Jesse Felder: The AI ‘Bubble of All Bubbles’ Is About to Hit Reality
Summary
AI Bubble Risk: The guest argues the current AI-driven market is a late-stage bubble, fueled by overbuilding and unsustainable business models at major LLM players.
Key Companies: NVIDIA (NVDA), Microsoft (MSFT), Alphabet/Google (GOOGL), Meta (META), Amazon (AMZN), and MicroStrategy (MSTR) were discussed as central to the AI and crypto speculation narrative.
Hyperscalers & Earnings: Reported earnings strength in big tech is flattered by losses at OpenAI and Anthropic funneled into hyperscaler buildouts, posing longer-term risk if compute costs collapse.
Leverage Concerns: Record margin debt, leverage ETFs, and options activity heighten the risk of a sharp unwind if sentiment turns, amplifying market downside.
Macro & Inflation: Despite potential AI bust risks, commodities signal resurgent inflation; gold’s strength and broader commodity index breakouts suggest no deflation.
Energy Opportunity: The guest pitches energy stocks as deeply undervalued with strong cash flows, under-owned positioning, and potential tailwinds from rising oil prices.
Natural Gas Tailwinds: Natural gas demand from AI data centers and LNG exports is surging amid years of underinvestment, supporting a bullish case for gas-focused E&Ps.
Commodity Supercycle: He expects the commodity supercycle to resume, with oil likely following gold’s lead and broader commodities (copper, gas) gaining momentum.
Transcript
a Frankenstein of bubbles. Let's take, you know, everything from the.com bubble, from the housing bubble. You know, you have a financial component, you have a technology component. Um, and you have this this great uh narrative that's uh driving extreme speculation among retail investors and institutional investors alike. And you kind of put it together into, you know, the bubble of all bubbles. And and I think that's really what we're looking at here here today. Don't forget to sign up for a free portfolio review with one of our endorsed investment partners at wealthon.com/free. With markets hitting all-time highs, now is a great time to stress test your strategy and be prepared for what comes next. Hello everyone, welcome to Wealthon. I'm Maggie Lake and joining me today to talk about the outlook for tech ahead of NVIDIA results is Jesse Fedler, founder and editor of the Felder Report. Hey Jesse, it's good to see you. >> Good to see you Maggie. Thanks for having me back on. >> Yeah, absolutely. Uh there has been an awful lot of concern lately about whether there's an AI bubble and we do have those Nvidia earnings out this week which feel like they're going to be a real bell weather and and no doubt feed into that debate. So, what are you watching for and where is your head when it comes to technology, the tech sector? >> Yeah. No, I I I've been arguing it's it's a bubble pretty much all along. Um I I I think that it's it's pretty clear that uh you know, and and what's interesting is you know, everybody seems to know that it's a bubble, right? That there's a you could say there's a bubble in people talking about a bubble. Um, I I think it was really interesting. There was a there was a great uh interview with Paul Kadroski last week on OddLotss where, you know, he he's a guy who's been around markets about as long as I have and has seen kind of, you know, the dotcom bubble firsthand, the housing bubble firsthand. And he makes the point that this is um kind of a he doesn't use this term, but kind of a Frankenstein of bubbles. Let's take, you know, everything from the dot bubble, from the housing bubble, you know, you have a financial component, you have a technology component. >> Um, and you have this this great uh narrative that's uh driving extreme speculation among retail investors and institutional investors alike. And you kind of put it together into, you know, the bubble of all bubbles. And and I think that's really what we're looking at here here today. Um there really is no fun fundamental underpinning, right? the revenues um you know to support all the AI spending are just not there and uh you know as much as OpenAI wants to believe that you know they're going to see explosive revenue growth to support $1.5 trillion dollars in in data center spending um you know there's really no business model that has even been identified yet to get us there. So so I I do think it's a bubble and I do think we're starting to see signs that uh it's in its later stages. Yeah, you you you make a really interesting point which is sort of like every it's the worst kept secret in the world sort of because everybody feels like that there's a risk at least that there's a bubble and we could talk a little bit about sort of the technology versus I think the sort of the market exuberance because I think they're they are slightly two different things but you know that has been the case for a while and yet you know we have these earnings reports and they blow out right there's revenue there especially when you're talking about you know Nvidia and and companies like that and then everybody's like, "Okay, and and the market rockets higher." Why do you sense or do you sense that it's shifting now? Like what's changed? Because that argument's been out there. >> Yeah. I I think really what people are maybe not um appreciating is there's there's a big open AI has really been at the heart of this. Anthropic is another big one. Um but there was a great article in the Wall Street Journal last week from James Macintosh. You pointed out that essentially 100% of the earnings growth in these hyperscalers has come from the losses at OpenAI anthropic. Right? So OpenAI had 12 billion loss in the third quarter. That was essentially equivalent to 65% of the the entire earnings growth for the Magnificent 7 Companies. Anthropic lost another 8 billion. So you had, you know, 20 plus billion loss in the quarter by these two private companies who are funneling money into these big tech companies to to help them develop um the the data centers and and and uh you know perform the hyperscaling kind of side of the equation. So it's boosting big tech's earnings in the short run to a terrific degree, right? big tech might not have have had any uh earnings growth over the last couple years without this huge move towards towards uh uh you know AI and generative AI spending but I think what a lot of people don't necessarily appreciate is that it's in what what does open AI really want here right open AI you know what we're realizing is is that the cost of serving every query uh is is uh two is is you know greater than the revenue generated by every query. So literally the you know the company's business model is we lose money on every transaction we make it up in volume right I mean it's like the literally the apotheiois of this type of business model which is totally unsustainable in fact that's why their losses are growing exponentially is because just the business itself is is lossmaking so it's in Sam Alman's interest right as one of the biggest buyers of compute to see the cost of compute go down as fast as possible How do you create that? Well, as he has told everybody else, you know, the way these cycles work is you get an overbuilding and then you get a crash and right and so that might be the actually the only way for OpenAI to survive is to see a crash in compute costs. >> So is interest for the bubble. >> Exactly. The the best thing that could happen for open AI would be for there to be a crash in compute costs and a lot of data center companies go bankrupt and the cost of actually serving every query goes down 95 you know 99%. >> Because then that that might actually make their their business model profitable but it might be the only way for that to happen. So in the short run, big tech is getting this big boost to earnings, you know, due to their losses. But Sam Alman, you know, committing to $1.5 trillion of spending is doing everything in his power to get them to overbuild so that there is a collapse in compute costs, which would really obviously not be very good for the hyperscalers. So in the short run, they get this earnings boost. In the longer term, we're probably going to see what happens in every bubble. You get a massive overbuilding. you get way too much supply of compute, price crashes, and that's exactly what what uh I think Sam Waltman is really trying to engineer right now. >> It's a pretty devious plan. Uh I I if he's as aware of it um as you think he is, does so a couple things here. First of all, does does Open AI survive that kind of crash? Like, you know what I mean? Can he just stand on the sideline or when I say he representing that that part of the industry? Let's not make it all about Sam, but maybe it is. But I I'll let you weigh in on that. But can can they benefit? Can they come out of it unscathed and say, "Oh, here we are. Look, compute power has gone down." Or or will they get somehow taken out in that mess? >> I I think that might be the only way that Open AI can survive. And I think what's going on right now is OpenAI's losses are accelerating to such a degree. I said, like as I mentioned, we learned from Microsoft's earnings last quarter that their their share of OpenAI's losses meant that OpenAI essentially lost 12 billion in the quarter. Right now, they have a deal to to fund, you know, some of those losses into the future via Soft Bank. Now, SoftBank sold its Nvidia stake and they're trying to raise the money to meet those commitments to OpenAI, but it's even, you know, SoftBank is even leveraging up their portfolio via margin loans and things and selling off the the Nvidia stake to try and get the money together to fund OpenAI's losses. So, they're already kind of struggling to get that money together. How does if OpenAI's losses next year are going to be two to three times, you know, what they are this year, where is that money going to come from to fund those losses? You know, I think Nvidia said, you know, we're we'll commit10 billion dollars, you know, sequentially to try and, you know, over time help Nvidia or OpenAI, you know, uh, continue to invest. But I I I think it's unlike what what I think is going on at OpenAI is they're realizing we can't stay on this path of accelerating losses because we won't be able to it'll be really difficult to continually find the money to fund them. So what they need is they need their cost of doing business to decline as soon as possible and by as much as possible. And so I think that's I think honestly that's what has gone on. Um it's either that or start getting you know government back stops for borrowing money which is what they kind of you know proposed recently CFO >> uh proposed. Um and the the backlash was immediate like you know nobody wants the government to backs stop uh you losses at this company. So, you know, I I I really do think that that might be the only way that OpenAI can survive is to see their cost structure decline dramatically as soon as possible. >> It's interesting the language you're using because what we usually hear is making a strategic investment in investing in open AI. You're saying fund their losses very specifically, I think, because that's how you see it, right? >> Absolutely. I mean, right. they, you know, uh, you know, they are, uh, in investments, but it's interesting when you look at, you know, Microsoft's side of things, right? They, you know, they they're reporting, um, you know, an investment, but they're not reporting like SoftBank is reporting, you know, they made X, Y, and Z off of the valuation of OpenAI going to $500 billion. You know, Microsoft is reporting it differently, you know, based on accounting standards that, you know, it's our their share of losses that we have to report. And that's really the reality of it, right? I mean all these different assets from public equities, private equities, the the valuation is really right the the present value of their future discounted cash flows. That's essentially what you know what we're all trying to to figure out here. Um you know right now there's no reason to believe with its current cost structure that there going to be any future cash flows net net positive cash flows at OpenAI based on you know the cost of compute and their business model. And so there really isn't any present value today unless they discover some new business model they haven't haven't found yet or like I said the cost of compute comes down dramatically and I think that's much more likely that they find a you know that that we we get what you see in