left on the outside.  So what's fascinating is... the capex has gone from like $30 billion a year to $160 billion a year with no visibility...  There's zero visibility on return on capital.  So this is capital expenditures just being deployed at a sick, aggressive, insane pace.  He called it a "Reagan-Gorbachev arms race" where the CFOs have a gun to their head.  They have to invest...  It's created these distortions where Wall Street analysts are falling all over themselves to upgrade Nvidia, but this capex trajectory is just not sustainable.  And the market's starting to figure it out now.

~ Larry McDonald, "Buy What Wall Street Hates," Stansberry Investor Hour, 26:40 mark, July 29, 2024