This week's interesting finds

This week in charts

Japanese corporate profits

Japanese tourism

Not-profitable tech stocks vs. the S&P 500 Index

Businesses using AI by sector

A.I. hyperscalers and U.S. industrial production

S&P 500 Index valuation measures

S&P 500 Index price-to-earnings ratios and equity returns

Magnificent 7 

Top 10 S&P 500 Index companies market cap by decade

Fixed income yields by sector

The AI capex endgame is approaching

The AI “bubble” looks to be approaching its endgame. The dramatic rise in AI capital expenditure by so-called hyperscalers of the technology and the stock concentration in US equities are classic peak bubble signals. But history shows that a bust triggered by this over-investment may hold the key to the positive long-run potential of AI. 

AI stocks have exhibited bubble characteristics for a while. Share prices have skyrocketed, driving excessive index concentration. AI companies are doing deals between themselves, helping inflate their valuations. And they are buying each other’s products and using vendor financing to sustain growth.

Until recently, the missing ingredient was the rapid build-out of physical capital. This is now firmly in place, echoing the capex boom seen in the late-1990s bubble in telecommunications, media and technology stocks. That scaling of the internet and mobile telephony was central to sustaining “blue sky” earnings expectations and extreme valuations, but it also led to the TMT bust.

This followed the similar patterns from the introduction of nearly all general-purpose technologies — from railways, electricity, radio, semiconductors, to the internet. These bubbles didn’t end because the dream about the new technologies fell short; rather, the bubbles burst either due to regulation, increased competition, or the buyers of the products being unwilling, or unable, to sustain the demand. While the technology theme may be structural, all too often the end users are cyclical, putting the returns on investment in this excess capacity at risk from weakness in end-user cash flow.

Today’s AI hyperscalers are seeing these vulnerabilities emerge. Europe is leading the way on regulation, with the European AI Act. Competing models Deep Seek from China and K2 from the United Arab Emirates use less computing power. More importantly, tech cash-flows are beginning to be squeezed. If the end buyers of AI suffer an exogenous cash flow shock, the merry-go-round will slow rapidly as sales collapse faster than capex can be reined in, resulting in faltering earnings and accelerated cash burn. Tech buybacks would also likely be cut, undermining both share prices and market valuations. 

So the message for today’s investors is “buyer beware”. The TMT bust shows why. Today we are living the digital dream envisioned in the TMT bubble: a hyperconnected world, with seamless digital communication and where the internet of things is a reality. Yet this did not stop today’s digital winners from the TMT era falling heavily in the tech bust — Microsoft (65 per cent), Apple (80 per cent), Oracle (88 per cent), and Amazon (94 per cent). These companies took 16, five, 14 and seven years respectively to regain their 2000 peaks. 

My perspective on technology bubbles has been shaped by five themes that emerged from William Janeway’s book Doing Capitalism in the Innovation Economy. First, periods of bubble behaviour — and especially excess capex — are central to the adoption of new technologies. The hype around them drives down the cost of capital, allowing the rapid build-out of the new technology.

Second, when the bubble bursts, the excess capacity does not just disappear. It can be acquired at low prices by new players. The waste in the creative destruction identified by economist Joseph Schumpeter is inherent to bubbles, giving access to the new technology capacity at a lower price than if the boom persisted. This cheap capacity helps embed the technology in society.

Third, late equity investors funding this excess capex are likely to lose a big slice of their investment. You need to have been invested in hyperscalers since 2019-2020 to survive a 70 to 80 per cent bust without a portfolio loss.

Finally, tech busts have more negative economic impact when this capex is funded by debt rather than equity. Given this AI capex is largely equity funded, the fallout may be more similar to the TMT bust. Policy should respond to any bust using the 1987 or 1998 playbooks, rather than zero rates and quantitative easing after the Great Financial Crisis.

The good news is that the aggressive AI capex build-out almost guarantees AI’s future ubiquity. The bad news is that this will probably only come after a period of Schumpeterian creative destruction. So, despite our positive view on the structural narrative for AI, investors should be wary of paying for AI stocks on valuations equivalent to 30 times earnings, or 8 times sales. Unless of course, they want to altruistically fund this rapid AI capacity build-out as their way of contributing to society’s longer-term gain.

