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Puerto Rico’s Debts Are “Not Payable” According to Governor



Puerto Rico's Debts Are

Puerto Rico’s Debts Are “Not Payable” According to Governor

The global economy has been walking a tightrope for some time. Zero interest-rate policies, slow economic growth, and mounting debt means zero room for error.

Puerto Rico is the latest jurisdiction to toss in the towel, with Governor Alejandro Garcia Padilla warning that the island is perilously close to falling into a “death spiral”.

“The debt is not payable… there is no other option. This is not politics, this is math,” Garcia Padilla told the New York Times. “But we have to make the economy grow. If not, we will be in a death spiral.”

Puerto Rico, as you can see in the above chart published by the WSJ, has been in a tricky situation for some time. It’s $72 billion of debt for an island of roughly 3.5 million is equal to 70% of economic output. This is a ratio that is at least three times higher than the next highest state or territory in the United States.

The territory, which was ceded to the United States after the Spanish-American War, has been in trouble for awhile. The population growth rate has slowed, emigration is at record levels, and per-capita GDP has dropped over the last decade. Puerto Rico has relied on debt to try to grow the economy, and now credit-rating companies expect the first default to occur this week from the island’s electricity provider, which borrowed $9 billion. Further, the territory has been issuing new debt to pay old debt, and now the government is expected to run out of cash in July.

The Puerto Rico scenario encapsulates the current challenge that the rest of the world faces. Central Banks have pulled out all the stops to try to get growth: QE, increased borrowing, ZIRP, and ongoing currency wars. However, if that growth doesn’t come at the rate needed to get the ball rolling, it makes the debt harder to service. The more leverage, the higher the stakes are. Then all that is needed is one catalyst and things can get ugly fast.

Speaking of defaults: here’s what will happen if Greece defaults, and here is a breakdown of their debt.

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Just 20 Stocks Have Driven S&P 500 Returns So Far in 2023

From Apple to NVIDIA, megacap stocks are fueling S&P 500 returns. The majority of these firms are also investing heavily in AI.



Just 20 Stocks Have Driven Most of S&P 500 Returns

Just 20 firms—mainly AI-related stocks—are propping up the S&P 500 and driving it into positive territory, signaling growing risk in the market.

The above graphic from Truman Du shows which stocks are making up the vast majority of S&P 500 returns amid AI market euphoria and broader market headwinds.

Big Tech Stock Rally

Tech and AI stocks have soared as ChatGPT became a household name in 2023.

The below table shows data from last month, highlighting that just a small collection of companies drove most of the action on the U.S. benchmark index.

Company RankNameContribution to S&P 500 ReturnAverage Weight
3NVIDIA 1.00%1.62%
7Alphabet (Class A Shares)0.34%1.72%
8Alphabet (Class C Shares)0.31%1.53%
10Advanced Micro Devices0.16%0.39%
11General Electric0.10%0.28%
15Walt Disney0.08%0.55%
16Booking Holdings0.07%0.28%
17Exxon Mobil0.06%1.37%
Top 20 Companies7.05%29.17%
S&P 500*7.55%100.00%

*Based on the Vanguard S&P 500 ETF as of April 11, 2023. Source: Vanguard S&P500 ETF, Bloomberg.

Microsoft invested $10 billion into OpenAI, the creators of ChatGPT. It has also integrated generative AI into its search engine Bing. This large language model is designed specifically to make search capabilities faster, generate text, and perform other automations.

Also of interest is NVIDIA, which is the most valuable chipmaker in America. It sells $10,000 chips called A100s that allow machine learning models to run. These models perform multiple tasks simultaneously to develop neural networks and train AI systems, including OpenAI’s ChatGPT. Companies that are developing AI-related services, such as chatbots or image generation, may use up to thousands of these chips.

Despite being the world’s most valuable company and a key driver of returns, Apple is an outlier among tech giants with no major projects announced in AI (so far).

Implications of Market Divergence

The problem with the strong gains seen in a few select AI-related stocks is that it clouds wider stock market performance.

Without the AI-led rally, the S&P 500 would be returning -1.4%. as of May 17, 2023.

This form of steep divergence, known as market breadth, often signals higher risk in the market.

When more companies experience positive returns it is less risky than a small handful seeing the majority of the gains. Today market breadth is very narrow, and these companies make up over 29% of the entire index’s market capitalization.

How long AI-related firms mask the broader performance of the S&P 500 remains to be seen. A growing number of market pressures, from higher interest rates to banking uncertainty could add further challenges.

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