every bubble right um you you see uh a massive overbuilding that results in a huge glut in of supply we saw it with you know the fiber optic buildout in the internet and then you had all this dark fiber and uh you know way too much supply which brought the cost down for companies operating in the space to kind of pursue internet-based business models and things at a lower cost. Um railroad bubble you know all of these things kind of operate the same way and it's interesting to me that the people at the center of the bubble acknowledge this. This is something you know Sam Alman has talked about this is how these things work. Even Mark Zuckerberg has said, you know, wait, if we end up overbuilding by a ton and, you know, we it takes years to kind of end up needing all that compute, then then that's okay. It's not that not that big of a deal. In fact, it's it's it's one of the the benefits of of a bubble is that you end up uh you know, getting um a lot of infrastructure built. U you know, it it's not great for the the people who build that infrastructure, right? A lot of those companies end up going bankrupt or losing a lot of money, but it's great for everybody else to come and come in and use be able to use those things at very low cost. >> If you're looking for a simple, secure way to invest and own physical gold and silver, visit our sister company, Hardass Assets Alliance, at hardassallalliance.com. That's hardassallalliance.com. >> Well, that was my question. And based on what we've seen before, there is a there will ultimately be a beneficiary if not a winner from that. It seems to be that the sort of mega tech companies believe they will be the winners. Does that seem likely based on their size and influence or is it entirely possible that once again once that infrastructure is built out that there'll be other winners that we don't know about? Yeah, I mean that's kind of the lesson of it, right? The of these the way these things work is that, you know, it's really hard to pick winners, right? You never know in the dotcom bubble after, you know, do burst um you know, we we really didn't know that um you know, Meta was going to come and invent social media, different things, but they benefited from that that internet revolution. Um I I think what's what's interesting about this particular one is that people are extrapolating you know these terrifically profitable uh you know um capital light business models that we've seen in big tech for the last 15 years that have done phenomenally well. they're kind of extrapolating that performance into the future where we've we've had you know now these you know the AI business models are are not very profitable and they're hugely capital intensive >> so you know it's it's a it's you know dramatically different thing you know the other thing too is that you know uh you do not get the economies of scale like you do with other platform economics right like so with meta it costs some kind of you know build the website whatever and then all the incremental users essentially you know 100% profit same thing with Microsoft we build out the software um we have a certain fixed cost and then all the incremental users based on you know network effects well I use Excel I'm sending you an Excel you got to get an Excel you know subscription all those incremental users are 100% net profit that's not how the generative AI business model works for every single new customer openai serves or any generative AI platform and thropic you know uh utilizing the LLMs they have significant incremental cost for every single user there's also not those those network effects of well you're using open AI and so I have to use openai no I can go use claude I could go use perplexity I can go use any you know copilot um you know and it doesn't really affect you know my my relationship with you so these platforms don't benefit from network effects they don't have the economies of scale And they're all competing now in the same they don't have their own walled gardens anymore, right? Microsoft had Office and whatever and and Google had has YouTube and and uh Google search. They have their own walled gardens where they really have terrific, you know, monopolies. Now they're all competing in the same space and that space is not very profitable, doesn't benefit from network effects. So it it it it doesn't to me seem to uh fit the mold that we've seen of these very capital light uh business models that have done phenomenally well in creating highly profitable monopolies for these companies. It's this is totally different and it's not nearly as profitable. >> Were you against that backdrop? Were you surprised to see Bergkshire Hathway taking a stake in Google? >> Yes and no. I mean Google has has terrific cash flows. I think among the hypers scalers I think that um they are uh you know the ones that are are um you know you look at meta and you know the no more cash left on the balance sheet um they're they're spending essentially the when you look at their free cash flow net of stockbased compensation which is how I do they're essentially spending you know more you know negative free cash flow at this point and that's not the case with with Alphabet it's also you know I think important to point out it's a tiny position for Berkshire Hathaway I think it was you know55$5 billion or something like that when they have 350 billion built now in cash >> it also was less than the amount of Apple stock that they sold in the quarter. So I think you know to some extent um you know Bergkshire essentially wants to have a a modified index fund um portfolio. We have big slug of Apple. We have some Google. We don't want to own the the higher risk names. We want to own cash cows. Kind of typical you know Buffett type of thing. But um I I think you know to not miss the forest for the trees. the ca they're, you know, net sellers, I think, at Bergkshire for for eight quarters now, building up the biggest cash position relative to total assets that the company's ever had in its 65 plus year history. So, that doesn't strike me as as as a a guy or a firm who's very bullish on the market right now. >> Yeah. you know, you mentioned before um the the kind of folks who've been pumping money into um into this area and I think that you do hear people say, well, you know, it's private credit and venture that's exposed. It's not uh it's not going to be the type of, you know, banks, the investment banks that you we saw with housing with the financial crisis in08. So, it's sort of like if they if they take a hit on it, so be it. Um, that's okay. Does that ring true to you or do you feel like AI is getting to the point where it's too big to fail? >> No, I I don't think it's too big to fail. I I think that um yeah, I it doesn't strike me that it's it's become so intertwined in, you know, the financial system that there's this daisy chain of liabilities that, you know, we saw back in the financial crisis where where one failure could take down the entire financial system. it doesn't seem to me like it's anywhere near that. Uh and I think that's probably a good point that it is private equity and it is these big companies. I think one thing that that you know argument misses is the fact that uh the stock market relative to GDP, relative to household wealth has never been more important to to the overall economy and overall household wealth. Um you look at you know there's all kinds of statistics that show um you know investors of all stripes have gone essentially all in in the stock market. You have um you know investors in that 70 year old you know plus uh age bracket and they're 80 90% invested in the stock market. >> Yeah. Um, same thing you have, you know, Gen Z, you know, buying leveraged ETFs and, you know, speculating on and so it's it's it's uh, you know, to think that we could have an AI bust and it wouldn't be that bad of a thing for the economy, I think might be a little overly optimistic. Um, I, you know, having lived through and trading through the the dotcom bubble, I was, you know, head trader at a at a hedge fund at the time. Um, you know, it did seem like that bust was really kind of isolated to those NASDAQ companies mainly that, you know, dropped significantly in value. The economy had kind of a mild recession and and and didn't kind of suffer too greatly from that. Um, but because I think the economy is so much more dependent on the stock market today, uh, you know, for the wealth effect, right? And a lot of people talk about this K-shaped economy and the people at the top of the K are, you know, are still spending like crazy because they've got all these stock market gains and real estate gains and things and and uh, you know, if that were to go away, that would that would hurt the economy. One other point that I would just make is that I think a lot of the, you know, government finances have been bolstered by capital gains taxes too over the last few years. So we have this massive deficit. you know, you you get an AI bust, it's going to really hurt the stock market, right? Because AI is the stock market at this point. It's going to hurt the economy, hurt the wealth effect, but it could also hurt, you know, uh you know, taxes in terms of, you know, uh uh the amount of capital gains um tax generated um could really exacerbate um you know, a a the fiscal deficit which is already kind of at problematic levels. And so I think that the ramifications could be significant. So no, I don't think it's too big to fail, but I do think it's, you know, dangerous to kind of think that we could have an burst of this bubble and there wouldn't be uh painful ramifications. >> Yeah. No, absolutely. We talk about the financialization of the economy and this is a perfect example of, you know, it would it's hard to imagine from even a sentiment point of view, you know, what that would do. I think it's just let me ask you because I think at this point there's always when we're talking about uh this kind of uh tech and you know the the sort of balance sheet issues around it and stuff the the push back we get is sort of like oh you're a bear on not you but like you know that >> I no I do I get that push back all the time. >> You get that too but you know that anyone raising those concerns is bearish on tech. We're in the middle of a tech revolution. Um the world is getting more and more moving more and more in that direction. and it's embedded in everything and you know um when I'm listening to you are you are you skeptical of that point of view or is this a basis of could we see this mass investment in the next era result in some company problems or sector problems but broad economic breakthroughs and higher productivity that justify some of this investment? Are you negative on the tech too or is it more just some of the companies and the way that they're that that capital is being allocated here? Well, you know, I'm not negative on on the tech. I I do think it's been massively overhyped in the short run, but that's how these these things work. As you look at the the internet bubble, and everybody thought, you know, there going to be internet companies, whatever, that were going to, you know, just all they needed were eyeballs and whatever. And and it took so many years for companies to figure out how to integrate the internet into their businesses effectively. >> Um, and now we have companies, there aren't internet companies. if you're not on the internet, you're you're not really, you know, doing business. So, um, but it's taken, you know, it took at least 10 plus years to really start to develop some some interesting, um, business models that that utilized the the revolution of the internet in an effective way. So, I think that's kind of where we're at today. We're in the, you know, the very early stages of the internet. People think this technology is going to revolutionize business this year, next year. Um, you know, and and and it's really going to take 10 years, 15 years for companies to really recognize where do the opportunities here, how do we use them, how does how do we improve the technology so that it becomes, you know, uh, more effective at at doing what we're trying to do with it. because you there's so many statistics that have come out and this is why I think everybody knows that it's a bubble is that there's so many statistics that come out that uh businesses are trying to use this stuff. There's a great quote um from from the information and uh you know I think there was one company saying it was trying to create um use use