This week’s fun find

Does painting cows with stripes prevent fly bites? Researchers who studied this win Ig Nobel prize

A team of researchers from Japan wondered if painting cows with zebralike stripes would prevent flies from biting them. Another group from Africa and Europe pondered the types of pizza lizards preferred to eat.

Those researchers were honored Thursday in Boston with an Ig Nobel, the prize — a hand made model of a human stomach — for comical scientific achievement. In lieu of a big paycheck, each winner was also given a single hand wipe.

The 35th annual Ig Nobel prize ceremony is organized by the Annals of Improbable Research, a digital magazine that highlights research that makes people laugh and then think. It’s usually held weeks before the actual Nobel Prizes are announced.

The ceremony to celebrate winners Thursday night at Boston University began with a longtime tradition: the audience pelting the stage with paper airplanes. Several of those who couldn’t attend had their speeches read by actual Nobel laureates including Esther Duflo, who won the Nobel Prize for her experimental approach to alleviating global poverty.

This week's interesting finds

The path less travelled

Taking a walk down memory lane to revisit some of the times where we took the path less travelled and ended up far from the maddening crowd.

This week in charts

Private equity

Business development company (BDC) leverage

U.S. total goods imports

Mexico vehicle trades with China

Mexico vehicle trades with U.S.

Automotive trade balance with China

Unemployment rate by province

Declining US$ impact

Alcohol consumption and spirits market share

Spirits

'ChatGPT, what stocks should I buy?' AI fuels boom in robo-advisory market

As ChatGPT nears its third birthday, at least one in 10 retail investors is using a chatbot to pick stocks, fuelling a boom in the robo-advisory market, but even fans say it is a high-risk strategy that cannot replace traditional advisors just yet.

Thanks to artificial intelligence, anyone can select stocks, monitor them and obtain investment analysis that was once only available to big banks or institutional investors. The robo-advisory market - which includes all companies providing automated, algorithm-driven financial advice such as fintech, banks and wealth managers - is forecast to grow to $470.91 billion in revenues in 2029 from $61.75 billion last year, marking a roughly 600% increase, according to data analysis firm Research and Markets.

NO ACCESS TO INFORMATION BEHIND A PAYWALL

Jeremy Leung, who spent almost two decades analysing companies for UBS, has been using ChatGPT to chase stocks for his multi-asset portfolio since he left the Swiss bank late last year.

Leung isn't alone. The industry is growing fast and exponentially.

About half of retail investors say they would use AI tools such as ChatGPT, whose launch in November 2022 ignited the AI boom on the markets, or Google's Gemini to pick or alter investments in their portfolio, and 13% of them already use these tools, according to a survey from broker eToro, which polled 11,000 retail investors across the world.

In the UK, 40% of the respondents to a survey by comparative company Finder said they have used chatbots and AI for personal finance advice.

ChatGPT itself warns it should not be relied on for professional financial advice and says its owner OpenAI has not released data on the number of people who use its chatbot to choose investments.

'USE ONLY CREDIBLE SOURCES'

Finder asked ChatGPT in March 2023 to select a basket of stocks from high-quality businesses, with criteria such as levels of debt, sustained growth and assets that generate an advantage over competitors.

The selection of 38 stocks, which includes AI posterchild Nvidia, opens new tab and online retailer Amazon, opens new tab alongside consumer staples like Procter & Gamble and Walmart, opens new tab, has surged nearly 55% so far, almost 19 percentage points more than the average of the UK's 10 most popular funds, including those managed by Vanguard, Fidelity, HSBC and Fundsmith.

Granted, U.S. stocks are around record highs and right now, seem invulnerable to erratic U.S. policies and patchy economic data. But stock picking using ChatGPT requires some financial knowledge and its adopters say there is a high risk of getting it wrong before getting it right.

Leung creates prompts like "assume you're a short analyst, what is the short thesis for this stock?" or "use only credible sources, such as SEC filings".

"The more context you provide, the better the responses," he said.

The risks are big. The exuberance for the AI tool, which has democratised access to investment, means it is also impossible to tell if retail investors are using risk management tools to properly mitigate potential losses when the markets turn.

