How does it all end?!
Spoiler alert: You get diagnosed with a terminal disease. Or you have a cardiac event.
Oh, the question was about markets? Sorry. “I’m a little dark sometimes,” as Paul Bettany’s Will Emerson put it.
It ends, in one bank’s bear case, with Democrats taking the US Senate and the Texas governor’s race. And that’s just like Wall Street, isn’t it? The bear case always starts with Democrats winning something, despite the fact that historically, stocks (and the economy) do better under Democratic presidents than Republicans. (Who was it who presided over the GFC? I can’t remember…)
Anyway, a new Marist poll shows James Talarico leading state Attorney General Ken Paxton (who was impeached, but later acquitted, on bribery and corruption allegations in 2023) in the race for John Cornyn’s senate seat. In the same poll, Gina Hinojosa had a 3ppt edge over Greg Abbott, who’s seeking to become the longest-serving governor ever in the Lone Star State.
In a testament to Texas’s red reputation, poll participants said they still expect Paxton and Abbott to win. Indeed, more than two-thirds believed Abbott would extend the GOP’s three-decade run in the governor’s mansion.
Still, the fact that both contests are competitive — the senate race is now listed as a toss-up on the Cook Political Report, and the governor race shifted to “likely” Republican from “solid” in the latest update — says a lot about a lot, including the AI buildout.
Abbott’s position on data centers reversed sharply to reflect voter skepticism and fend off criticism from Democrats. Indeed, he’s instituted what amounts to a ban, temporary or not, on development in the state, where environmental regulators are under orders to halt permits for new tech projects pending the results of an electricity audit.
“Data centers must protect our grid and water,” Abbott said this week. (Greg the environmentalist, apparently.) The figure on the left, below, shows you the RealClearPolitics aggregate polling for the governor’s race in Texas.
The figure on the right, from the same BofA note, alludes to the connection with markets.
“Bonds and voters.” That’s how the bank’s Michael Hartnett summed up the bear case in the latest installment of his popular weekly “Flow Show” series, which found BofA describing the Texas races as “referend[a] on AI data center expansion.”
In the bear case, Democrats take the senate in Washington and the Texas Governor’s Mansion, while “the bond tantrum deepens, ending the boom and bubble.”
With the AI “big 10” (which BofA defines as the Mag7 plus AMD, Broadcom and Micron) now on par, in terms of market cap dominance, with every major bubble in American history save the railroad boom, the stakes are high.
A 200bps increase in Treasury yields ended the Nifty Fifty, Hartnett noted. In Japan, it was 230bps on JGBs that cracked the bubble in 1989. And a 260bps selloff in Treasurys preceded the bursting of the dot-com bubble in 2000. In all cases, Hartnett wrote, the “cost of capital broke speculation in the concentrated leadership” and curbed “overspending.”
10-year US yields are up 118bps since the late-February lows.
In the present, the future seems way more uncertain than it “normally” has seemed (at least to me), over the past 20 or so years.
Yes, there is uncertainty over “bubble or not”, elections and interest rates. However, in my mind- the biggest uncertainty has come from the incremental, yet now substantial, unleashing of unintended power of the presidential office. This genie won’t be able to be put back in the bottle- regardless of who is elected, or regardless of what an individual candidate promises they will do if elected (versus what they do once they are in office). I have no idea where this “known unknown” leads us.
The second biggest uncertainty comes from an increased level of deficit spending- with no path to decrease the deficit. The “new normal” average annual deficit is now in excess of $2T. Less than 6 years ago, the average annual deficit was running at less than $1T. What this gets spent on can shift dramatically, depending upon election outcomes. I doubt we are ever going back to anything close to a balanced budget and regardless of how it gets spent, the United States will be forever changed. Another “known unknown”.