one of these agents you know from these companies to to to create um you know an in-house kind of um AI product through all their testing you know they spent I think he said $30,000 and he goes it was complete waste he goes we didn't realize that it wasn't going to be difficult it was literally just going to be a uh you know functionally useless was was the quote that that he used. And I think that's a a lot of companies are finding that right now is there's this hype that you can lay off, you know, have x amount of your workforce. You don't need to make these entry-level hires anymore. You can replace them with AI. But then you have companies that are trying to do that and then they're they're failing and saying, "Okay, we need to go hire hire people back now." Um >> well, that's good news for the labor market at least. It takes away that concern that we're going to have these sort of mass layoffs right around the corner if that's the case. Um you you mentioned the the whole issue of let's say that the bubble somehow is able to deflate in an orderly ma manner and not blow up. Um you mentioned the compute power uh cost coming down. is is this if we see a a slow deflation of the AI bubble um does that usher in a deflationary period where the price of compute power goes down and you know maybe because of the knock-on effect we're we're in recession perhaps and are we on the cusp of that or does it look different to you? Yeah, I I think the reason why it's unlikely to deflate slowly is that everybody knows it's a bubble as we've been talking about and everybody knows how a bubble ends and I think this is what you know one of the risks I'm really attuned to right now is that we have so much leverage margin debt is off the charts right we have more than a trillion de dollars of margin debt employed in the markets record low cash accounts that's the other side of that FINRA those statistics you look at record high margin debt, record low net cash uh among investors, record uh amount of money in leverage ETFs, and then you know, everybody's talked about the amount of options trading that we've seen, right? There's there's, you know, so much speculation going on in the options markets >> that there's just literally unprecedented amounts of leverage betting on AI working right now. Um, and as I said, everybody knows if everybody knows it's a bubble and everybody knows how a bubble ends, it bursts. What happens to that leverage when there are clear signs that the bubble is starting to burst? And I think that's when you start to see people trying to attempt to unwind some of that leverage, you know, pay back their margin debt. Maybe it's margin calls, maybe it's just I need to delever, maybe it's, you know, liquidating some of those leveraged ETFs. Um and you know with all the speculation in the markets I don't think we've seen so much of discussion about the results of you know gamma squeezes and stuff in the market with all the call buying right massive massive call buying leaves dealers you know short calls they have to buy the underlying securities which has been created a bid in the markets for years. If speculators start to bet on a bubble bursting because they start to see that type of action in the market. You get a lot of put buying dealers are, you know, short puts, they have to sell stock essentially short equities in order to hedge that exposure. >> If that speculation in the in the options markets were to kind of flip in a more bearish type of trading, you know, I I I don't even know what could happen. We haven't really seen it before in markets. So I think there's this leverage means that it's really really unlikely that the bubbles would just slowly deflate this time. >> Yeah, that's really scary and a really good point point to make. And I think this is again where everything's been so financialized and you have that level of activity happening in markets maybe uh people also participating who've not who are sort of not battle tested in those markets. That's very concerning. Uh and and in that situation when they're facing leverage, people sell their winners. They sell everything, don't they? >> Yeah. And so, you know, we've seen this kind of rally this year where it's not just been stocks, it's been stocks and well, mainly the AI stocks, right? There's a lot of, you know, economically sensitive stocks under the surface that have done poorly. You have, you know, the AI stocks, the crypto space, precious metals, a lot of things have all kind of rallied um, you know, very strongly this year together. there's a there's kind of an overall kind of speculative boom that's kind of taken a lot of these boats up to, you know, floated a lot of these boats together at the same time. Um, yeah, I I think, you know, they could potentially unwind. It's why I've been paying such close attention to the crypto space. >> I was just going to say, is that the >> Yeah, the crypto treasury companies. Um because you know that was one that was you know very uh you know obvious area of speculation that was really just built on the hype generated by you know Michael Sailor and his many many imitators who took their you know companies and flipped them into becoming you know crypto treasury companies and investing capital in crypto that space is you know clearly in the process now of unwinding right I think micro strategies down uh 50% Plus there there is no premium left in the stock price relative to its Bitcoin holdings. Um and and cryptos rolled over pretty significantly. So to me from from a risk appetite standpoint um you know that that could be a decent kind of leading indicator towards overall risk appetites in the AI space because I I really do think there's a parallel there where where you know Michael Sailor was able to generate a lot of um hype and excitement in in regards to you know let's buy these these stocks as a a leveraged play on crypto. Um I I think you know Sam Alman uh is essentially been able to do the kind of the same thing in the AI space where there's been very little in the way of like fundamental um you know business underlying the the AI narrative but there's been so much hype as to what AI is capable of and that's driven a lot of speculation in in these names. uh if that confidence you know were to start faltering and and I really think it it has faltered already um then uh you know a lot of that error could start to come out of the AI space as well >> which I think is going to worry people because when that happens now every time I feel like we go through one of these it's quicker and quicker you know the ability for people to now even on their phones start to make moves you know seems to take longer you don't it happens so quickly now and that puts a lot of pressure on policy makers um and anyone who's trying to figure out how to, you know, salvage that situation or intervene in that kind of situation. How is the how's the real economy doing? >> How what kind of footing are we on if something like that were to occur? Well, I I think it's pretty clear the underlying economy is pretty poor and that AI has been one of the things, the wealth effect created by AI and the AI spending boom has been one of the things that's kind of propped up um the economy when uh you know we have rising unemployment and you have uh you know most of that the only kind of job creation in the market right now is really kind of in healthcare and education. um you know private sector is really struggling outside of AI. So if AI were to kind of falter then then yeah I think it would be pretty clear that we we probably be headed for recession um you know and the unemployment rate would would would start to jump higher um you know in short order. uh you know you you also asked about u you know the deflationary aspect of of a bubble bursting and I think that's a really interesting thing to think about because you know as as you and I have talked before I'm of the mindset that we are in a new inflationary era era that really began you know when the economist uh you know back in I think it was 2018 posed that uh you know inflation was dead it was essentially the the the death >> counterintuitive poster of >> yeah it was like the death of equities cover for for you know stock market in 1980 uh the death of inflation in 201819 was was a really good tell that that probably were headed there's way too much overconfidence that inflation's never coming back and so policy makers created policies that to really kind of bring it back and we're now in an inflationary era that we haven't seen for 40 plus years um I think you see that in the commodity space and so I think commodity The message from commodities right now is that no deflation. We're not headed for deflation. You look at the gold price, it's had such a strong run and gold typically leads the broader commodity space. So copper now prices are now starting to to act strong. I think you could start to see some strength in natural gas prices are potentially breaking out to multi-year highs right now. The oil price probably will follow and the broad commodity space. You look at the the Bloomberg commodity spot index and it's it's breaking up to out to multi-year highs. That to me tells me that no, we're not headed for deflation. We're heading for uh a resurgence in inflation. And uh you know, I I don't know how that really kind of jibes with the bursting of the bubble. Unless it's you know, the market starting to price in that with the bursting of the bubble, you're going to need to get um some monetary stimulus, right? It might be >> uh the fact that looks like the Fed's going to have to start quantitative easing again. They won't call it Kiwi, but they're going to have to start coming back and reverse quantitative tightening, support the Treasury market. And as I said, you know, with that bursting of the bubble, what's different this time is the deficit is so much more so much more uh massive today than it was 25 years ago. We had we had a fiscal surplus for a short period of time in the late 90s. >> Hard hard to even recall that we were there, right? It's like starting with the deficit, you know, 6% plus of GDP. So, you get a bust that really blows out the deficit much further and the Fed is going to have to step into the Treasury market, print a bunch of money. It's hard to see how that's deflationary. And that might be what the commodities market what the gold price is telling us, what the commodity markets are telling us is that yeah that that uh you know inflation is is not going away you know because of the fiscal situation >> which is I I think uh there are folks like you that are talking about it but I don't think that that's fully entered the psyche of investors yet. They're sort of seeing what's happening with gold. Um, but you know, we're also a lot of folks sitting here with a whole boatload of tech in their portfolio because that's been the winner. Um, and so, you know, again, everyone's kind of talking about this shift, but I'm not sure it's really come home to roo one one thing that's really interesting, and I I think you've been writing about this and thinking about this, um, but maybe we're not all not talking about it as much, is, you know, we just saw some elections here in the US. They were re regional for folks who are not here. um some state governors and some other types of mayors and and things like that. It's not a presidential not a big presidential uh election and affordability mattered so much and and uh that was the number one message coming from voters when you're talking about a bubble bursting and policy response and uh you know government investment in infrastructure. uh you know we know from the last time around that there was a huge backlash uh that came with bailing out the banks. Um we still see the reverberations of that. This is a very interesting time. We're going to face another presidential election. Are policymakers hands tied by the voters and what matters to them? Especially when you're talking about the real economy not doing well and we're in an inflationary period. that seems like it's going to be very hard to navigate. >> Yeah, I I think that's a great point. I I think that that's that's another thing that investors maybe aren't um tuned into right now is that you have this we talked about the top half of the the K-shaped economy, right? the very tip of the kay the ultra wealthy you know there's a great uh article in the Wall Street Journal over this weekend how you know the ultra wealthy are really kind of shrinking you know secluding