This week’s fun find

You can't spell "enjoyable" without Joya. The newest member of the Relationship Management team hosted her first moai from her go-to lunch spot in the Path. She set expectations low when she described it as a "salad place". EdgePointers appreciated the super food power bowls with a side of mac & cheese. It’s all about balance.

These Tiny Gears Can Fit Inside a Strand of Hair, Paving the Way for Micromotors That Could Revolutionize Medicine

For more than three decades, researchers have been attempting to create gears that are small enough to fit inside the human body, but with the current available tech, they’ve hit a wall at 0.1 millimeters in diameter. Now, however, a team at Sweden’s University of Gothenburg has built gears that are so tiny, they can fit inside a strand of hair, laying the groundwork for the smallest on-chip motors in history — and they’re powered by light.

This week's interesting finds

This week in charts

CapEx % of EBITDA

Foreign flows into Canadian securities

Canadian investment in industrial machinery and equipment

Passive ETFs and mutual funds

Magnificent 7 vs. S&P 493

Hyperscalers – CapEx growers and % of operating cash flow

U.S. domestic investment

S&P 500 companies’ revenue per worker

2024 U.S. oil exports

Number of GTA homes being taken over by lenders is skyrocketing

People who work with overextended real estate borrowers in the Toronto area say they’re busier than they’ve been in more than a decade. The number of homes that have been taken over by lenders under “power of sale” is up almost 60 per cent from the same time last year, according to new data.

Some in the sector are comparing the current climate to the fallout from the 2008 financial crisis.

Robert Marsiglio, a sales representative with Valery Real Estate, who keeps track of distressed real estate, said that searches of the Toronto Real Estate Board show at least 228 current active listings described as “power of sale” (or some variant) as of early September. That’s up 59 per cent from 143 in the same period last year.

Some say the legal system is buckling under the increased workload of power of sale business.

The power of sale process is not like a foreclosure: Canadian banks or lenders don’t typically end up owning a debtor’s home. However, in most cases, the way a lender secures the return of the money they are owed is through a court-approved sale of a mortgaged property. If there’s any money made in the sale above what the lender is owed, it’s returned to the seller (or their other creditors if there are other claims).

When the demand letters have been served and a power of sale process is under way, borrowers will often hear from someone like Medina Young, a law clerk at Fogler, Rubinoff LP. – which has such clients as Equitable Bank – who walks them through the next steps.

Ms. Young has also noted a larger number of working families among her files, people who might not previously have ended up facing power of sale unless a major job or health event intervened.

There’s also an increase in the number of investment properties facing power of sale.

Toronto accounted for 38 per cent of the power of sale properties in Mr. Marsiglio’s data, but fully half of those listings are for condominium apartments. In the GTA as a whole, condos made up 28 per cent of the power of sale listings. The problems may go even deeper, since some of the properties weighing on indebted homeowners haven’t even been built yet.

Ms. Young said that while it was once rare for a lender to record a loss on their power of sale, in the condo market, it’s becoming increasingly normal.

Canada’s Office of the Superintendent of Bankruptcy recorded 158,441 insolvencies of all types in 2009; in the seven months it has released data for in 2025 there have been 84,610, which is on pace to surpass 2024’s total of 143,483, if not quite rival 2009.

This weeks fun find

The New Hotness

It was the hottest day of the year in New York City. Oddly, that wasn’t why I was half naked.

And it’s not why I was surrounded by nearly 100 bodies in equal or greater states of undress. We were all in a 175-degree sauna, where partial nakedness is not unusual. What was unusual was what we were all doing there: watching two artists perform an interpretive dance. 

Welcome to the Aufguss USA Nationals, America’s first Aufguss World Masters event, a two-day competition held at Brooklyn’s Bathhouse. It was late June, and the nation’s best sauna experts had flown in to show off their skills in aufguss, a blend of dance, sport, theater, therapy, and aerodynamic manipulation so odd it could only come from Germany. I was witnessing, for lack of a more succinct description, competitive sauna–ing. 

This is no fad. Or if it is one, it’s a growing one. Over 1,000 people had come out to watch the spectacle. An enormous (700-square-foot) “event sauna” had been custom built at Bathhouse to accommodate aufguss, complete with a sound and lighting system. It was the second and final day, and the winners would move on to the world championships in Italy, scheduled for the week of Sept. 14. The competition was the same day Zohran Mamdani and Andrew Cuomo faced off at the polls, and it was a showdown just as momentous, provided that you were extremely invested in European spa dancing. 

