Kevin Muir: With the AI Funding Narrative Retreating Layer by Layer, Why Should Investors Shift Focus to Canada and Brazil?

Author: Maggie Lake (Interviewee: Kevin Muir)

Compiled by TechFlow

TechFlow Editor's Note:Beneath the seemingly calm surface of the S&P 500, U.S. equities are paddling frantically underwater: Goldman Sachs' AI Winners vs Losers Basket has plunged 55% in six months, while the Magnificent 7 has been pushed to the sky by safe-haven flows, and the intense negative correlation among individual stocks artificially masks the index's underlying volatility.

Veteran macro hedge fund trader Kevin Muir keenly observes that the market narrative around AI infrastructure capex is undergoing successive capitulation and retreat: it initially claimed that abundant free cash flow would pay for it, then degraded into being driven by cheap debt, and now, as borrowing costs surge, the market is numbing itself with equity issuance financing—a classic late-stage bubble danger sign. Meanwhile, micro trading mechanisms represented by multistrategy quant hedge funds (Pod Shops) and tax-sensitive long/short hedge funds (TALS) are inflicting a slow, never-covered bleed on many heavily shorted stocks.

In this distorted macro game, smart money should not blindly play the overvalued tech frenzy, but should lock onto real assets with more asymmetric odds: embrace Canada, which is entering an economic revival and capex boom, and Brazil, oversold on election sentiment and offering critical global commodity reserves and cyclically sensitive energy upside.

For financial markets, this is an extremely critical week: a flood of heavyweight earnings reports is about to land, and the Fed policy meeting arrives as scheduled. The week began with high drama as frontier AI giantAnthropic officially filed for an IPO(tech stocks were delighted by this), but President Lula's unexpected victory in Brazil's election triggered a violent reaction (Brazil's stock market clearly did not buy it）。

Fortunately, well-known macro analyst Kevin Muir, author of “The Macro Tourist,” joined our “Talking Markets” podcast yesterday to help cut through the fog and sort out the complex logic behind it...

Honey Badger Market

Image: Honey Badger Don't Care

“Looking across the market, there are already a million tiny warning signals flashing red danger lights, but people seem to keep finding one excuse after another to ignore them,” Kevin said. “In my view, this is an extremely worrying market. I am stunned that everyone appears so blindly complacent in the face of all of this.”

One of the most telling examples is the evolution of the narrative around the funding sources for AI infrastructure buildout:

“Once upon a time, the mainstream market view was that the bubble did not matter,because it was all being funded by massive free cash flow……”

“Then the argument degraded into ‘It doesn’t matter because they can borrow by issuing bonds at extremely low cost’… And now, with the window for cheap borrowing closed, they have started comforting themselves by saying, ‘It still doesn’t matter because they can raise money by issuing more equity.’”

There has been massive sector rotation within the market

Kevin recently wrote an in-depth research report (click here to read the original), in which he highlighted the following key facts:

On June 22 of this year, the Goldman Sachs AI Winners vs Losers Baskethad risen as much as 94.2% year to date. Over the same period, the Nasdaq Composite rose 21%, and the S&P 500 rose 10%.

Since then,the Goldman Sachs hedge basket has plunged 55% from its high, while the Nasdaq Composite fell only 4% and the S&P 500 was roughly flat… Meanwhile, the U.S. Magnificent 7 (MAG 7) kept “screaming higher.”

“So the environment we are in has experienced massive internal sector rotation,” Kevin explained. “There is violent turmoil beneath the surface, yet broad-based indices have been almost completely flat over the past six months.”

In other words, correlation among individual stocks has fallen to extremely low levels. It is like a white swan gliding gracefully and calmly on the surface, while its feet frantically paddle underwater, stirring up mud and splashes.

“This extremely strong negative correlation among individual stocks ultimatelysuppressed the index's realized volatility“,” Kevin said, “We have witnessed so much carnage and severe divergence, yet the index itself has barely moved.”