themselves from the rest of society and and have you know these unbelievable private you know u dinners and jets and all this kind of stuff and it's interesting that people are taking notice that now that's always kind of been there but with the bottom half of the case suffering so greatly today right um people really struggling with affordability. It's noteworthy that that some of this attention to the top of the K more and more attention is happening to it because really what's what's uh driving it and Warren Buffett, you know, people remember when Warren Buffett wrote in Fortune magazine about the Buffett yard stick, you know, the the the measure of uh you know, the stock market to GDP. They don't really, I think, remember from that piece that he talked about corporate profit margins and that corporate profit margins are the flip side of labor share of income. >> To the extent that corporate profit margins are going way up, labor share of income is coming down. And that's kind of a a necessary equation is that right now we're seeing uh you know all these layoffs and things and it's and it's basically you know being done to preserve corporate profit margins. But to the extent that I think the the bottom half of the K becomes more and more um you know disenchanted, feeling disenfranchised um and and wanting to vote for policies that kind of create some narrowing in in the legs of the K. That is a direct target uh bullseye on corporate profit margins. Right? The only way that the bottom half of the K does better is if the is if corporate profit margins come down to allow labor share to come back up. I don't know how that happens, but I think it's likely to happen. I mean, you look at a lot of these Gen Z protests around the world that are creating literally regime change um you know, in in places. My my kids are Gen Z and um you know, you look at the job market is terrible for people their age. I mean, unemployment for people their age relative to the rest of the market is the worst that it's ever been. Um, you know, >> we should talk about more and we don't. We just do the headline. It's so lazy. But youth unemployment everywhere in the world is skyrocketing and that's dangerous. >> And and the idea that they could ever, you know, uh, be able to buy a house with, you know, price to income ratios and things. It's the the un the the dissatisfaction with the economy is likely to come from Gen Z. As Gen Z be, you know, realizes the more and more power that they have, they're going to vote for policies that that kind of boost uh, you know, their interests and that will come directly at the expense of corporate profit margins. And so right now people look at price to earnings ratios and say you know 20 times earnings you know if we can stay at 20 times earnings or or whatever it is for the next 10 years and earnings can grow whatever 3 five 7% a year then we can make you know five seven 8% a year from our equities. I think it's much more likely that you know as as uh you know Buffett wrote he said you cannot get a long period of time with corporate profit margins so elevated and labor share so low without creating political problems was was the term that he used and I think that's kind of the polite way of saying that >> people are not going to tolerate that for very long they've tolerated it now for 25 years since he wrote that >> but now the labor share being so persistently low for so long I I think we're starting to see some of the political ramifications, you know, populism rising on both sides of of the the aisle and uh that's likely to to mean that um you know, politicians are going to do more and more to kind of uh look for ways to kind of raise labor share at the expense of corporate profits. >> Yeah. They're going to be forced to uh if they if they they won't get into office unless they promise to. And I think it strikes me listening to you say that the difference is also that there was a time when people were aspirationally believing they would be asset owners. And in the US 401k programs kind of created that where if you started working for a company you you know you signed up and you were um incentivized to invest in the market. you know, with the gig economy and remote work and contractual work and that's all changing and the more people who are not doing that, you know, they they are absolutely voting for a change because they they don't have any skin in the game and they are not benefiting from those assets and that feels a little bit different this time when I talk to young people. They're not, >> you know, they're not getting those 401, they're not getting staff positions and that's I think that creates a problem. >> Yeah. And and the gig economy is is probably one of the things that's making the economy look better than it is in terms of the unemployment rate that you know people say I can go collect unemployment or I can you know drive for Uber or I can you know drive for Door Dash and those people who are doing that instead are not you know filing for unemployment and good for them that's actually you know good for the economy but those people don't necessarily have jobs that they they really want that are you know fit their their skill set uh and and don't really provide the lifestyle that uh you know they they necessarily want. I would just point out too that I think this this this dynamic for the last 40 plus years of corporate profit margins you know uh rising steadily and labor share falling steadily has been one of the great drivers of disinflation in the economy for that long period of time and to the extent that it's now going to reverse. And you could just ar you could just look at demographics too. Demographically uh we are going to have a smaller share of the population responsible for providing for the entire overall recon economy that that uh you know so that puts pressure on on wages um you know structurally not not you know it's not a cyclical issue um like like we see today with the economy but uh over longer periods of time we're going to see uh you know wage growth and those things be be pressured and to the extent that labor share is going to take back some from profit margins that's probably a structurally inflationary environment as well. So, >> so against this backdrop, what's what's investable? Uh because it sounds like there's so much risk out there. >> Yeah. Well, I've been super bullish on gold for the last 10 years and I've only kind of just recently kind of scaled that back. And it's because when you look at things like the the gold to oil ratio, you know, I think it's a it's a handy way to kind of it's you know, a lot of people don't know how to value commodities, there's not easy ways to kind of understand what is the intrinsic value of of a a single commodity. You look at them relative to each other and that can be really helpful. So, you know, uh gold was really cheap relative to oil um a few years ago. that was a really kind of good, you know, buy signal that that gold was relatively undervalued. Now it's about as overvalued relative to the oil price as it's been. >> Um I, you know, so if you think we are in a commodity super cycle as I do, uh you know, for the last five plus years, um and that it's about to resume, then you're going to want to focus on these areas that haven't really responded yet. As I said, gold is a leading indicator. I think oil the opportunity in energy stocks particularly right now is really attractive. You look at natural gas prices breaking out. The demand for natural gas from AI from exporting liquid natural gas from all of these things is is literally exploding at the time when when uh uh you know development of these oil and gas wells is really declined significantly. So, uh, you know, as the CEO of, uh, you know, the the Sa Saudi A Ramco said, we spent the last 10 years with nobody really looking for new oil and gas, and that's going to have ramifications when demand for energy is is soaring in the way that it is right now. So, I I I think that the oil price is likely to start to follow the gold's lead here over the next uh, you know, year or two. Um, en energy stocks are are are one of the cheapest areas in the market right now. I mean, I find stocks that are trading six, seven times earnings um with with really good cash flow at depressed, you know, prices for oil. So, I I think, you know, that we have seen a a paradigm shift in markets where we're shifting from, oh, you want to own financial assets, stocks and bonds to now you want to own real assets. And so and that has worked really really well with as I said with with gold and precious metals but within that real asset space I think it's time to focus more on some of the other commodities because I think they're about to have uh you know kind of an explosive move higher that uh the gold price has been hinting at for the last year or so. >> And do you have to own the commodities themselves or can you express it through equities given all that we talked about? >> Yeah, I I prefer to not own the the uh the commodities themselves. um unless it's precious metals obviously I I prefer to own the precious metals directly but in terms of other commodities I think the energy stocks are are really interesting I've you know for the last year I've seen a number of successful you know all super successful billionaire investors in the energy space um you know buying um you know insider buyers in their own in their own stocks um Jerry Jones was one uh you know at u you know in major natural gas company that, you know, the stock price has already doubled or tripled since he started buying. But there's there's there's tons of uh examples like that where where you have companies that are are cheap. They have a really good I think fundamental story and then you have insider buying at the same time the company's buying back stock as my friend Of Surya calls you know double dippers. You have the insiders buying and the company buying back stock. Really compelling. It's an area of the market that nobody is looking at today. Literally, you know, the ownership, the exposure to energy from most investors today is the lowest that it's ever been. So, it it's fascinating to me that this is one of the uh the areas of the market, I think energy is still uh even after the, you know, a couple years of pretty poor performance, the best performing single sector of the last five years. Hard to believe because it was so depressed in 2020. Uh, and it's still the the the most underowned. So, it's incredible. >> Fantastic opportunity, I think, in that space right now. >> And lastly, do you do you count critical minerals in with that as well? Um, they're kind of right in the crosshairs of geopolitics right now, or is that just too tough because of the the sort of political risk around it? >> Yeah, it's not something that's really kind of hit my radar. You know, my my um work is really kind of founded in in a lot of this insider activity. I want to see what are the top CEO, CFO, top executives doing uh in these companies and I haven't really seen uh much interest compelling, you know, insider activity in in that space. It's not to say it's not there. It's just hasn't hasn't necessarily hit my radar. So, you know, I I I just think it's fascinating. I see, you know, massive insider selling at companies like Coreweave, right? One of the biggest, you know, data center operators, and they can't sell stock fast enough. uh Jensen Fang selling, you know, a bunch of Nvidia, Jeff Bezos selling monster amounts of Amazon stock this year. And the companies that are going to be relied upon for providing all that energy are buying up stock uh left and right and uh trading at in incredibly cheap valuations relative to what you see in the AI space. So, >> fantastic stuff, Jesse. Always so great to catch up with you. um you always I think um are trying to think uh a little bit further out around the corner uh to see what's coming and sort of peeking up the hood where other folks aren't looking. So always great to get your take on this. >> Always good to talk with you. Thanks Maggie. Appreciate it. >> Thanks so much. And if you are listening to this and looking at your portfolio and are worried or are enthusiastic about the opportunities out there because they're both uh and you need a little bit of help, you can get a free portfolio review from one of the adviserss in the Wealthy Network. Go to the description in the link or go to wealthy.comfree. Thanks Jesse so much. Thanks everybody for watching. We'll see you again soon.