It might look like Eurovision with linens, but aufguss, which has been practiced in Europe for at least a century, has its roots in the humble maintenance work of sauna masters. The magazine Spa Business defines the craft as “raising the temperature and controlling the wafting of the steam, heat and aromas via creative towel waving.” (The name aufguss comes from the German word for “infusion.”) Since hot air rises, not all seats in a sauna are created equal. “If you’re in a 175-degree sauna, the heat on the ceiling of that sauna is probably 200 degrees,” explains Bathhouse co-owner Travis Talmadge. Aufguss was developed to counter this thermal lift. “You use a towel to wave it and bring it down onto guests to bring more heat onto them and get them sweating even more.”

This week's interesting finds

This week in charts

Market-cap weighted performance by region

Global valuation range by country

Valuations and expected earnings growth

European equity fund flows

Ownership of European equities

Historical GDP growth cycles

U.S. tech sector credit spreads

Small- vs. large-cap stocks – 10-year returns

AI hyperscalers – capex % of operating cash flow

Hyperscalers vs. telecom companies – capex

S&P 500 Index market cap concentration

S&P Information Technology Index vs. S&P 500 Index performance

New technology indexes and stock bubbles

US public pension funds pare allocations to private credit

A Financial Times analysis of public records shows 70 major US public pension funds reported an 18 per cent decline in allocation to private credit in the first six months of 2025 from a year earlier. Public pensions have been a key source of capital for the sector, which posted an overall 40 per cent drop in North American fundraising in the first half of the year, according to financial data provider Preqin.

State and city pension plans told the FT they have tightened scrutiny of new private credit managers and paused allocations since the start of the year.

The pullback highlights institutional investors’ growing unease with a boom that emerged as private investment funds became key lenders to small- and mid-market businesses. Private credit has flourished in recent years as it has filled the void left by banks that pulled back from small- and medium-sized business lending amid tougher capital rules and strains at regional lenders such as Silicon Valley Bank.

The asset class has drawn investors by delivering high single- to double-digit returns with limited risks. Total assets under management at US private credit vehicles more than doubled to $1.4tn in 2024 from five years ago, according to Federal Reserve estimates.

Until now, public pension funds played a pivotal role in fuelling the boom. A survey of 438 public pension plans by the National Conference on Public Employee Retirement Systems in November last year found their average allocation to private debt had surged to 4.1 per cent from 0.7 per cent three years ago.

But as the private credit binge has intensified, spreading from institutions to retail investors, pension funds are beginning to retrench.

The $44bn Iowa Public Employees’ Retirement System paused its $550mn annual private credit allocation after committing $100mn in the first five months of this year, according to public records.

At a June board meeting, chief investment officer Sriram Lakshminarayanan said the fund would resume making new private credit commitments in the following month but set a “pretty high” bar for future investments.

The $2.4bn Cincinnati Retirement System has also shelved plans to hire a new private credit manager. “I’d rather wait and see what happens over the next six months,” said chief investment officer Jon Salstrom.

Such caution has led many funds to allocate less to private credit than they previously planned. An S&P Global Market Intelligence study of more than 70 plans found 66 per cent fell short of their targets in June, up from 63 per cent in January.

Some managers cite policy uncertainty as a factor, as many plans struggled to gauge the impact of President Trump’s tariff war and tax bill on investment outcomes.

Pension plans are also worried the surge in private credit funds may weaken lending standards and increase default risks.

Yup Kim, CIO of the $46bn Texas Municipal Retirement System, said the retail rush was leading to an abundant supply of capital which can lead to “looser covenants, structural protections and underwriting standards” — trends that ultimately affect pensions as well. The problem is exacerbated by higher-for-longer interest rates and an uncertain US economic outlook that may “inevitably” cause private credit defaults to “tick up”, said Ross Alexander, a senior portfolio manager at the $85bn Alaska Permanent Fund Corporation.

Alexander said Alaska was looking to work with private credit managers with experience in asset recovery to make sure the fund’s returns are “better protected”.