So, what exactly has caused the severe lack of correlation? Kevin listed several different market theory hypotheses, including:

AI is atransformative, revolutionary technology, and disruptive major technologies often “ultimately create extreme dispersion in similar market patterns.” Kevin agrees with this view “only a little,” but he gives greater weight to...

……Multi-strategy quant hedge funds (Pod Shops): “Today, a large number of market participants are trading in ways very different from the past few decades. Suddenly, traders are no longer simply going long; instead, every long position must be strictly matched by a corresponding short position.”

TALS (Tax-Sensitive Long/Short): An AI bot gave a very accessible explanation:

Chart: How the TALS (Tax-Sensitive Long/Short) strategy works

“When one of the long positions falls, fund managers decisively sell it, instantly locking in capital losses for tax purposes, and immediately replace it with another highly correlated comparable stock,” Kevin said, “and when one of the shorted stocks rises, they buy to cover and likewise replace it with a new short candidate.”

If you notice certain stocks “grinding lower,” it is likely because they carry “an extremely high proportion of short positions that have never truly been covered, and part of the reason shorts have been slow to cover is the rebalancing mechanism of the TALS strategy.”

Kevin emphasized that the core of the problem is that this operating model is “creating all kinds of serious microstructure distortions in the market.”

Canada’s economic revival?

More than a year ago, Kevin wrote an article on the core thesis for being bullish on Canada (Click here to read)）。

His analytical logic at the time was that, regardless of whether Mark Carney or Pierre Poilievre ultimately came to power, “the country’s political and economic pendulum is swinging to the right, and it will more seriously pursue economic reforms and take every practical, necessary measure,” Kevin noted.

“And that is exactly what has happened. Mark Carney is far from an out-of-touch, purely radical environmentalist. The previous leader was merely a former high school teacher, while Carney is a heavyweight who truly understands finance and capital markets.”

“Over the past year, the Canadian market has been on a strong upward run,” Kevin said, “many people have not realized thatthe Canadian equity market’s actual performance has fully outperformed the S&P 500 Index.”。”

“Admittedly, geopolitical conflicts have certainly played a key role in boosting energy stocks, but the deeper reality is that Canada is fully implementing the reforms needed to revitalize its economy… the country’s business environment is becoming more business-friendly.”

But he has a relatively negative view of Canada’s banking sector, because he believes bank stocks are currently valued at levels detached from fundamentals.

“So, short or sell Canadian domestic banks, go long basic materials, go long the real economy, and continue to buy dips in energy and related names,” Kevin suggested. “If you want to build a perfect pairs trade (Pairs Trade) in the Canadian market, the appeal of this strategy is probably unprecedented right now.”

Key Takeaways from Kevin

“Often,people very easily confuse a good company with a good investment…there is a fundamental difference between the two.”

“Since when did we naively assume that the government can really control the market as freely as it claims?the power of the market is far greater than anyone’s, even the president’s…I absolutely do not think that if there is a future crash, the government would bail out AI-related stocks.”

Lula’s election win certainly took the market by surprise, but “the elected lawmakers in Congress have long skewed significantly to the right… Admittedly, it would be more ideal if a leader who fully embraces free markets were at the helm, but the real macro trend is evolving in this direction…”

““I view today’s panic-driven selloff as an excellent dip-buying opportunity. In fact, I was already buying aggressively at today’s open.”

“I remain firmly bullish on the energy sector seeing unexpectedly strong buying over the coming period, especially in crude oil,” Kevin said. “As the global geopolitical landscape becomes more volatile and unpredictable, sovereign nations will need to significantly increase their strategic reserves.”

“This is precisely the core rationale for allocating to Brazil and Canada in a portfolio, because these two countries own and continue to produce the critical commodities that the world will need to stockpile aggressively if uncertainty emerges in the future.”

“This metric measures the funding adequacy of pension funds, and we are currently at the highest funding adequacy level since 2007.” It is chilling.Click here to view the detailed data report.。

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Disclaimer:This article is for informational purposes only and does not constitute investment advice. Please consult a qualified professional financial advisor to assess your risk tolerance, investment objectives, and overall financial planning.

Source: 深潮 TechFlow