Jesse Felder: The AI ‘Bubble of All Bubbles’ Is About to Hit Reality
Summary
Transcript
a Frankenstein of bubbles. Let's take, you know, everything from the.com bubble, from the housing bubble. You know, you have a financial component, you have a technology component. Um, and you have this this great uh narrative that's uh driving extreme speculation among retail investors and institutional investors alike. And you kind of put it together into, you know, the bubble of all bubbles. And and I think that's really what we're looking at here here today. Don't forget to sign up for a free portfolio review with one of our endorsed investment partners at wealthon.com/free. With markets hitting all-time highs, now is a great time to stress test your strategy and be prepared for what comes next. Hello everyone, welcome to Wealthon. I'm Maggie Lake and joining me today to talk about the outlook for tech ahead of NVIDIA results is Jesse Fedler, founder and editor of the Felder Report. Hey Jesse, it's good to see you. >> Good to see you Maggie. Thanks for having me back on. >> Yeah, absolutely. Uh there has been an awful lot of concern lately about whether there's an AI bubble and we do have those Nvidia earnings out this week which feel like they're going to be a real bell weather and and no doubt feed into that debate. So, what are you watching for and where is your head when it comes to technology, the tech sector? >> Yeah. No, I I I've been arguing it's it's a bubble pretty much all along. Um I I I think that it's it's pretty clear that uh you know, and and what's interesting is you know, everybody seems to know that it's a bubble, right? That there's a you could say there's a bubble in people talking about a bubble. Um, I I think it was really interesting. There was a there was a great uh interview with Paul Kadroski last week on OddLotss where, you know, he he's a guy who's been around markets about as long as I have and has seen kind of, you know, the dotcom bubble firsthand, the housing bubble firsthand. And he makes the point that this is um kind of a he doesn't use this term, but kind of a Frankenstein of bubbles. Let's take, you know, everything from the dot bubble, from the housing bubble, you know, you have a financial component, you have a technology component. >> Um, and you have this this great uh narrative that's uh driving extreme speculation among retail investors and institutional investors alike. And you kind of put it together into, you know, the bubble of all bubbles. And and I think that's really what we're looking at here here today. Um there really is no fun fundamental underpinning, right? the revenues um you know to support all the AI spending are just not there and uh you know as much as OpenAI wants to believe that you know they're going to see explosive revenue growth to support $1.5 trillion dollars in in data center spending um you know there's really no business model that has even been identified yet to get us there. So so I I do think it's a bubble and I do think we're starting to see signs that uh it's in its later stages. Yeah, you you you make a really interesting point which is sort of like every it's the worst kept secret in the world sort of because everybody feels like that there's a risk at least that there's a bubble and we could talk a little bit about sort of the technology versus I think the sort of the market exuberance because I think they're they are slightly two different things but you know that has been the case for a while and yet you know we have these earnings reports and they blow out right there's revenue there especially when you're talking about you know Nvidia and and companies like that and then everybody's like, "Okay, and and the market rockets higher." Why do you sense or do you sense that it's shifting now? Like what's changed? Because that argument's been out there. >> Yeah. I I think really what people are maybe not um appreciating is there's there's a big open AI has really been at the heart of this. Anthropic is another big one. Um but there was a great article in the Wall Street Journal last week from James Macintosh. You pointed out that essentially 100% of the earnings growth in these hyperscalers has come from the losses at OpenAI anthropic. Right? So OpenAI had 12 billion loss in the third quarter. That was essentially equivalent to 65% of the the entire earnings growth for the Magnificent 7 Companies. Anthropic lost another 8 billion. So you had, you know, 20 plus billion loss in the quarter by these two private companies who are funneling money into these big tech companies to to help them develop um the the data centers and and and uh you know perform the hyperscaling kind of side of the equation. So it's boosting big tech's earnings in the short run to a terrific degree, right? big tech might not have have had any uh earnings growth over the last couple years without this huge move towards towards uh uh you know AI and generative AI spending but I think what a lot of people don't necessarily appreciate is that it's in what what does open AI really want here right open AI you know what we're realizing is is that the cost of serving every query uh is is uh two is is you know greater than the revenue generated by every query. So literally the you know the company's business model is we lose money on every transaction we make it up in volume right I mean it's like the literally the apotheiois of this type of business model which is totally unsustainable in fact that's why their losses are growing exponentially is because just the business itself is is lossmaking so it's in Sam Alman's interest right as one of the biggest buyers of compute to see the cost of compute go down as fast as possible How do you create that? Well, as he has told everybody else, you know, the way these cycles work is you get an overbuilding and then you get a crash and right and so that might be the actually the only way for OpenAI to survive is to see a crash in compute costs. >> So is interest for the bubble. >> Exactly. The the best thing that could happen for open AI would be for there to be a crash in compute costs and a lot of data center companies go bankrupt and the cost of actually serving every query goes down 95 you know 99%. >> Because then that that might actually make their their business model profitable but it might be the only way for that to happen. So in the short run, big tech is getting this big boost to earnings, you know, due to their losses. But Sam Alman, you know, committing to $1.5 trillion of spending is doing everything in his power to get them to overbuild so that there is a collapse in compute costs, which would really obviously not be very good for the hyperscalers. So in the short run, they get this earnings boost. In the longer term, we're probably going to see what happens in every bubble. You get a massive overbuilding. you get way too much supply of compute, price crashes, and that's exactly what what uh I think Sam Waltman is really trying to engineer right now. >> It's a pretty devious plan. Uh I I if he's as aware of it um as you think he is, does so a couple things here. First of all, does does Open AI survive that kind of crash? Like, you know what I mean? Can he just stand on the sideline or when I say he representing that that part of the industry? Let's not make it all about Sam, but maybe it is. But I I'll let you weigh in on that. But can can they benefit? Can they come out of it unscathed and say, "Oh, here we are. Look, compute power has gone down." Or or will they get somehow taken out in that mess? >> I I think that might be the only way that Open AI can survive. And I think what's going on right now is OpenAI's losses are accelerating to such a degree. I said, like as I mentioned, we learned from Microsoft's earnings last quarter that their their share of OpenAI's losses meant that OpenAI essentially lost 12 billion in the quarter. Right now, they have a deal to to fund, you know, some of those losses into the future via Soft Bank. Now, SoftBank sold its Nvidia stake and they're trying to raise the money to meet those commitments to OpenAI, but it's even, you know, SoftBank is even leveraging up their portfolio via margin loans and things and selling off the the Nvidia stake to try and get the money together to fund OpenAI's losses. So, they're already kind of struggling to get that money together. How does if OpenAI's losses next year are going to be two to three times, you know, what they are this year, where is that money going to come from to fund those losses? You know, I think Nvidia said, you know, we're we'll commit10 billion dollars, you know, sequentially to try and, you know, over time help Nvidia or OpenAI, you know, uh, continue to invest. But I I I think it's unlike what what I think is going on at OpenAI is they're realizing we can't stay on this path of accelerating losses because we won't be able to it'll be really difficult to continually find the money to fund them. So what they need is they need their cost of doing business to decline as soon as possible and by as much as possible. And so I think that's I think honestly that's what has gone on. Um it's either that or start getting you know government back stops for borrowing money which is what they kind of you know proposed recently CFO >> uh proposed. Um and the the backlash was immediate like you know nobody wants the government to backs stop uh you losses at this company. So, you know, I I I really do think that that might be the only way that OpenAI can survive is to see their cost structure decline dramatically as soon as possible. >> It's interesting the language you're using because what we usually hear is making a strategic investment in investing in open AI. You're saying fund their losses very specifically, I think, because that's how you see it, right? >> Absolutely. I mean, right. they, you know, uh, you know, they are, uh, in investments, but it's interesting when you look at, you know, Microsoft's side of things, right? They, you know, they they're reporting, um, you know, an investment, but they're not reporting like SoftBank is reporting, you know, they made X, Y, and Z off of the valuation of OpenAI going to $500 billion. You know, Microsoft is reporting it differently, you know, based on accounting standards that, you know, it's our their share of losses that we have to report. And that's really the reality of it, right? I mean all these different assets from public equities, private equities, the the valuation is really right the the present value of their future discounted cash flows. That's essentially what you know what we're all trying to to figure out here. Um you know right now there's no reason to believe with its current cost structure that there going to be any future cash flows net net positive cash flows at OpenAI based on you know the cost of compute and their business model. And so there really isn't any present value today unless they discover some new business model they haven't haven't found yet or like I said the cost of compute comes down dramatically and I think that's much more likely that they find a you know that that we we get what you see in every bubble right um you you see uh a massive overbuilding that results in a huge glut in of supply we saw it with you know the fiber optic buildout in the internet and then you had all this dark fiber and uh you know way too much supply which brought the cost down for companies operating in the space to kind of pursue internet-based business models and things at a lower cost. Um railroad bubble you know all of these things kind of operate the same way and it's interesting to me that the people at the center of the bubble acknowledge this. This is something you know Sam Alman has talked about this is how these things work. Even Mark Zuckerberg has said, you know, wait, if we end up overbuilding by a ton and, you know, we it takes years to kind of end up needing all that compute, then then that's okay. It's not that not that big of a deal. In fact, it's it's it's one of the the benefits of of a bubble is that you end up uh you know, getting um a lot of infrastructure built. U you know, it it's not great for the the people who