AI Bubble Popping Or A Boring Pullback?

Um, I think the interesting thing about this week is it's just a completely different dynamic, right? That it's, it's not, you know, the theme has been Iran, diesel, oil up, yields up, all that kind of stuff, and it's a completely different theme now.

We have y- yields are, are moving the opposite direction, so you have some protection from bonds for the first time in a long time.

And I mean, I'll give my thesis, which I think is pretty consensus, so I don't think it's, it's rocket science.

But the US economy is more and more this one-legged stool, which is AI CapEx pushing up growth, pushing up stocks.

The wealth effect from stocks creates more, uh, consumer strength.

Consumers buy more because the top of the K has all the money.

You know, 80% of the people...

Or 20% of the people buy 80% of the stuff.

So they see the stock market going up.

The stock market going up create, creates revaluation of earnings for Mag Seven because Mag Seven has a lot of cross-ownership, and w- every time, you know, OpenAI and Claude do a r- or Anthropic does a round, does an up round, they take an earnings benefit, which pushes their stocks up, which creates more wealth effect.

Meanwhile, all the AI CapEx is squeezing the, um, sque- is crowding out every other industry in like a Dutch disease kind of process, where housing and everything else is getting squeezed out by higher yields.

But no high- no level of higher yields will squeeze out AI if, if you think that the forward returns on AI investment are infinite or at least, you know, 25% a year or 50% a year, then you're funding at six, seven, or eight.

Doesn't really matter.

However, that's just all in theory, and the, in reality, there is a point where the whole thing is built on faith, right? Like, we don't have any visibility as to whether these companies are gonna make money, whether OpenAI will go bankrupt and Anthropic will succeed, I think would be, like, a reasonable theory.

[chuckles] But we have no idea.

And then, you know, how will it impact the real economy? Also no idea.

You know, will it be...

I think the initial theory would be it's a demand shock because you need a lot of workers and a lot of stuff, and then it's a supply shock later because you get a, this glorious productivity boom.

But you know, that's all TBD.

And then also, can any of these companies make money selling a commoditized product that's potentially open source and free coming out of China, where we've invested a trillion dollars to try to charge people 20 bucks a month to, to make the money back? So there's so many things that all work in the same direction and are procyclical.

But then I think everyone kind of knows that it all rests on faith, which is...

And that faith is that this stuff will somehow have payback in the future.

And everybody also knows that everybody knows that there's a lot of people worried about the, all the financial interconnections and, and, um, circular financing and all that stuff.

So when, now when AI wobbles, bonds are, are rallying, which is something new, and I think that's kind of exciting for someone like Alf because, you know, there's potential to, to have a nicer portfolio instead of, you know, for a while it's just you had to be short bonds and short stocks or, or long bonds and long stocks and, um...

Or sorry, you had to be short, short...