Despite the concerns, some pension plans are still keen to expand their private credit exposure in the belief that careful planning may generate excess return without undue risk.

This weeks fun find

Rivals Rub Shoulders in the World of Competitive Massage

The moment when a massage begins, for both practitioner and receiver, has a sacred quality. The initial touch marks the transition from regular life—chitchat, logistics, social armor—to the otherworldly realm of the massage, in which mind and body are uniquely harmonized, and some kind of euphoria is achieved. It’s also a transfer of power, in which the receiver willingly becomes vulnerable to the practitioner. If the first touch feels off, you won’t relax. If you don’t relax, you won’t have a good massage.

The eighth annual World Championship in Massage was under way in a modernist, glass-and-concrete building owned by University College Copenhagen. For a weekend, more than two hundred and sixty competitors from fifty-eight countries would face off in nine categories, including Swedish, Thai, chair, and Eastern- and Western-freestyle massage. At the opening ceremony, staged in a lecture hall with tiered seating, the mood had been set by a music video for “vikings (Hey Ho),” by Hedegaard, a Danish d.j. The song starts off eerie and atmospheric, then morphs into pounding, monster-voiced E.D.M., the video showing a lone Viking sailing beneath a crow-filled sky. The massage therapists sang—“hey . . . ho . . . hey . . . ho”—and danced, waving their arms. “warriors!” the singer bellowed, invoking Thor, bravery, and Valhalla. “to victory!” The massage therapists went wild. To my left, people brandished flags from Argentina, Cuba, Kazakhstan, and Ukraine. To my right, a man in a tracksuit looked befuddled.

The championship has two stages. In the preliminary rounds, competitors massage fellow massage therapists—“It basically functions as a giant massage trade,” one told me—in classrooms full of numbered stations, under the watchful eye of judges holding clipboards. Judges grade on an eighty-five-point scale, assessing technique, innovation, client communication, ergonomics, and flow. Winners then proceed to the championship round, in which they massage the judges. As at an élite dog show, starkly different categories have competitions within themselves, then against one another; at the end, a chair massage might beat a facial or a Thai massage, like a Yorkie besting a Weimaraner.

The championship has brought to the field what some felt it lacked: inspiration, dramatic stakes, and, perhaps, a mild rumspringa quality. (It’s very pleasant to visit Copenhagen in June.) There’s a mighty Thai presence at the event—more than two dozen competitors, with a strong group spirit—and several therapists told me that they’d gone to Thailand to train after being energized by the event in Copenhagen. Others had learned specific new techniques. Judy Drown, from northern Idaho, said that, before coming to the event in 2024, her routine had been stuck in a rut: “I started with the head, face down, I worked for a half hour, we flipped over, I worked head to toe for another half hour.” The world championship changed that. “One of the finalists basically picked their client up halfway and spun them head-for-feet halfway around on the table,” she said. “They didn’t flip them supine to prone—they flipped them head-for-feet, which got a big ‘whoo’ out of the crowd. I was, like, What?! It was really quick and smooth.” Drown is now striving to be able to flip sleeping clients without waking them up.

To outsiders, including noncompetitive massage practitioners, the whole thing can seem nuts. In Manhattan, at a low-frills spa I’ve been going to for years—everybody they hire has a good touch—one of the owners was incredulous. “I mean, imagine being a cardiothoracic surgeon and having a cardiothoracic-surgery competition,” he said. Nathan Nordstrom, a past president of the American Massage Therapy Association, had once been wary, too. “The A.M.T.A. is very focussed on the acceptance of massage therapy as a clinical practice,” he told me, and a massage championship might not help. But his friend and respected colleague Ryan Hoyme, the author of “The Complete Guide to Modern Massage” and the proprietor of MassageNerd.com, was going. “I reached out to him and I said, ‘Really, is this a joke?’ ” Nordstrom recalled. “And he’s, like, ‘No, it’s really competitive.’ He got me excited to know that you can actually create a standard and an acceptance of a technique worldwide.” Nordstrom, who has now medalled in one competition, and has judged events in Detroit, Kentucky, Copenhagen, and elsewhere, has a passion for standards. “I’ve been told I’m the Simon Cowell of massage judging,” he said.