Hedgie's Market Edge - December 8, 2025

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🦔 Hi everyone, Hedgie here! The S&P 500 is up 16.8% year-to-date and the Nasdaq gained 22.1%, but the bond market is flashing warning signs that don't match the equity rally. This week brought more evidence of an economy splitting in two directions.

The Fed's Dilemma

The Fed meets Wednesday with an 88% chance of another 25 basis point cut priced in. They've cut 1.5 percentage points since September to a range of 3.75%-4%, aiming for a neutral rate of 3.0%-3.5%. But here's the problem: 10-year Treasury yields have risen nearly half a percentage point to 4.1% since cuts began, and 30-year yields are up over 0.8 percentage points. When the Fed lowers short-term rates and long-term bond yields rise anyway, someone's wrong about inflation or growth. Core PCE sits at 2.8%, still 40% above the Fed's 2% target. Bond investors are demanding higher term premiums because they see risk from sticky inflation and massive federal debt. The paradox: Fed cuts rates to help the economy, but if bond yields rise in response, borrowing costs for mortgages, credit cards, and corporate debt go up anyway.

The Labor Market

November's jobs report comes December 16, the first complete reading since the government shutdown began in October. Forecasts expect 38,000 jobs added versus 119,000 in September. Unemployment is expected to tick from 4.4% to 4.5%. ADP showed private payrolls fell 32,000 in November, the biggest drop since early 2023. Weekly jobless claims remain steady, suggesting no imminent collapse, but job openings are falling and hiring has slowed. The November reading will clarify whether we're seeing temporary shutdown effects or something more structural.

The Consumer Fracture

The top 10% of earners now do almost half of all consumer spending and hold $113 trillion in wealth, up $5 trillion just between April and July. Companies responded with "premiumization," optimizing for wealthy customers. Chipotle's CEO said consumers making under $100K stopped eating out, and they account for 40% of sales. When a quarter of buy now pay later users are paying rent with it and 40% are using it to pay other debts, that's survival, not overconsumption. Car repossessions are tracking toward 3 million for the year, matching Great Recession levels. Q2 had the largest repossession volume for that quarter in recorded history. Credit card delinquencies hit 37% in Mississippi. Student loans have 5.3 million first-time defaults.

AI Reality Check

ChatGPT's user growth slowed to 6% over three months while Gemini grew 30% and Perplexity surged 370%. OpenAI sent a "code red" memo as market share erodes. American AI startups are switching to free Chinese open-source models. Microsoft cut AI sales targets because staff couldn't hit them. AI adoption at work sits at 11% and falling at large companies. Meanwhile hyperscalers issued $121 billion in debt this year, four times their average, to fund $349 billion in capex. Banks are immediately buying insurance against those same loans, with Oracle's debt protection costs hitting 2008 financial crisis levels. Morgan Stanley arranged $30 billion for Meta in one day and is now looking to offload the exposure. Apple is bleeding AI talent to Meta and OpenAI as its AI chief steps down after stumbles with Apple Intelligence and Siri running 18 months behind schedule.

Market Concentration Risk

Goldman Sachs says the AI boom now looks like 1997, several years before the dot-com bubble burst. Five warning signs to watch: peak investment spending ($349B in 2025 capex), falling corporate profits (not yet, margins at 13.1%), rising corporate debt ($121B issued this year), Fed rate cuts (happening now), and widening credit spreads (started widening from tight levels). In the 1990s these signs appeared two years before the crash. The imbalance between infrastructure spending and monetization keeps growing. HSBC calculated OpenAI has a $207 billion funding hole even under optimistic assumptions. IBM's CEO said there's no way to get returns on $8 trillion in capex because you need $800 billion in annual profit just to cover interest.

My Take

The economy looks fine in headline numbers because the top 10% carry spending while everyone else pulls back. The S&P 500 is up 16.8% year-to-date, but strip out the Magnificent Seven and the picture changes. Goldman found AI investment resembles 1997, two years before the bubble. Investment spending is clearly peaking. Corporate debt is building fast. The Fed is cutting. Credit spreads are widening. The only missing piece is falling profits, but that's because we're early in the spending cycle. When the Fed cuts rates and bond yields rise, mortgage rates and credit costs go up anyway, which defeats the purpose. The bond market is pricing in risk the equity market is ignoring. AI infrastructure spending hit $349 billion this year with another $5 trillion projected through 2028, but monetization keeps getting shakier. ChatGPT growth slowing while competitors surge and startups switching to free Chinese models undermines the investment thesis. Meanwhile 3 million Americans are losing cars they can't afford, using buy now pay later to cover rent, and racking up credit card debt at depression-era levels in parts of the country. The K-shaped economy is more visible every week: one line going up, one going down, and companies optimizing for the line going up while the line going down keeps sinking. December's jobs report and Fed meeting will clarify whether the soft landing holds or the cracks widen.

Thanks for reading. The final weeks of 2025 will tell us a lot about where 2026 is headed. 🦔

Week Ahead: Fed meeting (Dec 9-10), November jobs report (Dec 16), final inflation data for the year, and whether we get a Santa Claus rally (historically happens 73% of the time in late December).

Weekly Market Stats:

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