Animal Spirits• Dec 3, 2025• 1:12:10Interview

The Age of Discontentment | Animal Spirits 441

From Animal Spirits

Michael Batnick & Ben Carlson

Executive Summary

Despite a brief correction, 2025 has been a strong year for traditional, diversified portfolios, with US stocks, international stocks, and bonds all posting significant gains.
The generative AI boom is creating tangible economic effects beyond tech, fueling a massive demand for data centers that has led to a 25-30% wage increase for skilled construction labor.
The cryptocurrency market is showing signs of significant stress, with record monthly outflows from global crypto funds and defensive moves by major players like MicroStrategy, diverging from the strength in equities.
The media landscape continues its dramatic shift, with legacy studios losing viewership and profitability to tech giants like Netflix and YouTube, prompting M&A discussions like a potential Warner Bros.

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Concerns Raised

Widespread overvaluation across nearly all financial asset classes.
Significant investor outflows and price weakness in the cryptocurrency market.
The continued decline and potential irrelevance of legacy Hollywood studios.
The film industry's box office and ticket sales have not fully recovered to pre-pandemic levels.

Opportunities Identified

Exponential revenue growth in the generative AI sector.
Strong performance of developed international stocks, which are outpacing the S&P 500.
Sectors benefiting from the AI build-out, such as data center construction and skilled labor.
Dominant streaming platforms like Netflix and YouTube continue to capture market share and profits.

Key Themes

The AI Gold Rush's Second-Order Effects

The massive investment in generative AI is creating a real-world economic boom in adjacent industries. The ninefold increase in AI revenue is fueling unprecedented demand for data center construction, which in turn is causing significant wage inflation for skilled labor like electricians and project managers.

This highlights that the AI revolution's economic impact is not confined to tech companies, but is creating tangible opportunities and inflationary pressures in physical industries like construction and labor markets.

Resilience of 'Plain Vanilla' Investing

Contrary to narratives about the death of traditional portfolios, 2025 has been an excellent year for simple diversification. With US stocks up 17%, developed international stocks up nearly 30%, and the aggregate bond market up 7%, a basic three-fund portfolio has performed exceptionally well.

This serves as a reminder that foundational investment principles like diversification across asset classes and geographies remain effective, even in complex and volatile market environments.

Divergence in Digital and Speculative Assets

A clear split is emerging between the performance of the broader stock market and more speculative assets. While equities are strong, the crypto market is experiencing record outflows and price weakness, and companies like MicroStrategy are building USD reserves, signaling caution.

This divergence suggests a potential shift in risk appetite, where investors are rotating out of the most speculative assets while remaining bullish on established equities, particularly those tied to the AI theme.

The Unbundling of Hollywood

The power dynamic in media has decisively shifted from legacy studios to tech-driven streaming platforms. Legacy media's share of TV viewing time has plummeted, while Netflix generates significant profits and YouTube surpasses it in viewership, leading to speculation that a giant like Warner Bros. could be acquired by Netflix.

This trend indicates a fundamental and likely irreversible consolidation of power in the media industry, where content distribution and creation are now dominated by a few large technology companies.

Pervasive Overvaluation Concerns

Despite strong market returns, there is a persistent undercurrent of concern that nearly all financial assets are overvalued. This sentiment, voiced by prominent investors like Jeff Gundlach, echoes historical warnings and questions the sustainability of current price levels across stocks, bonds, and real estate.

This highlights the central tension in the current market: strong momentum and positive economic data clashing with valuation metrics that suggest heightened risk and the potential for a significant future correction.

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