AI Capex Wave Drives Industrialization, Rewriting Economic Models

This conversation with Anshul Sehgal, Global Co-Head of Fixed Income, Currencies, and Commodities at Goldman Sachs, offers a profound, albeit complex, re-evaluation of market drivers. Beyond the immediate pronouncements on Fed policy or dollar fluctuations, Sehgal reveals a seismic shift underway: the transition from an era of financialization to one of industrialization, driven by the AI capex wave. The hidden consequence? A potential for significant political turmoil and a widening K-shaped economy, where labor's share of income may shrink unless actively negotiated. This analysis is crucial for investors, strategists, and policymakers who need to understand the non-obvious downstream effects of this industrial renaissance and position themselves for a future where traditional economic models are being fundamentally rewritten. Those who grasp this industrialization thesis will gain a significant advantage in navigating the coming decade's market dynamics.

The Industrialization Wave: Beyond Financialization's Reach

The prevailing narrative in financial markets often focuses on the immediate. Interest rate hikes, inflation figures, or quarterly earnings reports dominate headlines. However, Anshul Sehgal argues that we are in the midst of a far more significant, secular shift--a transition from an era dominated by financialization to one driven by industrialization, powered by the AI capex impulse. This isn't just about technological advancement; it's about a fundamental re-architecting of global GDP growth engines.

Sehgal frames this as a historical parallel to the post-World War II era when American industrial might, particularly in automotive manufacturing, reshaped the global economy. Today, the equivalent is the AI capex wave, projected to inject approximately a trillion dollars globally into AI-related technologies by 2026, with a significant portion benefiting American corporations. This massive investment isn't merely a cyclical uptick; it's the foundational infrastructure for the next five to ten years of GDP growth.

The implication here is that while Fed policy, fiscal stimulus, and monetary actions remain relevant, their impact is dwarfed by this industrial investment wave. This has direct consequences for labor. While labor incomes are expected to rise, their share of the overall income pie may shrink, potentially fueling political unrest. This dynamic underscores the "K-shaped" economy we're already experiencing, where certain segments of the population thrive while others are left behind. The deflationary nature of AI technologies and aging demographics further complicates this picture, creating a complex interplay of forces that haven't been untangled for nearly fifty years.

"We're going through a shift in the opposite direction. This is industrialization. This is like the Detroit of our times. Like when Detroit was building out more cars than the rest of the world put together, it was American cars on every street from Havana to Hanoi. But today, the equivalent of that is the AI capex wave."

This industrialization thesis suggests that traditional recession fears are becoming less relevant, replaced by the question of identifying winners and losers in this new economic landscape. The sheer momentum of this secular change provides a buffer against overheating concerns, as long as the underlying investment continues.

The Shifting Sands of the US Dollar and the Barbell Strategy

The global fragmentation and geopolitical shifts are also impacting the US dollar's traditional dominance. Sehgal points to the post-Global Financial Crisis era, where central banks relied on Fed swap lines for dollar liquidity, diminishing the need for gold as a reserve asset. However, in a more fragmented world, this reliance is less certain. This uncertainty, coupled with geopolitical considerations, incentivizes a move away from dollar holdings and towards tangible assets like precious metals.

While commodity markets, particularly gold and copper, are attractive due to their limited speculative float and AI-related applications, Sehgal emphasizes a specific portfolio structure: a barbell strategy. This involves being long assets with significant upside growth potential, such as stocks, and simultaneously being long physical commodities and precious metals, which act as a ballast against inflation and economic shocks.

"So when it comes to the dollar, structurally, if one is trading with a horizon of, say, 12 to 24 months, the totem pole we look at hasn't really changed. In this world, because of monetary debasement, you want to own physical commodities. You want to own gold. You want to own copper. Copper has AI-related things going for it as well. That sits at the top of the pyramid. Then for us, if the US is going to benefit disproportionately because of the AI capex wave and the reindustrialization that we've talked about, then the dollar sits next."

The traditional fixed-income component is seen as problematic in this environment. If inflation rises and the Fed remains passive, gold offers protection. However, if the Fed actively combats inflation by raising rates, both stocks and gold can suffer, while short-duration assets become more attractive. This highlights a critical insight: the barbell approach, with long stocks and long precious metals, coupled with short duration, provides a more robust portfolio structure for the current economic regime. The dollar, while facing geopolitical headwinds, remains a key component for accessing the AI capex cycle, suggesting a nuanced, rather than outright bearish, stance.

Gold's Multi-Decade Trajectory: Catch-Up, Not Mania

Concerns about gold being "ahead of itself" are addressed by Sehgal's perspective on commodity market dynamics. He notes that a mere 5% of the world's gold is speculatively held, meaning even moderate shifts in demand, such as from central banks diversifying away from the dollar, can cause significant price movements. This explains the parabolic price action observed.

However, Sehgal distinguishes this from a speculative mania. He posits that gold's recent appreciation is, in part, a "catch-up" to the growth stocks' performance from 2010 to 2020, a period when gold barely moved. With expectations of global nominal growth exceeding 5% over the next decade, gold is seen as providing essential ballast to growth-oriented assets. Furthermore, the propensity for governments to engage in fiscal expansion during crises (a populist response) suggests continued demand for assets like gold that can withstand economic shocks.

"So we don't see this as speculative mania for gold. We think this is a multi-decade trajectory of gold."

The implication is that while exponential appreciation might not continue, gold's role in private portfolios as a hedge against monetary debasement and geopolitical instability is firmly established for the long term. This requires patience and a focus on longer-term trends rather than short-term fluctuations.

Key Action Items:

• Embrace the Industrialization Thesis: Re-evaluate your investment strategy through the lens of the AI capex wave and global industrialization, not just financialization cycles. (Immediate: Strategy review; Long-term: Portfolio allocation)
• Adopt a Barbell Portfolio Strategy: Allocate significantly to both growth assets (stocks, industrials) and inflation/geopolitical hedges (gold, physical commodities). (Immediate: Portfolio assessment; Long-term: Rebalancing)
• Shorten Duration: Position portfolios to benefit from potential rate increases or a Fed response to inflation. (Immediate: Fixed income review)
• Monitor Labor's Share of Income: Track wage growth and labor negotiations as potential indicators of inflation and political stability. (Ongoing: Economic monitoring)
• Diversify Dollar Holdings: While the dollar remains necessary for accessing US growth, consider diversifying reserves with physical commodities and precious metals. (Immediate: Asset allocation review)
• Invest with a 12-24 Month Horizon: Focus on assets with demonstrable growth potential and resilience against inflation and geopolitical shocks, acknowledging that immediate gains may be less pronounced than longer-term payoffs. (Long-term: Investment horizon adjustment)
• Prepare for Political Turmoil: Recognize the potential for increased political instability stemming from a widening K-shaped economy. (Long-term: Risk assessment)