build that infrastructure, right? A lot of those companies end up going bankrupt or losing a lot of money, but it's great for everybody else to come and come in and use be able to use those things at very low cost. >> If you're looking for a simple, secure way to invest and own physical gold and silver, visit our sister company, Hardass Assets Alliance, at hardassallalliance.com. That's hardassallalliance.com. >> Well, that was my question. And based on what we've seen before, there is a there will ultimately be a beneficiary if not a winner from that. It seems to be that the sort of mega tech companies believe they will be the winners. Does that seem likely based on their size and influence or is it entirely possible that once again once that infrastructure is built out that there'll be other winners that we don't know about? Yeah, I mean that's kind of the lesson of it, right? The of these the way these things work is that, you know, it's really hard to pick winners, right? You never know in the dotcom bubble after, you know, do burst um you know, we we really didn't know that um you know, Meta was going to come and invent social media, different things, but they benefited from that that internet revolution. Um I I think what's what's interesting about this particular one is that people are extrapolating you know these terrifically profitable uh you know um capital light business models that we've seen in big tech for the last 15 years that have done phenomenally well. they're kind of extrapolating that performance into the future where we've we've had you know now these you know the AI business models are are not very profitable and they're hugely capital intensive >> so you know it's it's a it's you know dramatically different thing you know the other thing too is that you know uh you do not get the economies of scale like you do with other platform economics right like so with meta it costs some kind of you know build the website whatever and then all the incremental users essentially you know 100% profit same thing with Microsoft we build out the software um we have a certain fixed cost and then all the incremental users based on you know network effects well I use Excel I'm sending you an Excel you got to get an Excel you know subscription all those incremental users are 100% net profit that's not how the generative AI business model works for every single new customer openai serves or any generative AI platform and thropic you know uh utilizing the LLMs they have significant incremental cost for every single user there's also not those those network effects of well you're using open AI and so I have to use openai no I can go use claude I could go use perplexity I can go use any you know copilot um you know and it doesn't really affect you know my my relationship with you so these platforms don't benefit from network effects they don't have the economies of scale And they're all competing now in the same they don't have their own walled gardens anymore, right? Microsoft had Office and whatever and and Google had has YouTube and and uh Google search. They have their own walled gardens where they really have terrific, you know, monopolies. Now they're all competing in the same space and that space is not very profitable, doesn't benefit from network effects. So it it it it doesn't to me seem to uh fit the mold that we've seen of these very capital light uh business models that have done phenomenally well in creating highly profitable monopolies for these companies. It's this is totally different and it's not nearly as profitable. >> Were you against that backdrop? Were you surprised to see Bergkshire Hathway taking a stake in Google? >> Yes and no. I mean Google has has terrific cash flows. I think among the hypers scalers I think that um they are uh you know the ones that are are um you know you look at meta and you know the no more cash left on the balance sheet um they're they're spending essentially the when you look at their free cash flow net of stockbased compensation which is how I do they're essentially spending you know more you know negative free cash flow at this point and that's not the case with with Alphabet it's also you know I think important to point out it's a tiny position for Berkshire Hathaway I think it was you know55$5 billion or something like that when they have 350 billion built now in cash >> it also was less than the amount of Apple stock that they sold in the quarter. So I think you know to some extent um you know Bergkshire essentially wants to have a a modified index fund um portfolio. We have big slug of Apple. We have some Google. We don't want to own the the higher risk names. We want to own cash cows. Kind of typical you know Buffett type of thing. But um I I think you know to not miss the forest for the trees. the ca they're, you know, net sellers, I think, at Bergkshire for for eight quarters now, building up the biggest cash position relative to total assets that the company's ever had in its 65 plus year history. So, that doesn't strike me as as as a a guy or a firm who's very bullish on the market right now. >> Yeah. you know, you mentioned before um the the kind of folks who've been pumping money into um into this area and I think that you do hear people say, well, you know, it's private credit and venture that's exposed. It's not uh it's not going to be the type of, you know, banks, the investment banks that you we saw with housing with the financial crisis in08. So, it's sort of like if they if they take a hit on it, so be it. Um, that's okay. Does that ring true to you or do you feel like AI is getting to the point where it's too big to fail? >> No, I I don't think it's too big to fail. I I think that um yeah, I it doesn't strike me that it's it's become so intertwined in, you know, the financial system that there's this daisy chain of liabilities that, you know, we saw back in the financial crisis where where one failure could take down the entire financial system. it doesn't seem to me like it's anywhere near that. Uh and I think that's probably a good point that it is private equity and it is these big companies. I think one thing that that you know argument misses is the fact that uh the stock market relative to GDP, relative to household wealth has never been more important to to the overall economy and overall household wealth. Um you look at you know there's all kinds of statistics that show um you know investors of all stripes have gone essentially all in in the stock market. You have um you know investors in that 70 year old you know plus uh age bracket and they're 80 90% invested in the stock market. >> Yeah. Um, same thing you have, you know, Gen Z, you know, buying leveraged ETFs and, you know, speculating on and so it's it's it's uh, you know, to think that we could have an AI bust and it wouldn't be that bad of a thing for the economy, I think might be a little overly optimistic. Um, I, you know, having lived through and trading through the the dotcom bubble, I was, you know, head trader at a at a hedge fund at the time. Um, you know, it did seem like that bust was really kind of isolated to those NASDAQ companies mainly that, you know, dropped significantly in value. The economy had kind of a mild recession and and and didn't kind of suffer too greatly from that. Um, but because I think the economy is so much more dependent on the stock market today, uh, you know, for the wealth effect, right? And a lot of people talk about this K-shaped economy and the people at the top of the K are, you know, are still spending like crazy because they've got all these stock market gains and real estate gains and things and and uh, you know, if that were to go away, that would that would hurt the economy. One other point that I would just make is that I think a lot of the, you know, government finances have been bolstered by capital gains taxes too over the last few years. So we have this massive deficit. you know, you you get an AI bust, it's going to really hurt the stock market, right? Because AI is the stock market at this point. It's going to hurt the economy, hurt the wealth effect, but it could also hurt, you know, uh you know, taxes in terms of, you know, uh uh the amount of capital gains um tax generated um could really exacerbate um you know, a a the fiscal deficit which is already kind of at problematic levels. And so I think that the ramifications could be significant. So no, I don't think it's too big to fail, but I do think it's, you know, dangerous to kind of think that we could have an burst of this bubble and there wouldn't be uh painful ramifications. >> Yeah. No, absolutely. We talk about the financialization of the economy and this is a perfect example of, you know, it would it's hard to imagine from even a sentiment point of view, you know, what that would do. I think it's just let me ask you because I think at this point there's always when we're talking about uh this kind of uh tech and you know the the sort of balance sheet issues around it and stuff the the push back we get is sort of like oh you're a bear on not you but like you know that >> I no I do I get that push back all the time. >> You get that too but you know that anyone raising those concerns is bearish on tech. We're in the middle of a tech revolution. Um the world is getting more and more moving more and more in that direction. and it's embedded in everything and you know um when I'm listening to you are you are you skeptical of that point of view or is this a basis of could we see this mass investment in the next era result in some company problems or sector problems but broad economic breakthroughs and higher productivity that justify some of this investment? Are you negative on the tech too or is it more just some of the companies and the way that they're that that capital is being allocated here? Well, you know, I'm not negative on on the tech. I I do think it's been massively overhyped in the short run, but that's how these these things work. As you look at the the internet bubble, and everybody thought, you know, there going to be internet companies, whatever, that were going to, you know, just all they needed were eyeballs and whatever. And and it took so many years for companies to figure out how to integrate the internet into their businesses effectively. >> Um, and now we have companies, there aren't internet companies. if you're not on the internet, you're you're not really, you know, doing business. So, um, but it's taken, you know, it took at least 10 plus years to really start to develop some some interesting, um, business models that that utilized the the revolution of the internet in an effective way. So, I think that's kind of where we're at today. We're in the, you know, the very early stages of the internet. People think this technology is going to revolutionize business this year, next year. Um, you know, and and and it's really going to take 10 years, 15 years for companies to really recognize where do the opportunities here, how do we use them, how does how do we improve the technology so that it becomes, you know, uh, more effective at at doing what we're trying to do with it. because you there's so many statistics that have come out and this is why I think everybody knows that it's a bubble is that there's so many statistics that come out that uh businesses are trying to use this stuff. There's a great quote um from from the information and uh you know I think there was one company saying it was trying to create um use use one of these agents you know from these companies to to to create um you know an in-house kind of um AI product through all their testing you know they spent I think he said $30,000 and he goes it was complete waste he goes we didn't realize that it wasn't going to be difficult it was literally just going to be a uh you know functionally useless was was the quote that that he used. And I think that's a a lot of companies are finding that right now is there's this hype that you can lay off, you know, have x amount of your workforce. You don't need to make these entry-level hires anymore. You can replace them with AI. But then you have companies that are trying to do that and then they're