Living in a Material World | March 2026
I went through my formative high school years in the mid-80s. You may think I am borrowing this title from a certain Material Girl of that era, but the context is completely different in my case. I never owned one of her albums, I was more prone to Van Halen and Led Zeppelin back in the day. Yet somehow this aged title popped out of my head as a perfect description of risk and reward trade-offs in today’s markets.
Making up for Decades of Financialization
I often use the term financialization. It refers to moving value forward in time, most often by robbing it from the future. It has been a hallmark of the past 20 years in financial markets and has shown up in a few different ways that hollow out the base of potential future growth. Just like designer clothing and luxury purses may drain a bit from the size of your investment account, not putting money back into future growth investment in a business can result in less value-creation in the future.
That sounds stupidly obvious, but alas, it needs to be said. Here are ways that companies have done exactly this over the past few decades.
1) Stock buybacks at the expense of real re-investment in new growth initiatives
2) Excessive dividends to owners resulting in strained balance sheets with little room for re-investing in the business – think companies bought by private equity firms
3) General short-term behavior in response to quarterly earnings reporting of public companies
According to a 2024 piece by Advisorpedia (The Truth About Corporate Buybacks: Benefit or Hidden Danger?) The entire net flow into the equity market since 2003 (which totaled $5.2 trillion) was from corporate buybacks. The other notable market activity was selling by Pensions and Mutual Funds being offset by buying from Individual and Foreign Investors.
The Rewards of Reinvestment
Not all companies suffered from this failure to reinvest, noted examples reinvested heavily in new markets and became today’s “Magnificent 7”. Apple, Alphabet and the rest of the crew. They built dominant businesses with incredible scale and profit margins. When they did start to generate cash flow from these investments, they became cash engines unlike any the world had seen before.
Accelerating Change Requires Accelerated Spending
Now the world and markets are changing. There is a new prize in Artificial Intelligence models that has most of this group investing frantically to be the dominant provider. Cash that was once used to acquire promising competitors of the future and buy back shares to drive Earnings per Share ever higher is now being deployed into datacenters and computing power to teach AI models. Unlike the capital-light models of software and internet search, this new investment is required in physical infrastructure.
There is a general belief that AI will create a productivity miracle by cutting corporate costs and driving new innovations. The keeper of the best AI model should have the world at their behest. But it is a very competitive and expensive race to the top. The mega companies seeking this prize are often referred to as hyper-scalers. Contrary to the buzz that they generate in the media, I do not believe they present the best risk-reward trade-off at this early stage of the buildout.
The Realities of a Material World
With major capital investment on the horizon, as far as the eye can see, there will be shortages and choke points in this buildup from time to time. Most notably, there is a shortage of available electric power and the physical machinery needed to generate it. There are also potential shortages in semiconductors needed for computation and memory capacity in datacenters that have yet to be built. This critical infrastructure buildout requires physical inputs that cannot be brought into being by anything short of natural resource extraction (think critical metals and energy), and industrial processing to convert it into useful input materials.
In effect, there is more certainty about the future demand for critical physical inputs to the pending infrastructure buildout than there is to the revenue that will ultimately flow to the owner of a world class AI model. The old saying about investing in the “picks and shovels” providers in the California gold rush is not fully accurate today. There is currently considerable value in going downstream to the material producers as well – modern resource extractive industries have come a long way from hand-panning for gold in streams.
Busts and Booms
Underinvestment in resource industries over the past fifteen years has resulted in attractive potential returns in financing new resource projects. Cyclical commodities that have been underinvested in now have supply constraints that make bringing new projects online attractive for the foreseeable future (5 – 10 years in my estimation). Enhancing supply chain reliability in the face of deglobalization trends also result in attractive opportunities in building out value-added processing capabilities for these materials.
In a world where AI is deeply changing the labor market and the dynamics of corporate competition, the role of long-hated “dirty” industries is something that cannot be bypassed by AI. Rather, their near-term attractiveness is created by the AI buildout itself.
It all comes down to power, and the aged infrastructure of this country’s electrical grid is inadequate. In effect, these datacenter projects need to bring their own power generation capacity to the table as they cannot just pull from the grid. While they are at it, they need to generate a little extra to return to the grid and enhance its reliability if they want projects approved by regulators.
The material world. Building physical datacenters with physical computer hardware in them. Using power from new generation facilities, connected with copper wires and electrical distribution and cooling equipment. Suddenly, some of those previously sleepy industries of the past are back in the limelight and present an opportunity. Physical realities cannot be bypassed with innovation or computer code. Resource companies and key industries just need to do what they do with discipline and seize the economic profits ahead them.
Sources
Advisorpedia — The Truth About Corporate Buybacks: Benefit or Hidden Danger? (Nov 2, 2024) The Truth About Corporate Buybacks: Benefit or Hidden Danger? | Advisorpedia
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