Macro Weekly: A Tale of Fire and Ice

As AI and computer memory stocks soar to extraordinary highs, many consumer-facing businesses are slipping into recession-like conditions. In this analysis, we explore the widening gap between booming tech sectors and weakening real-world industries, what it means for investors, and whether the latest AI-driven rally is an opportunity or a dangerous bubble forming.

A widening market wedge

Since the unexpected outbreak of the Iranian conflict in February, global stock sectors have diverged significantly.

On one hand, the red-hot AI industry extends its extraordinary ascent into uncharted territory. From LLM companies (OpenAI, Anthropic), the asset bubble has emerged in the “computer memory” sector.

On the other, a wide swathe of real-world industries are howling in economic pain. The shortage of energy and material is real, to the point that even colourful snack packaging is turning black and white. Household is suffering from high energy prices and rising borrowing costs.

This wide disparity in fortunes is unlike anything that market veterans have seen in years. A snapshot of this contrast in performance is captured below:

Source: FT.com (paywall)

– Fire –

The hottest sector right now is found in the computer memory industry. The investment story here is actually quite straightforward.

Since the emergence of generative AI in 2023, cash-rich tech companies are racing to build vast data centres to power these AI models. The four major “hyperscalers” (MAMA – Microsoft, Amazon, Meta, Alphabet) are splashing out $725 billion on new physical infrastructure.

Initially, investors anticipated the shortage of energy and chips from these extensive build-outs. Hence, the massive rally in uranium stocks and Nvidia (NVDA). The latter – at $5,4 trillion – is currently the largest company by market cap.

But soon after, another critical component was found to be lacking: memory.

Before 2023, RAM was plentiful and cheap. AI upended the industry because AI servers consume much higher RAM than standard servers. In the last 18 months, prices for DDR5-5200 (2*16GB) have skyrocketed 5x as manufacturers battled to get hold of these essential parts.

As a result, the “RAMpocalypse” is causing investors to pile into every memory manufacturing stock.

In recent weeks, the Roundhill Memory ETF (DRAM, factsheet) – a fund that invests exclusively in memory stocks – became the fastest growing ETF in years. It hit $6.6 billion in assets in just 36 days.

Source: techfinitive.com

Below I show the staggering stock rallies in the RAM sector:

Micro Technology (MU) – went ballistic as investors stampeded into the stock. At $900 billion in market cap, the company may become the 14th company to hit $1 trillion.

Western Digital (WDC) – did a 10x rally in just 12 months; hit $500 milestone this week.

Seagate (STX) – is rocketing to new all-time highs week after week. Prices doubled in a few weeks.

Sandisk (SNDK) – another 10-bagger after its spin-off from WDC. Hit major price level at $1,500 this week.

In Korea, SK Hynix (000660 KS) is, too, in a commanding rally. At $900 billion, its market cap rivals that of Micron. Prices almost touched 2,000,000 level this week (see below).

Meanwhile, Samsung became the first Korean stock to hit $1 trillion in market value. Labour issues in its Korean plant may cause even more component shortage.

Other chip stocks like Intel (INTC) and AMD (AMD) also soared in tandem. Even Qualcom (QCOM), an old tech stock, surged from its multi-year lows to new highs. Fortunes are created rapidly in these fabulous tech rallies.

– Ice –

While tech investors are rejoicing endlessly, shareholders in many other companies are not faring well.

Whirlpool (WDC), a household appliance seller, recently announced earnings shortfall. Its share price immediately collapsed. The industry decline, warned its CEO last week, “is similar to what we have observed during the global financial crisis and even higher than during other recessionary periods.”

In other words, discretionary consumer spending is rapidly contracting. A recession?  The reason is very obvious: uncertainty in the labour market plus rising expenditure on essentials. Gas prices in California topped $6.2 per gallon, up from $4 in February.

Nike (NKE) and Lululemon (LULU)’s stock trends are equally dispiriting.

The ‘athleisure’ trend is contracting and appears to be dragging down many sportswear companies. In the UK, JD sports (JD.) is also struggling to regain its mojo.

Tractor Supply (TSCO) saw its share price collapse after the latest earnings report.

Home Depot (HD) slipped to new 52-week lows, potentially completing a cyclical top.

For McDonald’s (MCD), prices are still under pressure. Prices are down nearly a fifth from its February highs as it warns on the negative impact from rising meat and energy costs.

Even the high-end segment of consumer spending is tapering off. LVMH, one of the largest luxury conglomerates, has regressed slowly back to its major support level. In the same category, I note the pattern of falling lows in Ferrari (RACE).

In other words, for every rally seen in the tech industry, another major stock – companies dealing in the real world – is falling.

Should we chase fire?

Investment booms are a function of imbalanced supply and demand.

In the past few years, we have witnessed a litany of impressive price rallies triggered by supply or demand shocks.

Do you remember Cocoa? Well, prices for that soft fruit surged six-fold during 2023/4 as crop yield plummeted. Just last year, Silver prices rocketed 5x from $25 as demand suddenly swelled. Bitcoin enjoys manic buying time to time.

The latest frantic dash into the computer memory sector is no different from these boom-bust episodes. The question now is: Should we chase the latest booming RAM stocks?

Many reports are anticipating a continuation of shortage. Micron CEO, for example, notes “memory today is very tight supply, and supply cannot be brought up that easily.” SK Chairman predicts bleakly that “the current shortage could continue until 2030.”

The problem with all these predictions is that they are creating a fear of shortage. After a massive price boom, perhaps a lot of this fear is already baked in.

Therefore, from the risk-reward perspective, chasing this rally is dangerous because prices could easily drop 20-30% overnight due to a bout of profit-taking. I suspect the run-away rallies are unsustainable over the long term.

Should a ‘DeepSeek’ event emerge – say, an optimisation AI algorithm that reduces demand – prices may even halve in a short time. One thing that an investment boom always brings is price volatility.

And not to forget, the Strait of Hormuz is still practically closed.