The AI Trade Is Finally Cracking | Weekly Roundup

In this roundup episode, hosts discuss the dramatic unwind of momentum factors in AI and semiconductor stocks, which they attribute to two specific catalysts: Meta's announcement that it may sell excess AI compute capacity, and a viral tweet about a memory efficiency breakthrough from an OpenAI spinout. These headlines, combined with positioned long flows and a 4-sigma momentum unwind, triggered a sharp selloff. The hosts note this mirrors the July 2024 factor implosion that coincided with yen carry trade unwinding and Fed policy confusion.

The broader economic context is examined in detail. They highlight that the market has been built on reflexive flows fueled by yen weakness and dollar strength, which concentrated capital into US tech and AI trades. As these dynamics reverse—particularly with Bank of Japan intervention—the correlated unwinding accelerates across semis, AI companies, Korean won weakness, and Taiwan exposure. The hosts observe that the same positioning that lifted assets during the rally amplifies the selloff on the way down.

On monetary policy, both hosts argue strongly against rate hikes, despite recent hawkish Fed rhetoric and dot plot projections. They emphasize that wage growth has flatlined compared to 2021-2022 levels, eliminating evidence of a wage-price spiral. Labor force participation is falling, suggesting an unhealthy job market, and the unemployment rate decline is attributed to shrinking participation rather than robust hiring. They note that new orders and manufacturing PMI leading indicators are rolling over, and oil prices below $70 should support disinflation. The hosts interpret Fed Chair Powell's recent comments as implicitly dovish despite the committee's hawkish dots, and argue the Fed has no mandate to hike into tepid job growth and falling inflation.

The discussion also covers positioning risks across multiple asset classes. They note record yen shorts, dollar longs, and sofu shorts that could unwind further. Bitcoin and crypto assets are discussed as a contrarian play, with the hosts noting that Microstrategy's removal of buying support through their 'free money printer' strategy could allow Bitcoin to bounce without needing further strategic buying—just from unwinding bearish positioning. They express cautious interest in crypto long-term while acknowledging near-term liquidity risks.

The hosts debate whether they should be buying dips in semis and memory stocks or waiting longer. One argues for selling bounces and staying long gold and sofu as fading-hawkishness trades, while the other takes a more nuanced multi-year view, acknowledging Jevon's paradox (efficiency gains driving new use cases) but noting that the current questioning of hyperscaler capex and AI ROI requires time to resolve. They agree the next two months heading into mid-summer are treacherous due to extreme positioning, potential election-year interventionism, and conflicting narratives around growth and inflation.