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🦔 Hey everyone, Hedgie here. The 43-day government shutdown ended last week, the longest in U.S. history. About 1.4 million federal workers are getting backpay, critical programs like SNAP are being restored, and airlines should retur

n to full capacity ahead of Thanksgiving. But the Congressional Budget Office estimates the shutdown could cut fourth quarter GDP growth by 1.5 percentage points, lowering projections from 2.5 to 3.0% down to 1.0 to 1.5%.

Shutdown Aftermath

The shutdown reversed layoffs of over 4,000 federal workers at Commerce, Education, and Homeland Security. Most paychecks should be distributed by Wednesday, November 19. Air traffic had been reduced at 40 of the country's busiest airports but should be back at full capacity ahead of Thanksgiving.

However, health care premiums remain an outstanding issue. ACA subsidies expire December 31 for 24 million people. The Senate will vote by mid-December to extend them for three years, but passage isn't guaranteed. If no deal is reached, health care costs will rise and chances of another shutdown after January increase.

The October nonfarm jobs report is expected this week with total jobs added, but not the unemployment rate since the household survey wasn't completed. The BLS should release a full schedule soon with dates for critical inflation and labor-market data.

The Tech Rotation

After a nearly 55% Nasdaq rally since April 8 lows, something shifted in November. Technology is underperforming while health care, energy and materials outperform.

The Business Model Shift

Mega-cap tech companies are fundamentally changing in two ways. First, they've shifted from cash-rich to issuing more debt to finance AI capital expenditure spending. This is particularly worrisome for Oracle, but Meta and Google also show rising debt levels.

The probability of a December Fed rate cut fell from 95% just last month to about 51% now, leaving rates elevated just as these companies take on more leverage.

Second, mega-cap tech has gone from asset-light to asset-heavy, with investment in data centers and AI infrastructure potentially reaching $500 billion next year. This will weigh on margins and free cash flows over time.

What Major Institutions Are Saying

Last week I wrote about how major credit investors are positioning defensively. DoubleLine Capital's Robert Cohen warned "Who knows what the spillover will be if the music stops?" TCW Group CEO Katie Koch said she's "very nervous" about parts of private credit, positioned 15% underweight. Deutsche Bank is exploring ways to hedge billions in AI data center exposure, including shorting AI stocks and buying default protection on debt.

An estimated half a trillion dollars was wiped from markets last week as Nvidia, Microsoft, and Palantir saw sizeable drops. Goldman Sachs and Morgan Stanley predict a 10 to 20% decline in equities over the next one to two years. Singapore's central bank joined the IMF and Fed Chair Powell warning about overvalued stocks fueled by "optimism in AI's ability to generate sufficient future returns."

Treasury Auctions and Fed Policy

Markets face $125 billion in Treasury auctions starting Monday with three-year, 10-year notes, and 30-year bonds, testing demand when economic uncertainty remains elevated and Fed policy path is less clear. Treasury bulls and bears fought to a draw last week as conflicting data left December rate cut expectations in limbo. Fed Chair Powell said a December cut is "not a foregone conclusion."

My Take

I think the shutdown cutting fourth quarter growth by 1.5 percentage points matters more than markets are pricing in. The economy was on pace for 2.5 to 3.0% growth, now likely 1.0 to 1.5%. We should expect Q1 recovery, but many households may face higher health care costs if ACA subsidies aren't extended, hitting consumer spending right as the economy tries to recover.

The tech rotation isn't normal consolidation. What I'm seeing is a fundamental reassessment of the AI investment thesis. Last week I wrote about Oracle's debt more than doubling to $290 billion by 2028, Meta hiding $30 billion off balance sheet using special purpose vehicles, and Morgan Stanley forecasting hyperscalers will spend $3 trillion on infrastructure through 2028 with cash flow funding only about half.

