Equities Are Back, Baby!! ft. Andreas Steno

The global economy is undergoing a significant shift in liquidity creation from central banks to the private sector and governments, fostering a prolonged business cycle driven by geopolitical and technological arms races, particularly in AI, robotics, and clean energy.

• Liquidity creation is shifting from central banks to private banks and government deficits globally.

• The ongoing AI and technology arms race requires massive CAPEX in automation and decentralized energy solutions like solar and gas.

• The current economic cycle is anticipated to be prolonged and characterized by high returns in technology, defense, and clean energy sectors.

The global business cycle is currently in an accumulation phase, not late-cycle, as liquidity is expanding from new sources like private bank lending and government deficits, compensating for flat central bank balance sheets. This shift is incentivizing private sector credit creation globally, which is more efficient for capital allocation and driving strong equity returns, especially in the US technology sector and emerging areas like defense and clean energy. The ongoing technology and geopolitical arms race, particularly in AI, necessitates massive CAPEX in automation and energy, ensuring a sustained and perhaps extended cycle.

Business Cycle & PMIs

• 00:04:47 Contrary to common perception, the current business cycle is not late-stage or heading into recession; it is in an acceleration phase. The S&P PMI is a more accurate indicator of future economic activity than the ISM index, showing a 'plus minus 55' uptake in the cycle due to its focus on domestic trends and a larger sample size including SMEs. While labor market indicators and the ISM index appear lukewarm, the S&P PMI's superior predictive power suggests a more robust economic outlook one to two quarters ahead.

Shifting Liquidity Dynamics

• 00:09:27 Liquidity creation has fundamentally shifted over the past two years from central bank balance sheets to the broader economy, driven by private sector lending and treasury deficits. Three agents can create a dollar: the Federal Reserve, the US Treasury through deficits, and commercial banks through lending and increased leverage. The Fed is no longer the primary source, with the private sector and government deficits now solely driving money creation, a change largely missed by many and indicative of central banks orchestrating this shift to avoid blame for inflation.

Global Liquidity & Yield Curves

• 00:11:53 The global trend shows central banks incentivizing private banks to lead liquidity creation, as seen in Japan and Europe. Japan's aggressive steepening of its yield curve, allowing long-term bond yields to rise, has revitalized its commercial banking system by restoring 'carry' and encouraging lending. This global move towards removing red tape and capital restrictions for private banks suggests a deliberate strategy by central banks to manage inflation messaging while still fueling economic activity through alternative liquidity sources.

Defense Sector Growth

• 00:27:14 Europe's defense sector is experiencing significant demand and investment growth, driven by geopolitical developments and increased military spending targets. Following calls from the US and NATO, member countries, excluding Spain, have committed to increasing military spending to 4% of GDP. This surge in demand, particularly for 'war from home' technologies like drone detection and counter-measures, presents substantial investment opportunities due to the sector being historically undersubscribed and facing immediate needs for robust defense capabilities.

AI & Energy Investment Opportunities

• 00:41:57 The AI boom is creating significant investment opportunities, extending beyond primary AI firms to the energy sector, which is now considered the next critical bottleneck after GPUs. Alphabet executives indicate that reliable grid infrastructure near data centers is paramount, highlighting the need for massive CAPEX in energy, particularly solar and gas. China's doubling of solar capacity in a single year demonstrates the speed and scale required, pushing the US towards similar rapid adoption of decentralized solar and battery solutions to support its AI expansion.

The Prolonged Exponential Cycle

• 00:56:07 The current economic cycle is expected to be longer and slower than usual, potentially extending for several years, due to delayed CAPEX and geopolitical arms races. Key indicators suggest an accumulation zone, not a peak, with massive investments in robotics, automation, AI, and clean energy still in early stages. This extended cycle is fueled by political imperatives and technological advancements, leading to a 'hyperspace' scenario where sustained liquidity and investment drive significant wealth creation through exponential growth in technology and crypto assets.