they're failing and saying, "Okay, we need to go hire hire people back now." Um >> well, that's good news for the labor market at least. It takes away that concern that we're going to have these sort of mass layoffs right around the corner if that's the case. Um you you mentioned the the whole issue of let's say that the bubble somehow is able to deflate in an orderly ma manner and not blow up. Um you mentioned the compute power uh cost coming down. is is this if we see a a slow deflation of the AI bubble um does that usher in a deflationary period where the price of compute power goes down and you know maybe because of the knock-on effect we're we're in recession perhaps and are we on the cusp of that or does it look different to you? Yeah, I I think the reason why it's unlikely to deflate slowly is that everybody knows it's a bubble as we've been talking about and everybody knows how a bubble ends and I think this is what you know one of the risks I'm really attuned to right now is that we have so much leverage margin debt is off the charts right we have more than a trillion de dollars of margin debt employed in the markets record low cash accounts that's the other side of that FINRA those statistics you look at record high margin debt, record low net cash uh among investors, record uh amount of money in leverage ETFs, and then you know, everybody's talked about the amount of options trading that we've seen, right? There's there's, you know, so much speculation going on in the options markets >> that there's just literally unprecedented amounts of leverage betting on AI working right now. Um, and as I said, everybody knows if everybody knows it's a bubble and everybody knows how a bubble ends, it bursts. What happens to that leverage when there are clear signs that the bubble is starting to burst? And I think that's when you start to see people trying to attempt to unwind some of that leverage, you know, pay back their margin debt. Maybe it's margin calls, maybe it's just I need to delever, maybe it's, you know, liquidating some of those leveraged ETFs. Um and you know with all the speculation in the markets I don't think we've seen so much of discussion about the results of you know gamma squeezes and stuff in the market with all the call buying right massive massive call buying leaves dealers you know short calls they have to buy the underlying securities which has been created a bid in the markets for years. If speculators start to bet on a bubble bursting because they start to see that type of action in the market. You get a lot of put buying dealers are, you know, short puts, they have to sell stock essentially short equities in order to hedge that exposure. >> If that speculation in the in the options markets were to kind of flip in a more bearish type of trading, you know, I I I don't even know what could happen. We haven't really seen it before in markets. So I think there's this leverage means that it's really really unlikely that the bubbles would just slowly deflate this time. >> Yeah, that's really scary and a really good point point to make. And I think this is again where everything's been so financialized and you have that level of activity happening in markets maybe uh people also participating who've not who are sort of not battle tested in those markets. That's very concerning. Uh and and in that situation when they're facing leverage, people sell their winners. They sell everything, don't they? >> Yeah. And so, you know, we've seen this kind of rally this year where it's not just been stocks, it's been stocks and well, mainly the AI stocks, right? There's a lot of, you know, economically sensitive stocks under the surface that have done poorly. You have, you know, the AI stocks, the crypto space, precious metals, a lot of things have all kind of rallied um, you know, very strongly this year together. there's a there's kind of an overall kind of speculative boom that's kind of taken a lot of these boats up to, you know, floated a lot of these boats together at the same time. Um, yeah, I I think, you know, they could potentially unwind. It's why I've been paying such close attention to the crypto space. >> I was just going to say, is that the >> Yeah, the crypto treasury companies. Um because you know that was one that was you know very uh you know obvious area of speculation that was really just built on the hype generated by you know Michael Sailor and his many many imitators who took their you know companies and flipped them into becoming you know crypto treasury companies and investing capital in crypto that space is you know clearly in the process now of unwinding right I think micro strategies down uh 50% Plus there there is no premium left in the stock price relative to its Bitcoin holdings. Um and and cryptos rolled over pretty significantly. So to me from from a risk appetite standpoint um you know that that could be a decent kind of leading indicator towards overall risk appetites in the AI space because I I really do think there's a parallel there where where you know Michael Sailor was able to generate a lot of um hype and excitement in in regards to you know let's buy these these stocks as a a leveraged play on crypto. Um I I think you know Sam Alman uh is essentially been able to do the kind of the same thing in the AI space where there's been very little in the way of like fundamental um you know business underlying the the AI narrative but there's been so much hype as to what AI is capable of and that's driven a lot of speculation in in these names. uh if that confidence you know were to start faltering and and I really think it it has faltered already um then uh you know a lot of that error could start to come out of the AI space as well >> which I think is going to worry people because when that happens now every time I feel like we go through one of these it's quicker and quicker you know the ability for people to now even on their phones start to make moves you know seems to take longer you don't it happens so quickly now and that puts a lot of pressure on policy makers um and anyone who's trying to figure out how to, you know, salvage that situation or intervene in that kind of situation. How is the how's the real economy doing? >> How what kind of footing are we on if something like that were to occur? Well, I I think it's pretty clear the underlying economy is pretty poor and that AI has been one of the things, the wealth effect created by AI and the AI spending boom has been one of the things that's kind of propped up um the economy when uh you know we have rising unemployment and you have uh you know most of that the only kind of job creation in the market right now is really kind of in healthcare and education. um you know private sector is really struggling outside of AI. So if AI were to kind of falter then then yeah I think it would be pretty clear that we we probably be headed for recession um you know and the unemployment rate would would would start to jump higher um you know in short order. uh you know you you also asked about u you know the deflationary aspect of of a bubble bursting and I think that's a really interesting thing to think about because you know as as you and I have talked before I'm of the mindset that we are in a new inflationary era era that really began you know when the economist uh you know back in I think it was 2018 posed that uh you know inflation was dead it was essentially the the the death >> counterintuitive poster of >> yeah it was like the death of equities cover for for you know stock market in 1980 uh the death of inflation in 201819 was was a really good tell that that probably were headed there's way too much overconfidence that inflation's never coming back and so policy makers created policies that to really kind of bring it back and we're now in an inflationary era that we haven't seen for 40 plus years um I think you see that in the commodity space and so I think commodity The message from commodities right now is that no deflation. We're not headed for deflation. You look at the gold price, it's had such a strong run and gold typically leads the broader commodity space. So copper now prices are now starting to to act strong. I think you could start to see some strength in natural gas prices are potentially breaking out to multi-year highs right now. The oil price probably will follow and the broad commodity space. You look at the the Bloomberg commodity spot index and it's it's breaking up to out to multi-year highs. That to me tells me that no, we're not headed for deflation. We're heading for uh a resurgence in inflation. And uh you know, I I don't know how that really kind of jibes with the bursting of the bubble. Unless it's you know, the market starting to price in that with the bursting of the bubble, you're going to need to get um some monetary stimulus, right? It might be >> uh the fact that looks like the Fed's going to have to start quantitative easing again. They won't call it Kiwi, but they're going to have to start coming back and reverse quantitative tightening, support the Treasury market. And as I said, you know, with that bursting of the bubble, what's different this time is the deficit is so much more so much more uh massive today than it was 25 years ago. We had we had a fiscal surplus for a short period of time in the late 90s. >> Hard hard to even recall that we were there, right? It's like starting with the deficit, you know, 6% plus of GDP. So, you get a bust that really blows out the deficit much further and the Fed is going to have to step into the Treasury market, print a bunch of money. It's hard to see how that's deflationary. And that might be what the commodities market what the gold price is telling us, what the commodity markets are telling us is that yeah that that uh you know inflation is is not going away you know because of the fiscal situation >> which is I I think uh there are folks like you that are talking about it but I don't think that that's fully entered the psyche of investors yet. They're sort of seeing what's happening with gold. Um, but you know, we're also a lot of folks sitting here with a whole boatload of tech in their portfolio because that's been the winner. Um, and so, you know, again, everyone's kind of talking about this shift, but I'm not sure it's really come home to roo one one thing that's really interesting, and I I think you've been writing about this and thinking about this, um, but maybe we're not all not talking about it as much, is, you know, we just saw some elections here in the US. They were re regional for folks who are not here. um some state governors and some other types of mayors and and things like that. It's not a presidential not a big presidential uh election and affordability mattered so much and and uh that was the number one message coming from voters when you're talking about a bubble bursting and policy response and uh you know government investment in infrastructure. uh you know we know from the last time around that there was a huge backlash uh that came with bailing out the banks. Um we still see the reverberations of that. This is a very interesting time. We're going to face another presidential election. Are policymakers hands tied by the voters and what matters to them? Especially when you're talking about the real economy not doing well and we're in an inflationary period. that seems like it's going to be very hard to navigate. >> Yeah, I I think that's a great point. I I think that that's that's another thing that investors maybe aren't um tuned into right now is that you have this we talked about the top half of the the K-shaped economy, right? the very tip of the kay the ultra wealthy you know there's a great uh article in the Wall Street Journal over this weekend how you know the ultra wealthy are really kind of shrinking you know secluding themselves from the rest of society and and have you know these unbelievable private you know u dinners and jets and all this kind of stuff and it's interesting that people are taking notice that now that's always kind of been there but with the bottom half of the case suffering so greatly today right um people really struggling with