In their latest quarterly Market Observer, the team at Canso Investment Counsel Ltd., a leading Canadian institutional investment management firm, questions whether the expectations around AI (and resulting monetary policy) will accurately reflect the realities that will eventually emerge. Click here for the full Market Observer.
AI: The optimism of animal spirits
In John Keynes’ 1936 bestseller, The General Theory of Employment, Interest and Money, he talks about animal spirits, describing them as a “spontaneous urge to action rather than inaction.” Keynes thought a large part of humanity’s positive activities depends on optimism rather than on a simple mathematical expectation. The present-day artificial intelligence build-out reminds the team at Canso of rampant animal spirits.
In the October 2026 Market Observer, the authors acknowledge that the AI investment is expected to be the largest sectoral investment in the U.S., surpassing other major projects such as the fibre network for the Internet and railroads. It is primarily being funded by debt and led by hyperscalers such as Alphabet, Microsoft, Amazon and Meta.
The Canso team has identified over US$3 trillion of spending by hyperscalers on leases and purchase commitments. “These companies are using complex structures and off-balance sheet arrangements to raise funds…This reminds us of an older time when we would discuss vendor financing at Nortel Networks. Even as Nortel booked revenues on selling its products, it also created account receivables that kept creeping higher. Eventually, Nortel had to write-off much of their account receivables and extending credit to buyers quickly unravelled.”
The Canso team points out that much of the lease liabilities are not reflected on the balance sheet of hyperscalers because data centres are not up and running. They warn that purchase commitments and lease obligations have expanded substantially and now dwarf reported long-term debt, reflecting the scale of investments required to support continued growth in cloud computing and AI.
Who is paying for the AI rush, and how much?
To further explain their point, the authors refer to Keynes’ concept of marginal efficiency of capital. This holds that as more investment is made in any type of capital, the marginal efficiency of that type of capital should decline. The concept is forward-looking and analyses two things: the prospective yield of that investment, and the supply price of that capital.
“In the short term, the pressure on facilities producing that capital causes its supply price to increase. In the long term, the prospective yields related to the investment become an issue. The output from the capital today will have to compete with the output from subsequent capital with arguably better technology. The economic life of chips is short, and their rapid obsolescence makes the next-gen chips better in terms of speed, size and heating. We can argue that a newer data centre will be more efficient than an older data centre,” the authors of the newsletter note.
To the Canso team, the expectation of a fall in the value of money stimulates investments, and conversely a rise in the value of money lowers the marginal efficiency of capital. They are also in the unsure camp related to AI demand.
“However, when we talk about hyperscalers and their animal spirits, we have to concede that it is their job to be optimistic. There is so much requirement of capital for investment in AI that domestic savings are not enough. Hyperscalers are borrowing aggressively in global currencies and issuing at concessions relative to their pristine credit ratings. The cost of capital in such a scenario is expected to increase,” the newsletter authors note.
U.S. borrowing costs remain high
As U.S. long-term bond yields marched higher, U.S. Treasury Secretary Scott Bessent announced a plan to double the purchases of long-term Treasuries (later upsized to triple the usual amount of US$2 billion) to improve the smooth functioning of the bond market.
The Canso team believes Bessent’s intention was clear: to lower the yields on long-term government bonds. Bessent also went on to chide the “Bloomberg terminal bros,” referring to the bond trading community, but the team at Canso disagrees with his assessment that “the level of yields didn’t reflect underlying fundamentals.”
“The U.S. government deficits are very high, and inflation is nowhere close to the Federal Reserve’s target level. Despite reasonable economic growth, U.S. deficits are higher than 5 per cent of gross domestic product (GDP). This is one of the main reasons that long-term bond yields have crept toward 5.2 per cent, the highest level in almost two decades,” the newsletter authors write.
Meanwhile, in Canada…
At the end of October, the Bank of Canada (BoC) raised rates by 25 basis points (bps) in the penultimate decision of 2026, with the final decision to be made in early December.
The Canso team notes that the two-year Government of Canada (GoC) bond yield has outperformed the U.S. two-year Treasury Note by 45 bps year-to-date under the narrative that the Canadian economy is susceptible to turbulence as it navigates a trade war with its southern neighbour that would point to an accommodative BoC. However, while the Canadian headline Consumer Price Index year-over-year increase of 3.1 per cent trails the corresponding U.S. measure by 0.6 per cent, it now sits slightly above the target range.
“The market clearly believes the BoC will not be able to err on the side of accommodation as a hedge against trade war damage. Given there does not appear to be any pending truce to reopen the Strait of Hormuz prior to the midterms, we believe the BoC will be cautious but ultimately will tighten rates to a limited degree,” the authors note.
So what now?
As the team at Canso maintains, the question is not whether AI or monetary policy will shape the future, but whether the expectations embedded in today’s markets accurately reflect the realities that will eventually emerge.
“Innovation and risk-taking have always been essential drivers of progress. However, history suggests that when enthusiasm and leverage run ahead of economic fundamentals, markets ultimately reconcile expectations with reality,” the Canso team writes, and adds that when these conditions converge, Canso will deploy its funds’ liquid reserves at yields that price risk appropriately.
Disclaimer: This story was created by Canadian Family Offices’ commercial content division on behalf of Canso Investment Counsel Ltd., which is a member and content provider of this publication.