David Busch 3.0 13 ideas

Busch states the "Mag 7" trade is tired and facing capex volatility. He explicitly says, "What investors need to look at is those sectors that are going to benefit from that AI infrastructure buildout. So everything from materials, industrials, energy producers, utilities." The hundreds of billions being spent by hyperscalers (Tech) must flow somewhere. It flows into the physical economy required to build data centers, generate power, and supply raw materials. This is a sector rotation from "Digital AI" (Software/Chips) to "Physical AI" (Grid/Construction). Long the physical infrastructure sectors. If AI capex spending slows down due to lack of ROI, these downstream sectors will lose their primary growth driver.

Busch notes consumers are "stretched thin" with rising delinquencies. He observes a shift to lower-priced goods, explicitly naming "Walmart" and "Yum Brands" (Taco Bell/KFC) as beneficiaries. As inflation and tariffs squeeze disposable income, the middle class does not stop eating; they trade down. They move from casual dining to fast food (YUM) and from premium retail to discount big-box (WMT). This is a classic "defensive" rotation during consumer stress. Long Consumer Staples/Discount Retail. If supply chain costs (tariffs) rise faster than these companies can raise prices, margins will compress even if volume increases.

Busch advises investors to "step out the curve and lock in yields" specifically in the "2 to 5 year part of the curve." He believes the Fed (under potential chair Kevin Warsh) might cut the overnight rate, but the long end (10yr+) will stay high due to debt supply. The "belly" of the curve (3-7 year duration) offers the best risk/reward. You capture the price appreciation if the Fed cuts rates (front-end drops), but you avoid the duration risk of the long bond (30yr) which might sell off due to fiscal deficits. Long 3-7 Year US Treasuries (IEI tracks this duration). If inflation re-accelerates to 4-5%, the Fed may be forced to hike, crushing all duration assets.

Busch explicitly says, "I would be very cautious in high yield corporates right now... we're seeing rising delinquencies and defaults." High Yield (Junk) bonds are correlated to equity risk and economic health. In a "white-collar job collapse" with rising consumer defaults, lower-rated corporate borrowers are the first to default. The risk premium (spread) is not high enough to justify the default risk. Avoid High Yield Corporate Debt. If the economy achieves a "soft landing" and growth accelerates, high yield spreads could tighten further, causing underperformance of safety trades.

Regarding the Middle East and potential war with Iran, Busch notes that in every war, "it's the defense contractors, the military suppliers" that benefit. The US military buildup in the Gulf is the largest since the Iraq war. Regardless of a full-scale invasion, this posturing requires replenishment of munitions and maintenance of hardware, directly benefiting the prime defense contractors. Long Aerospace & Defense. A sudden diplomatic resolution or peace treaty would cause a rapid repricing of the geopolitical risk premium.

Busch identifies a "resource war specifically with China" regarding rare earth minerals needed for AI and tech. He mentions China controls 70-80% of supply and the US is pushing for domestic sourcing/recycling. As the US decouples from Chinese supply chains (tariffs/sanctions), domestic producers and non-Chinese miners of rare earths become strategic national security assets. Prices for these assets must rise to incentivize production. Long Rare Earth/Strategic Metals. If China floods the market to bankrupt western competitors (a tactic used previously), prices could collapse temporarily.