Capital Intensityđ¤Capital Light
What if everyone wins?
delayed onset regime change
the change is coming from inside the tech
software, not dead yet?
discount shopping on aisle hyperscaler (maybe)
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Continuing on the theme of regime change, but shifting gears.
The rotation to tech continues to embigger, but within tech, the laggards have become the leaders. Low-capital softwareâthe darling of the old regimeâhas given way to high-capital hardware.
The rotation from capital light to capital intensive is something Random Walk has written about before, but hereâs a few more charts on that theme, plus a little wrinkle.
Delayed onset regime change
First, one âtable-settingâ observation on the current cycle.
While the inflection points for new market regimes historically tend to be recessions (reflecting the collapse of the prior regime), in this case the âregime change,â catalyst wasnât the pandemic or the pandemic ârecession,ââit was AI.1
Not that thatâs very controversial (even if the pandemic was a bit oversold as a behavioral shift at the time), but the NY Fed researchers have a neat visualization to that effect:
If you aggregate the total post-recession change in sectoral contribution to output (i.e. the extent to which different sectors contribute more or less to output relative to pre-recession), then the âeconomic reallocationâ post-pandemic was both less substantial, and less-enduring that the previous post-recession recoveries.
After Dotcom, the economy became asset-heavy and financials-oriented (i.e. financing the labor-intensive housing boom).
After the GFC, the economy became semis- and then software-orientedâthe iphone, apps, cloud and saas booms.
After the covid-recession, the economy didnât actually change all that much . . . until year 4 (2023), when rates went up, and the AI Capex surge began shortly thereafter.
And boy did the Capex rotation change some things.
At the sector level, you might say ânothing has changed,â because tech itself is still running away from the field:
Fwd ROE for tech has continued to accelerate, while the world-ex-tech is basically stagnant.
Notice, however, the ZIRP-peak in â21, followed by the rate-hike valley in â22, followed by the â23-present reacceleration. Something definitely changed, but the change is coming from inside the Tech.
