Yeppers- All Indicators Point To An Expanding A.I.-Bubble. How Long Before It Bursts?

 

                                                                           

The NASDAQ Composite index spiked in 2000 and then fell sharply as a result of dot-com bubble.

Speculative money is once more pouring into risky investment schemes, with staggering sums of money being thrown at artificial intelligence and cryptocurrencies. But rather than heed a century of hard-won lessons, the Trump administration’s financial regulators are embracing dissolute policies to keep the punch flowing. 

Maybe these incompetent clowns and grifters didn't see The Financial Times headline from Tuesday:

Why exactly would the hyped up A.I. spending spill into the bond market? Basically, because the A.I. tech chieftains are spending like 'drunken sailors' on a night on the town, which is worrying the buyers of debt in the bond markets. By some reckonings several trillions in debt have already been plowed in, mainly on infrastructure.  According to one European Finance Journal (not FT):

"The world’s largest technology companies are now committing extraordinary sums to infrastructure. The expansion ranges from hyperscale data centres and custom AI chips to power and cooling networks required to support dense computational workloads. For some companies, annual capital investment budgets have doubled in under two years.

Executives insist the spending is strategic and long-term. Artificial intelligence, they argue, will underpin almost every form of digital activity—search, advertising, enterprise computing, consumer devices and the next generation of industrial automation. The companies that control the infrastructure of AI, the logic goes, will command the dominant platforms of the next decade.

But for bond investors, the arithmetic has shifted. Where Big Tech once delivered reliable cash flows, modest leverage and buyback programmes, the emerging landscape is defined by heavier capital requirements and multi-year horizons before returns are realised. The question is no longer whether AI is transformative—it is whether the cost of getting there is being priced correctly."

Many bond investors are betting the pricing is not correct and a bubble is forming. Also, with many similarities to the dot.com bubble which burst back in 2002. But did anyone learn from that burst bubble? Not really. As before too many are buying in after the first 'pop', as well as placing hopes in the 'greater fool theory' - especially if they are leveraging their buys - i.e. using debt. Recall the greater fool theory says someone else will be willing to pay more per share tomorrow even if the stock is already overpriced.  For reference, Open AI not long ago attained a valuation of more than 38 times revenue.

Bubbles typically happen when the laws of standard finance diverge or other peculiar distortions creep in, such as to the tax code. Calvin Coolidge signed into law the Revenue Act of 1924 , which lowered personal income tax rates on the highest incomes from 73 percent to 46 percent.  Two years later, the Revenue Act of 1926  law further reduced inheritance and personal income taxes; eliminated  many excise imposts (luxury or nuisance taxes); and ended public access to federal income tax returns. The tax rate on the highest incomes was reduced to 25 percent.

The result was a speculative frenzy in the stock markets, especially the application of structured leverage in what were called at the time "investment trusts." These 'investment trusts' were the forerunners of today's mutual funds) and then - as now - touted as "the little guy's way to enter the stock market".

 In September 1929, this edifice of false prosperity began to wobble, and finally crashed spectacularly in October,  1929.

So it appears the financial excesses of 100 years ago seem not to have taught the A.I. tech bros that bubbles can still come back and wreak havoc. And while the dot.com stocks of the early 2000s were hard to short because there was little available to borrow. The same is not true now with the splurging on crypto driving many A.I. buys and leverage.

The FT warning about the A.I. spending is thus a shot over the bow of today's would be high finance billionaires and bigshots - who don't give two spits if the little guys buying in lose their shirts and savings.  But see, these arrogant fools never processed how high the costs of negligent oversight of our markets can be.  And hey, as one wit once said "When sentinels sleep, fraudsters flourish"  and they are doing so now. 

But do the A.I. magnates see it? Hell no. Nor do they see that, despite their frenzied celebration of unreal profits pumping froth into the market, ultimately, this bubble will also burst. As the more savvy among us behold stages of that cycle recurring, we must decide whether to intervene now — or to mop up the mess later.  A paragraph in the WSJ 'Guide to Wealth Management'  in the Oct. 21 Journal ought to raise alarms:

"AI appears to be running up against some immutable laws of common sense. First, we don't have that power. The Lawrence Berkeley National Laboratory predicts that by 2028, AI will require the same amount of energy it takes to power 22% of U.S. households.  Second, there is a circularity problem with all the investment in AI.  Most of the money is changing hands among the largest tech companies.  Nvidia, the world's leading AI chip maker, generates about half its revenue from Microsoft and Amazon.com.  ...

