What about A.I.?  The market has spun-up the A.I. debate around capacity, function, and productivity vs. funding, return, and valuation. There is an even deeper contradiction.  In our observation, some of the world’s largest asset-light businesses are increasingly moving toward more infrastructure-intensive models. To support this shift, these companies frequently own, finance, or contractually control data centers, electricity generation and transmission, cooling infrastructure, semiconductor capacity, water, and long-duration power agreements. While their core revenue streams remain rooted in software, advertising, and cloud services, their expanding capital commitments increasingly mirror those of industrial operators.  The dominant technology of the era is therefore becoming one of the largest new sources of demand for the physical economy.  We find the tension between capital intensity vs. physical constraint more relevant.  Higher sovereign yields therefore create a double pressure; they raise the discount rate applied to future A.I. earnings while simultaneously increasing the financing cost of the physical buildout “needed” to produce them. Technology can be revolutionary while segments of the underlying investment complex can still be miss-priced. Those ideas are not contradictory.  But for the man at the ‘stand, will this tension reconcile either way before the calendar’s turn?  Tough to see and Tech sector earnings are running north of +25% Y/Y (even adjusting for some of the most egregious accounting allowances) while the bid is in for hyperscaler paper.  For those versed in the history of Tech sector excess, it is tough to not see this ending badly, but ending badly before the holidays?  Unlikely.  Newsstand +3 (even if with time insensitive hypotheticals it could easily put at -3).

Are there other debates to settle that would swing the needle?  Perhaps.  But between now and year end it’s tough to see this broadening tape’s bid fading.  Inasmuch we have structured current positioning in our Global Macro Allocation portfolios and our Strategas Macro Thematic Opportunities ETF (SAMT) around five themes: 1) Cash Flow Aristocrats; 2) Artificial Intelligence; 3) Energy Power Renaissance; 4) De-Globalization; and, 5) Analog Edge.  The balance embraces both shifting pockets of cyclical strength and concern with structural considerations too important to not have on our radar.

For those with a longer lens than year-end we are compelled to consider the elements that will bridge

Are we experiencing one of the great millennial revolutions of economic order?  The agricultural revolution organized around land, optimizing output while externalizing costs.  The industrial revolution migrated from the farm to the factory, then the corporation and, ultimately, the exchange, where ownership became separated from operation and return on capital became the goal. The digital revolution organizes around data, coordinating information on demand in real time. Yet each successive system has abstracted economic value further from the physical substrate supporting it. It is interesting then that A.I. may represent the point at which that abstraction collides again with physical reality. Electricity, water, minerals, and land are not merely inputs but strategic constraints from which resource nationalism follows naturally.

A similar transition is occurring in the financial system. For most of the modern era, credit’s various functions traveled together first in Sterling and then the Dollar. The same instrument stored value, settled payments, served as collateral, was recognized by the courts, sat with custodians, and moved along politically controlled financial rails. Because those functions traveled together investors came to regard them as one thing. They are beginning to separate.  The freezing of Russian sovereign reserves was important because it showed that reserve assets could become instruments of geopolitical statecraft. The Eurodollar system is still extraordinarily deep and liquid, but participation is not politically neutral. The relevant consideration is not what is liquid, but what is “money” and what credit do I control when the system is under stress? That distinction will not cause investors to abandon Dollars tomorrow, but it may materially change how they allocate at the margin.  Tokenization accelerates this separation as credit, in all its forms, is managed seamlessly on non-Dollar rails.

The emergence of an increasingly digital monetary architecture seems imminent.  Digital on the surface; stable and real assets in custody.  This helps explain renewed interest in gold. Gold need not replace the Dollar to become increasingly valuable within a changing reserve architecture.  Bitcoin potentially occupies a parallel position; neither represents somebody else’s promise to pay.

For portfolio construction, the implications are more practical than philosophical.  We consider five guidelines in the management of our Macro Allocation Funds and in our Outsourced Chief Investment Officer (OCIO) advisory practice.

1. Maintain sufficient liquidity. Cash has option value when leverage unwinds because it prevents the investor from becoming the forced seller and provides capital when others are.
2. Identify hidden duration.  Any investment requiring refinancing into progressively lower interest rates deserves added scrutiny.
3. Cash Flow and balance-sheet strength should command a greater premium. This makes the traditional distinction between technology and value increasingly obsolete as mature technology companies themselves have become enormous capital allocators and infrastructure owners.
4. Own physical bottlenecks. Assets that emerging systems require but cannot manufacture instantaneously.  Scarcity has a time dimension.
5. Remain selective rather than doctrinaire about A.I.  The temptation to chase is real. Skepticism toward valuations should not become skepticism toward the technology. A.I. may deliver enormous productivity gains while simultaneously destroying the economics of its purveyors. The better investment may reside one layer beneath the technology—in the resources, infrastructure, energy, and physical capacity A.I. cannot function without.

None of this requires the existing financial architecture to collapse.  The Dollar can remain the world’s reserve currency.  Stocks can continue to rally.  A.I. can transform productivity.  Central banks can manage stress.  Structural transitions do not require the old system to disappear; they require the marginal economics to change.  We are watching capital become more expensive, resource security more strategic, and collateral contested.  The 60/40 portfolio constructed for fifty years of declining rates, globalization, inexpensive energy, and abundant liquidity is unlikely to remain optimal as those trends reverse.

Nicholas Bohnsack