affordability. It's noteworthy that that some of this attention to the top of the K more and more attention is happening to it because really what's what's uh driving it and Warren Buffett, you know, people remember when Warren Buffett wrote in Fortune magazine about the Buffett yard stick, you know, the the the measure of uh you know, the stock market to GDP. They don't really, I think, remember from that piece that he talked about corporate profit margins and that corporate profit margins are the flip side of labor share of income. >> To the extent that corporate profit margins are going way up, labor share of income is coming down. And that's kind of a a necessary equation is that right now we're seeing uh you know all these layoffs and things and it's and it's basically you know being done to preserve corporate profit margins. But to the extent that I think the the bottom half of the K becomes more and more um you know disenchanted, feeling disenfranchised um and and wanting to vote for policies that kind of create some narrowing in in the legs of the K. That is a direct target uh bullseye on corporate profit margins. Right? The only way that the bottom half of the K does better is if the is if corporate profit margins come down to allow labor share to come back up. I don't know how that happens, but I think it's likely to happen. I mean, you look at a lot of these Gen Z protests around the world that are creating literally regime change um you know, in in places. My my kids are Gen Z and um you know, you look at the job market is terrible for people their age. I mean, unemployment for people their age relative to the rest of the market is the worst that it's ever been. Um, you know, >> we should talk about more and we don't. We just do the headline. It's so lazy. But youth unemployment everywhere in the world is skyrocketing and that's dangerous. >> And and the idea that they could ever, you know, uh, be able to buy a house with, you know, price to income ratios and things. It's the the un the the dissatisfaction with the economy is likely to come from Gen Z. As Gen Z be, you know, realizes the more and more power that they have, they're going to vote for policies that that kind of boost uh, you know, their interests and that will come directly at the expense of corporate profit margins. And so right now people look at price to earnings ratios and say you know 20 times earnings you know if we can stay at 20 times earnings or or whatever it is for the next 10 years and earnings can grow whatever 3 five 7% a year then we can make you know five seven 8% a year from our equities. I think it's much more likely that you know as as uh you know Buffett wrote he said you cannot get a long period of time with corporate profit margins so elevated and labor share so low without creating political problems was was the term that he used and I think that's kind of the polite way of saying that >> people are not going to tolerate that for very long they've tolerated it now for 25 years since he wrote that >> but now the labor share being so persistently low for so long I I think we're starting to see some of the political ramifications, you know, populism rising on both sides of of the the aisle and uh that's likely to to mean that um you know, politicians are going to do more and more to kind of uh look for ways to kind of raise labor share at the expense of corporate profits. >> Yeah. They're going to be forced to uh if they if they they won't get into office unless they promise to. And I think it strikes me listening to you say that the difference is also that there was a time when people were aspirationally believing they would be asset owners. And in the US 401k programs kind of created that where if you started working for a company you you know you signed up and you were um incentivized to invest in the market. you know, with the gig economy and remote work and contractual work and that's all changing and the more people who are not doing that, you know, they they are absolutely voting for a change because they they don't have any skin in the game and they are not benefiting from those assets and that feels a little bit different this time when I talk to young people. They're not, >> you know, they're not getting those 401, they're not getting staff positions and that's I think that creates a problem. >> Yeah. And and the gig economy is is probably one of the things that's making the economy look better than it is in terms of the unemployment rate that you know people say I can go collect unemployment or I can you know drive for Uber or I can you know drive for Door Dash and those people who are doing that instead are not you know filing for unemployment and good for them that's actually you know good for the economy but those people don't necessarily have jobs that they they really want that are you know fit their their skill set uh and and don't really provide the lifestyle that uh you know they they necessarily want. I would just point out too that I think this this this dynamic for the last 40 plus years of corporate profit margins you know uh rising steadily and labor share falling steadily has been one of the great drivers of disinflation in the economy for that long period of time and to the extent that it's now going to reverse. And you could just ar you could just look at demographics too. Demographically uh we are going to have a smaller share of the population responsible for providing for the entire overall recon economy that that uh you know so that puts pressure on on wages um you know structurally not not you know it's not a cyclical issue um like like we see today with the economy but uh over longer periods of time we're going to see uh you know wage growth and those things be be pressured and to the extent that labor share is going to take back some from profit margins that's probably a structurally inflationary environment as well. So, >> so against this backdrop, what's what's investable? Uh because it sounds like there's so much risk out there. >> Yeah. Well, I've been super bullish on gold for the last 10 years and I've only kind of just recently kind of scaled that back. And it's because when you look at things like the the gold to oil ratio, you know, I think it's a it's a handy way to kind of it's you know, a lot of people don't know how to value commodities, there's not easy ways to kind of understand what is the intrinsic value of of a a single commodity. You look at them relative to each other and that can be really helpful. So, you know, uh gold was really cheap relative to oil um a few years ago. that was a really kind of good, you know, buy signal that that gold was relatively undervalued. Now it's about as overvalued relative to the oil price as it's been. >> Um I, you know, so if you think we are in a commodity super cycle as I do, uh you know, for the last five plus years, um and that it's about to resume, then you're going to want to focus on these areas that haven't really responded yet. As I said, gold is a leading indicator. I think oil the opportunity in energy stocks particularly right now is really attractive. You look at natural gas prices breaking out. The demand for natural gas from AI from exporting liquid natural gas from all of these things is is literally exploding at the time when when uh uh you know development of these oil and gas wells is really declined significantly. So, uh, you know, as the CEO of, uh, you know, the the Sa Saudi A Ramco said, we spent the last 10 years with nobody really looking for new oil and gas, and that's going to have ramifications when demand for energy is is soaring in the way that it is right now. So, I I I think that the oil price is likely to start to follow the gold's lead here over the next uh, you know, year or two. Um, en energy stocks are are are one of the cheapest areas in the market right now. I mean, I find stocks that are trading six, seven times earnings um with with really good cash flow at depressed, you know, prices for oil. So, I I think, you know, that we have seen a a paradigm shift in markets where we're shifting from, oh, you want to own financial assets, stocks and bonds to now you want to own real assets. And so and that has worked really really well with as I said with with gold and precious metals but within that real asset space I think it's time to focus more on some of the other commodities because I think they're about to have uh you know kind of an explosive move higher that uh the gold price has been hinting at for the last year or so. >> And do you have to own the commodities themselves or can you express it through equities given all that we talked about? >> Yeah, I I prefer to not own the the uh the commodities themselves. um unless it's precious metals obviously I I prefer to own the precious metals directly but in terms of other commodities I think the energy stocks are are really interesting I've you know for the last year I've seen a number of successful you know all super successful billionaire investors in the energy space um you know buying um you know insider buyers in their own in their own stocks um Jerry Jones was one uh you know at u you know in major natural gas company that, you know, the stock price has already doubled or tripled since he started buying. But there's there's there's tons of uh examples like that where where you have companies that are are cheap. They have a really good I think fundamental story and then you have insider buying at the same time the company's buying back stock as my friend Of Surya calls you know double dippers. You have the insiders buying and the company buying back stock. Really compelling. It's an area of the market that nobody is looking at today. Literally, you know, the ownership, the exposure to energy from most investors today is the lowest that it's ever been. So, it it's fascinating to me that this is one of the uh the areas of the market, I think energy is still uh even after the, you know, a couple years of pretty poor performance, the best performing single sector of the last five years. Hard to believe because it was so depressed in 2020. Uh, and it's still the the the most underowned. So, it's incredible. >> Fantastic opportunity, I think, in that space right now. >> And lastly, do you do you count critical minerals in with that as well? Um, they're kind of right in the crosshairs of geopolitics right now, or is that just too tough because of the the sort of political risk around it? >> Yeah, it's not something that's really kind of hit my radar. You know, my my um work is really kind of founded in in a lot of this insider activity. I want to see what are the top CEO, CFO, top executives doing uh in these companies and I haven't really seen uh much interest compelling, you know, insider activity in in that space. It's not to say it's not there. It's just hasn't hasn't necessarily hit my radar. So, you know, I I I just think it's fascinating. I see, you know, massive insider selling at companies like Coreweave, right? One of the biggest, you know, data center operators, and they can't sell stock fast enough. uh Jensen Fang selling, you know, a bunch of Nvidia, Jeff Bezos selling monster amounts of Amazon stock this year. And the companies that are going to be relied upon for providing all that energy are buying up stock uh left and right and uh trading at in incredibly cheap valuations relative to what you see in the AI space. So, >> fantastic stuff, Jesse. Always so great to catch up with you. um you always I think um are trying to think uh a little bit further out around the corner uh to see what's coming and sort of peeking up the hood where other folks aren't looking. So always great to get your take on this. >> Always good to talk with you. Thanks Maggie. Appreciate it. >> Thanks so much. And if you are listening to this and looking at your portfolio and are worried or are enthusiastic about the opportunities out there because they're both uh and you need a little bit of help, you can get a free portfolio review from one of the adviserss in the Wealthy Network. Go to the description in the link or go to wealthy.comfree. Thanks Jesse so much. Thanks everybody for watching. We'll see you again soon.