Eight of the market's 10 biggest stocks are tied in part to AI investment and represent $23 trillion in total market value."

In other words, when the AI bubble bursts it will be colossal.

The parallels between the 1920s and the 2020s are numerous — and ominous. The 1920s economy boomed while America recovered from a deadly pandemic, the flu of 1918.  The 2020s economy is still recovering from the covid 19 pandemic and the supply side issues still with us - which Trump's tariffs have made worse. The AI irrational exuberance has compounded all of these, as well as driving debt to the point investors may well demand a higher return for holding longer-dated bonds - which means higher operating costs for government.

 In the 1920s Americans used installment plans — the precursor to today’s ubiquitous “buy now, pay later” plans at online checkouts — to spend liberally on consumer products, and they poured money into speculative new investments. Automobile and telephone stocks were the high-flying tech investments of their day; Tesla and Apple are two of ours along with Open A.I..

And as with today, masses of Americans took advantage of easy credit and ubiquitous stock brokerages to speculate in finance. In 1929, a New York Times editor quoted a major newspaper’s financial expert who said that the “huge army that daily gambles in the stock market” had come to include, in the editor’s words, “the woman nonprofessional speculator,” whose share of market trading grew by one estimate from less than 2 percent to 35 percent. That influx of buying from 1919 to 1929 drove the stock market up more than sixfold over the decade — a growth rate our market has actually surpassed over the past three years.

But the unsustainable cannot be sustained. Between 1929 and 1932, the stock market dropped 77 percent, and the global economy staggered into the Great Depression while unemployment and malnutrition spiked. In 1932, suicide rates soared to their highest in recorded history.

Financial failure on such a massive scale ought to have taught Americans important lessons, including the need for prudent regulation.  But even as I write this, the crypto bogey has been released and threatens to bring the whole system crashing down, thanks to Dotard rewarding the crypto bros.  Hell, even pardoning crypto criminals. As David French noted in the NY Times yesterday:

"Look at Trump's pardon of the crypto billionaire Changpeng Zhao.The pardon came after Zhao’s company, according to reporting by The Wall Street Journal, “took steps that catapulted the Trump family venture’s new stablecoin product, enhancing its credibility and pushing its market capitalization up from $127 million to over $2.1 billion.”

But why be surprised when we have a regime of grifters, liars and criminals soiling everything in their path. And yeah, that includes destabilizing the financial future of this nation.

Best advice?  Look before you leap into anything now being offered as the easy path to wealth. A new Trump "meme" coin? Save you money. A new A.I. release ten times better than ChatGPT? Save your money.  Be satisfied with lower yields and saving as opposed to shorting A.I. or other tech stocks.  If you still want a buy in Apple may be the best bet. Again, from the WSJ Wealth Management piece:

"Apple carries a triple-A credit rating from both Moody's Investors Service and S&P Global. It generates nearly $100 billion in free cash flow each year, and unlike its megacap tech peers, isn't spending like an inebriated sailor on artificial intelligence."

As a separate (Oct. 24) WSJ column on bubbles in the A.I. realm warns:

"If Open AI quickly comes up with a vital service everyone proves willing to pay big bucks to use, maybe even its price can be justified. After all, the only absolute proof of a bubble is when it bursts."

See Also:

Opinion | Facing a $38 trillion debt, America hopes maybe AI will save the day - The Washington Post

Excerpt:

The International Monetary Fund forecasts the U.S. government debt will be above 7 percent of GDP every year until 2029, with the debt reaching 143.4 percent of GDP by the decade’s end. The Congressional Budget Office projects the debt increasing for decades. As a percentage of their GDPs, Italy’s and Greece’s debts are expected to decline, and to be exceeded by the U.S. debt’s percentage in 2030.

Last week, the undiscourageable Peter G. Peterson Foundation, which shoulders the Sisyphean task of warning Americans about their ruinous fiscal habits, published five essays by six fiscal and economics writers on “Lessons from History for America Today.” The essays probably will make no difference in this sleepwalking nation’s behavior, but they are, in their way, as riveting as Walter Lord’s 1955 “A Night to Remember,” about the “unsinkable” Titanic sinking. 

And:

The Stock Markets' Carnage Is Only Getting Started.

And:

The 'Game Stop' Speculative Frenzy And The Emerging Stock Bubble..

And:

 Yet More Reasons To Get Rid Of Bitcoin - And Other Cryptocurrencies