The business model shift from asset-light to asset-heavy is real. These companies built success on capital efficiency with high margins and strong free cash flow. Now they're taking on debt to build $500 billion in data centers and AI infrastructure next year. That's not temporary capex, it's a permanent shift. The margins and free cash flows investors expect will be under pressure.

The timing couldn't be worse. They're issuing debt right when the Fed might not cut rates in December. The probability dropping from 95% to 51% in one month shows the market repricing rate expectations. This leaves rates elevated when tech companies need to service new debt loads.

What concerns me most is what major institutions are doing. DoubleLine warning about spillover effects, TCW positioned 15% underweight and "very nervous," Deutsche Bank hedging billions in AI exposure by shorting AI stocks and buying default protection. These aren't retail investors panicking, these are sophisticated credit investors who see the debt side and are getting defensive.

Goldman and Morgan Stanley predicting 10 to 20% equity declines aligns with what I've been tracking. Half a trillion dollars got wiped last week as Nvidia, Microsoft, and Palantir dropped. Peter Thiel just dumped his entire Nvidia position, 537,000 shares representing nearly 40% of his portfolio, while Nvidia hits $5 trillion valuation. When someone who co-founded PayPal and Palantir exits Nvidia completely, that's saying the valuation ran too far ahead of reality.

Last week I wrote about the top 10 stocks accounting for over 40% of the S&P 500, record concentration that means any AI correction cascades through markets. Nvidia's market cap is larger than five of the S&P 500's 11 sectors, equal to 60% of the entire Russell 2000, and bigger than Germany's GDP. That concentration in one company based on AI infrastructure spending creates systemic risk.

Some will point to strong fundamentals, earnings beats, guidance raises. I'm not disputing these companies are delivering earnings growth now. What I'm questioning is whether current valuations, debt levels, and capital intensity are sustainable. OpenAI is accounting for over $1 trillion in AI infrastructure deals while losing $11.5 billion in the last three months. Companies are spending hundreds of billions building infrastructure for revenues that haven't materialized.

Geoffrey Hinton has said explicitly that to make money from AI "you're going to have to replace human labor." The value proposition isn't productivity enhancement, it's labor elimination. If AI succeeds at replacing labor at scale, you destroy the consumer base that generates revenues these infrastructure investments depend on. If it doesn't succeed at that scale, then the infrastructure spending was wasted capital.

I don't think this marks the end of the bull market in the traditional sense. The Fed isn't aggressively raising rates and we're not entering recession yet. But I think we're in the early stages of an AI valuation reset that could be sharp and disorderly given the concentration and leverage involved.

After a 55% Nasdaq rally since April with elevated valuations, I think a reset is not just healthy but necessary. The question is whether it happens gradually through rotation or abruptly through deleveraging and forced selling.

If your portfolio became too heavily skewed toward technology after three years of bull market gains, I recommend rebalancing now. Large-cap value, mid-cap stocks, health care, industrials, and emerging markets can provide diversification away from concentrated AI exposure. This isn't abandoning technology entirely, it's reducing concentration at valuations that price in perfection.

The structure I've been tracking, rising leverage at tech companies, off-balance sheet debt totaling $30 billion at Meta alone, institutions hedging exposure, credit investors positioning defensively, is now showing up in market performance. When smart money like Thiel exits completely and major institutions get nervous about spillover effects, that's signal.

This isn't a time to panic, but it's also not a time to ignore what multiple data points are showing simultaneously. The shutdown damaged Q4 growth, tech companies are taking on debt at elevated rates, major institutions are hedging AI exposure, and concentration remains at record levels. Those conditions don't resolve quickly or cleanly.

Stay sharp out there.

Hedgie

Weekly Market Stats

What's Coming

• Housing, PMI and sentiment data

• October jobs report with total jobs added but no unemployment rate

• $125 billion in Treasury auctions testing demand

• Government data gradually resuming after shutdown

For educational purposes only. I'm a hedgehog who tracks markets, not a licensed financial advisor. Always do your own research and consult professionals for personal financial decisions.