Big Tech’s Tipping Point Is Here: Jim Mellon On Biggest Short Of All Time

Jim Mellon argues that the Magnificent Seven stocks are down an average of 30% from their June 24th highs and that the group is transitioning from cash flow positive to cash flow negative because of AI capital expenditure, with no clear sign those investments will generate returns for a very long time, if ever. He singles out Oracle as particularly precarious and notes semiconductor stocks are down 20% from their peak with no recovery in sight. Apple is the exception because its capital expenditure this year is roughly one-tenth that of the other six combined, which Mellon says explains its relative outperformance. He expects Apple will eventually buy into AI by acquiring a failed AI company rather than building its own capability.

Mellon called the SpaceX IPO the biggest short of all time in his Master Investor letter. The IPO priced at 135 and was trading around 115 at the time of recording. He rates the probability that SpaceX marks the peak of the tech cycle at roughly 50-50, notes that Musk released less than 3% of his shares in the listing, and warns that a large unlock of shares is expected after the first quarterly results. Analyst price targets range from 80 to over 300, and Mellon dismisses the high end as reflecting investment banking relationships rather than independent analysis. He predicts even strong names like Microsoft could tread water for a couple of years or more, drawing a comparison to the post-2000 bust, while acknowledging he has called the US tipping point too early before. Margin debt is at an all-time high and the gamification of retail investing through platforms like Robinhood adds to his concern. He treats Jamie Dimon's comment that JPMorgan's record quarterly profit is as good as it gets as a meaningful warning signal.

On oil, Mellon made an energy call in January that he says played out well. Oil moved from 60 to 70 before a conflict began in March, spiked to 115, settled at 70 on a peace deal, then rose to 99 before pulling back to around 91. He does not expect oil to reach 150 because demand destruction would be entrenched well before that level. He trades oil tactically, shorting on threat-driven spikes and buying during lulls, and has faded broader oil major and US gas services positions as pricing moved up. He remains interested in UK North Sea stocks because the government is expected to permit more drilling beyond Rosebank and Jackdoor and may grant tax advantages. He views the Straits of Hormuz as potentially less important than markets assume because Saudi Arabia is finding alternative export routes and the UAE is rapidly building a new port beyond the straits. He also suggests the US may have run out of missiles for large-scale attacks on Iran and that Iran's use of cheap drones against million-dollar US missile responses makes the conflict financially unsustainable for the US side.

Mellon believes current bond yields are near the upper end of the trading range and that long-dated bonds are a buy for leverage. US wage growth below 3% is inconsistent with an inflationary boom in his view, though he thinks the Fed has been a little loose. He warns that escalating government debt is a longer-term tipping point because governments will attempt to inflate their way out, and that US Social Security will effectively become bankrupt within the next Senate term, requiring money printing.

Japan is Mellon's most enthusiastic positive call. The Japanese and British economies are roughly the same size in gross national output despite Japan having twice the population. Japan is the world's largest international creditor, its corporations are cash-rich, consumers carry little debt, and it sells bonds domestically without relying on foreign inflows. Japanese long-end bonds yield around 4% and Mellon says 5% would make them as attractive as US yields. He predicts the yen could return to 110 to 120 against the dollar, acknowledges his timing has been wrong, and believes Japanese investors could eventually stampede back into domestic assets, potentially doubling the Tokyo market without the usual warning signs of extreme overvaluation.

Gold peaked at 5,200 and has settled around 4,100. Mellon does not hold gold or silver directly but owns gold mining stocks including Equinox, which trades at approximately three times cash flow, noting miners have all-in sustaining costs of around 2,000 per ounce and that central banks remain buyers supporting the price floor. UK smaller companies trade at price-to-earnings ratios of 10 to 11, free cash flow yields of about 9%, and dividend yields of 4 to 5%, with UK companies being acquired at three or four per week. He favors accessing this through investment trusts trading at 10 to 15% discounts.

Mellon's Clean Food Group owns a nearly 12-acre precision fermentation facility in Liverpool producing oils without palms or plants in batches of 100,000 litres. The plant was bought for one million pounds and its equipment is now estimated at 100 million pounds. The company holds a 19-year patent, has received approval for cosmetic oil, and expects approval for palm oil, cocoa butter, and olive oil. Mellon claims production costs have reached parity with conventionally produced foods and predicts the facility will capture the entire UK palm oil market within three years. The international palm oil market is approximately 80 billion dollars per year.