Sinners

EU to Trump: Basta!

Soundbite: Europe is aligning from within to push back on President Trump’s weekend move to place tariffs on European nations who oppose his plan to “own Greenland.” President Macron threatened to invoke an anti-coercion clause that would go beyond retaliatory tariffs. European leaders described Trump’s tariff threat as potentially pushing the world into “a dangerous downward spiral.” The EU held an emergency meeting on Sunday where they decided to show restraint once again, although they did freeze last July’s trade deal with America. The EU meets again on Thursday to decide on any further action, one day after President Trump speaks at Davos. Our guess is that a unified Europe constructs a workable plan that will generate sufficient momentum in Washington to force the administration to compromise. Only get concerned if gold starts to fall with stocks, because that would mean gold investors are worried about a potential recession.

This weekend was a bit too similar to 1987 for our taste.

One weekend in October 1987 saw tensions between Germany and the U.S. escalate to the point where Treasury Secretary Baker threatened to “let the Dollar go” and sparked a stock market crash the following Monday, October 19. Thankfully, the threat of activating the anti-coercion clause did not materialize Saturday, and the EU meeting dodged a market bullet.

The anti-coercion instrument (ACI) was established in 2021 and authorizes the use of penalties, such as tariffs on goods, charges on services (harmful to the tech and financial industries), investment curbs that could eliminate hyperscaler data center build across Europe, among other measures. It was introduced as a deterrent, and the fact that it could take months to implement allows for ample negotiations, which should keep the markets placated.

While they chose reflection over retaliation, Europe is no longer going to stay defensive, and the U.S. may be dealing with a much more assertive—and importantly, more cohesive—continent.

Due to the severity of any fallout from undermining the Europe-U.S. axis, we expect the result to be a compromise and not a major market-moving tumult. We await the result of a meeting between European leaders announced by the European Council, which is likely scheduled for Thursday.

The administration’s recent strategy of pitting one internal component against another may finally be one step too far. This weekend’s move is an extension on a global scale of last week’s action where they had one part of the government face off against another when the DOJ initiated its criminal investigation against Jerome Powell.

Now we expect the discussion to take over Greenland to receive pushback from GOP members in Congress who could become aligned with a galvanized Europe thanks to this recent attack from within NATO.

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AI: You Gotta have Faith…?

Soundbite: We fear that the hyperscalers may have committed a host of deadly sins (pride, greed, envy, lust, and gluttony) by spending $1.3 trillion in search of a holy grail AI app. If they fail, then they will be introduced to the remaining two: the wrath of investor selling and the sloth of underperformance. We are not alone in wondering how this extraordinary capex spend turns into extraordinary ROI. The health of passive investments in the broad indices is reliant on the continued success of these overweight mega cap tech stocks. This fragile balance supports our argument that diversification must be achieved using a more active investment approach than trying to mirror the index.

Meanwhile, stock prices have climbed a wall of worry across multiple faces including a very difficult environment to forecast the long-term energy outlook. An example is Microsoft’s purchase of Three Mile Island where they chose to spend twice the industry’s twenty-year rate to guarantee a secure energy supply. Furthermore, there are concerns over financial engineering from circular financing and from unrealistic depreciation schedules. On that last point, Jeffries points out that the hyperscalers’ 2026 capex to revenue forecast is slightly more than 25%, while capex to cash flow is an eye-watering 70%.

These hyperscalers are no longer focused on keeping their remarkable monopoly positions and find themselves in a race that could land them in a commoditized heap. Since price always moves to marginal cost in heavy-capex commodity industries, we do not expect to see the most optimistic revenue targets hit.

So why haven’t we seen a panic dive in these stocks à la 2022?

It can be due to the massive cash boost from the depreciation tax change for R&D, or from the optimistic findings of a Wharton survey that revealed over one-third of firms polled with 1,000 or more employees have seen “significantly positive ROI” using AI. Additionally, Goldman Sachs forecasts a 15% increase in productivity that exceeds what we enjoyed during the Internet Age, translating to a net present value of $8 trillion.

Meanwhile, there are other surveys from Stanford and MIT that show low adoption rates, and even positive surveys and forecasts cannot pinpoint what consumers and companies will pay for productivity-enhancing AI tools. Nor do we have tangible data about what profits will go to which companies, even if we had a handle on revenue expectations.

JP Morgan pointed out that key metrics are falling:

• Cash flow margins are dropping along with liquidity ratios.
• GPU rentals in data centers have decreased by more than 20%.
• Applying a more realistic three-year depreciation schedule forces profits and margins to contract. JP Morgan estimates “EPS and operating margin revisions would range from -6% to -8%.”

Therefore, when tech bulls argue that valuations are not in bubble territory when you also consider their growth trajectory, they are not considering that the underlying growth and profitability metrics may be suspect.

Because we are worried about the shrinking labor pool, our economy needs the capital markets’ AI prayer to be answered, because that would grant us the productivity boost necessary to keep the economy growing.

