AI Is Booming — But the Consumer Is Struggling
I’m increasingly concerned about affordability in an AI World.
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As we published on Friday, not only was headline jobs growth strong, other portions of the various jobs reports we received last week were supportive too. But there were many question marks.
I did not focus on the slowdown in wage growth, but maybe I should have?
As I sat down this weekend to figure out what to write, I became fixated on just a few comments we heard this past week from corporations and CEOs engaged with the “consumer.”
- Recession-level demand slump in North America. (Whirlpool)
- Consumer sentiment is certainly not improving, and it may be getting a little bit worse. (McDonald’s)
- Consumers are literally running out of money toward the end of the month. (Kraft Heinz)
There are many stocks we can look to in order to gauge the state of the consumer. Home Depot (HD), for example, is almost 25% off of its high from last October. Lowe’s (LOW) is off 20% from its high set in February. That tells me there is something off with the consumer (rather than something company specific). If people are not spending money on home improvement, that indicates a lack of optimism from consumers.
AI vs. Affordability
The comments from major CEOs keep making me think about “AI doesn’t spend.” Or “one person’s expense, is another person’s revenue.”
So far any concerns about job losses due to AI don’t seem to be showing up in the jobs data. This is likely because:
- The buildout of AI requires a lot of hiring. Not just making the components necessary to run a data center (chips, cooling, electricity, etc.) but also the actual construction of the data centers and all the “picks and shovels” around data center construction.
- AI, in most cases, seems to have slowed hiring, rather than accelerated the firing of employees. Attrition is playing the biggest role in adjusting headcount to offset AI spending (and productivity, to the extent it is being productive).
I’m stuck believing that the pressure on the consumer, so far, is primarily due to affordability, rather than job losses.
My Concern (and Sadly Base Case) on Affordability
The cost of life (or affordability) is rising. More and more people are getting sucked into the daily, weekly, monthly, and annual struggle of making ends meet. If we want to go down the “K”- shaped analogy, more and more of the “K” is underwater.
Maybe it was only the lower leg of the K that was struggling, but as the water rises (affordability), more of the K is being covered. We may well be into the upper leg of the K.
I guess we better hope that is a “K” rather than a “k” where the upper leg is long and goes high, but I’m concerned it is not (I still stick with the i-shaped economy, where a handful is doing extremely well and the rest of us are seeing the water rise).
Bottom Line
The Data Center and AI Buildout Is Driving the Economy
So far that is occurring with minimal job loss. I also don’t think that it is generating benefits commensurate with the cost for most users, but the sense that AI will only get better is prevalent and will support ongoing spending in the space.
It’s always difficult to tell if too much is priced in, or as others will tell you, it is only 10 p.m. at a party that is going to 4 a.m.! I am cautious right now – I always get cautious on a parabolic move higher – and we’ve certainly had that.
I’m Focused on My ProSec – Production for Security Theme
I still hold some Intel (INTC) (my “pick” for TheStreet Pro in 2025 and 2026) and regret selling some, but again, taking some profit up almost 200% seemed to make sense.
I’m looking to add commodity plays (more the processing, refining and smelting) side of things. Both here, in Europe and South America.
I am looking at ship builders. General Dynamics (GD) is possible (I do not own it), but I’m more likely to get back into Brunswick Corp. (BC). I like the small boat “angle” as the U.S. Navy will adopt more surface drones/fast boats and (unfortunately) some of the most exciting opportunities are privately held companies.
Credit
I continue to think credit will do fine and like owning private credit as marks seem to be adjusting to a new reality. This is more for a “trade” than being married to the position. VanEck BDC Income ETF (BIZD) and Putnam BDC Income ETF (PBDC) are the two ETFs I tend to use. VanEck Alternative Asset Manager ETF (GPZ) is a play on the asset managers themselves.
I own BIZD/PBDC in small amounts – probably about 5% of my “income” portfolio. I think I will take that up to 10% to 15%. The bulk of my income portfolio remains held in closed-end muni funds (which I think may rally as on a quick glance we’ve had some nice changes in what is trading cheap to NAV).
On rates, I see them as largely rangebound, with 4.35% to 4.4% as the middle of the range on 10s.
Hope you all had a great Mothers Day! Weirdly, my concerns about the consumer aren’t heavily influencing my risk taking (nor that of the broad market), but it is a concern we need to pay more attention to.
At the time of publication, Tchir had positions in INTC, BIZD and PBDC.
