Ketu Desai
By Ketu Desai
There were two major events in August that could have a lasting impact on the markets. The first was two instances in which the Treasury used historically unconventional ways to defend its yields. The first instance involved the US intervening to support the Japanese Yen for the first time since 1998. This intervention came after the Yen hit a 40YR low against the US dollar and prevented the Japanese from selling Treasuries, which would have driven US rates up.
The second instance was the Treasury Secretary doubling long-term buyback amounts. While the new Fed Chair has made it clear that he wants the market to do the heavy lifting in setting short-rates, the power has now shifted to the Treasury with a clear bond put in place as a form of yield curve control.
The Treasury wants to push issuance to the front end, where rates are lower and stimulate new forms of demand for the short end, such as from stablecoins and banking de-regulation. It knows to keep rates below a certain level to help finance the US deficit. Interest expense as percentage of GDP is now near a historic high. From the market’s perspective, the debasement trade continues to have legs and gold looks like a good way to play it.
The second event is major Wall Street firms partnering with Nvidia to provide $500bn of outside capital for datacenter buildouts along with depreciation insurance. The importance of this is that it creates new sources of capital to finance the AI buildout and a new asset class securitizing compute. You could soon receive a notice from your broker to buy “CBS” – compute-backed securities. The SEC eased rules around such securities to further promote them. If there is even modest success, Wall Street will elevate this to a greater asset class.
With the Treasury defending yields, these types of securities along with the AI-buildout continue to get financed. The latest data from across the AI-supply chain should ease depreciation and payback concerns. Perhaps one of the most controversial AI-stocks, CoreWeave grew revenue 112% as its backlog rose to $104.2bn, and its near-term capacity sold out. Perhaps more important to broader AI depreciation concerns, it also reported that A100s, 6-year-old silicon was contracted through 2029, while pushing a 25% price increase in July.
Similarly, neo-cloud Nebius reported a 454% year-over-year growth. The expected payback period for their associated CapEx was 1-year and 10 months, down from 2 to 3 years. We are seeing returns on the spend across the value chain as hyperscalers all reported accelerated growth in their cloud business. Google and Microsoft showed 82% and 43% growth, respectively. Analysts expect hyperscaler margins to continue this growth to nearly 50%.
Amazon said on its earnings call, “We’ve long believed AWS could become a few hundred billion dollars revenue business and now believe it will be at least double that and very possibly be $1 trillion annual revenue business for us in time with very appealing accompanying free cash flow and return on invested capital.”
Semiconductors and infrastructure should remain the focus for investors while multiple data points indicate this is a very long cycle. Nvidia reported 106% growth (a $5 trillion dollar company basically doubled its revenue.) They are well on their way to 70% growth for the fiscal 2028 year, well above the 45% analysts expected. This guidance would have been higher, if memory was currently not so constrained.
Memory stocks are also likely to get re-rated as they all trade in the low-to-mid single digits. Both NAND and DRAM prices are at all-time highs and accelerating further. Most memory stocks will at least double earnings within the next year. This re-rating will come as analysts and investors price growth in 2028 & 2029.
For instance, analysts expect Micron’s earnings to decline by 29% in 2029. Micron announced 16 multi-year contracts through 2030 that are take-or-pay with pricing floors. Similarly, SanDisk has signed long-term agreements with eight customers totaling $94bn (~$250bn market cap), representing approximately 50% of bits in FY2027 and approximately two-thirds of bits in FY2028. They expect margins to sustain over 80%, up from 34% just 2 years ago. Earnings are likely to grow for much longer as these companies buy back a significant amount of their float. SanDisk announced that they will return 100% of their excess cash flow to shareholders. SK Hynix announced the largest buyback in South Korean history. Micron will announce a similar plan in December or early next year. The earnings estimates don’t have meaningful contribution from recursive self-improvement, physical AI, or robotics.
There are various ways to win with these stocks. As investors start to price for a longer cycle, the multiple will also re-rate higher. While you wait, you can gain tremendous earnings growth and capital returns. Elon Musk’s quote on the SpaceX earnings sums up the situation in memory very well, “Memory capacity is increasing by around 20% per year, but demand has risen by 200%.”
Looking ahead, the market will focus on the latest in geopolitics, AI, economic data, and Fed meetings.
Ketu Desai is the Principal of i-squared Wealth Management Inc. (www.isquaredwealth.com), an investment management firm based in New Jersey. ketu@isquaredwealth.com