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Quantum Computing: Chomping at the Bit(coin)

Soundbite: Today is another day when gold is up while Bitcoin is down. The cryptocurrency has underperformed since the start of a Trump administration that has been pro-crypto. Gold has a constituency of central banks supporting the commodity in 2025, but there has been no broadening for Bitcoin, which was helped enormously by institutional flows, especially after the SEC approved spot Bitcoin ETFs two years ago. Many worry that this institutionalization has changed the Bitcoin brand. Perhaps the biggest overhang is corporate treasury operations introducing structured products such as Michael Saylor’s convertible bond strategy that could cause huge liquidation if his stock price falls further. As if that was not enough, a May 2025 paper by Milton and Shickelman warned that quantum computers were not decades, but years away, and could crack passwords of “large institutional and exchange holdings, where public keys have been exposed due to “address reuse” practices.

There is a new phrase that has been hounding Bitcoin investors and has been a topic within the Bitcoin community: “quantum vulnerability.” Its definition is that quantum computers can grab a public key and then convert it to a private key. The authors of “Bitcoin and Quantum Computing: Current Status and Future Directions” estimate that one-third of the entire 1.3-billion-coin supply could be impacted. Jeffries’ Chris Wood just discussed the paper in a recent issue of his GREED & fear newsletter, making it more widely known.

This type of news can terrify investors, and it probably has scared people away, as ETF holdings topped shortly after the May 2025 article’s publication. However, there are glimmers of hope in this bad news: When public information hits the masses, it can often mark the low. Supporting this potential is a very smart insider who has bought shares of Strategy (formerly known as MicroStrategy) after the company’s market capitalization fell below the value of the Bitcoin the company owns, even after you include the company’s indebtedness.

That insider sits on the Strategy board and is also a board member of Apollo Senior Credit Funds (he is well versed in credit structures). He sold a large amount of MicroStrategy stock in November 2021 as Bitcoin was reaching its major peak above $69,000. He then bought stock in June 2022 after Bitcoin had fallen 70 percent. There are very few insiders who have bought MSTR stock, but he was joined in 2022 by the Chief Technology Officer. If the CTO joins this insider’s January 2026 buy, it will be a very positive signal that perhaps Bitcoin can regain its status as a digital store of value.

The sudden emergence of quantum computing soon stealing a massive proportion of existing Bitcoins is unquestionably problematic, but when should a distant threat impact today’s price? Insider buying may be suggesting that it is too early to worry about the crypto market’s equivalent of “the universe is expanding.” Now that quantum mining could see broader discussion, we are open to further Bitcoin losses, but we are now looking for reversal signals in Pave’s models over the coming months.

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What to Look for This Week

(All times D.S.T.)

1. Friday, January 23 at 10:00 a.m. Final data for the University of Michigan Survey of Consumers for January. We are focused on any revision to their long-term inflation expectations, and for any uptick in sentiment given firmer housing data out of the Mortgage Bankers Association last Wednesday. (The MBA Mortgage Refinance Index jumped almost 50% from the prior week to the fifth highest reading in almost three years, and the Purchase Index also jumped to the second highest level in almost three years.) The data could also reflect changes after the news bombs from Venezuela and the DOJ’s charges against Jerome Powell.
2. Thursday, January 22 at 10:00 a.m. We will know the Personal Consumption Expenditure Price Index data for November. Core PCE has not exceeded 3.0% for almost two years. October came in at 2.8% and is expected to be 2.7% for November. Later that day at 2:00 p.m., 10-Year TIPS auction results are out. Lately they have not been bid up, and are not showing any concern for inflation. The yield on 10-Year TIPS is only 1.8% and over the past month has fallen by 0.1%, and is now 0.4% lower than a year ago.
3. Tuesday, January 20 at 2:00 a.m. The November UK unemployment rate. The headline number is an average of the last three monthly unemployment rates. October data registered a rise to 5.1% in the three months to October 2025, but the highest level since the series peaked at 5.3% five years ago, just surpassing the 5.2% peak from 10 years ago. We are tracking this because, like the U.S., there is an unwelcome increase in those unemployed for up to six months, six to twelve months, and over twelve months. Total employment fell, marking its second consecutive quarterly decline, driven by a drop in full-time positions.

FOMC Voters Speaking: Now in the Fed Blackout Period until next week’s FOMC meeting. The World Economic Forum Annual Meeting at Davos started yesterday and resumed Tuesday, January 20 at 3:00 a.m., running through Friday, January 23. We hear the Bank of Japan’s Rate Decision on Thursday January 22 at 11:00 p.m. No change is expected after the BoJ raised rates 25 basis points at their last meeting. Earlier at 7:30 p.m. on the 22nd, Japan’s December Core CPI is out, averaging 3.0% over the past three years.

Earnings: Warmup for the major tech earnings the following week on Wednesday and Thursday. Tuesday January 20: Homebuilder D.H. Horton (DHI), regional banks U.S. Bancorp (USB), Fifth Third Bancorp (FITB), KeyCorp (KEY) before market; and Netflix (NFLX) after market, including Zions Bancorporation (ZION). Thursday January 22: Intel (INTC) and Capital One (COF) after market, and Freeport Mc-Mo-Ran (FCX) before market could give insight into commodity demand for copper.

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By Peter Corey

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