AI泡沫内爆风险与中期选举前瞻

Hello my friends and welcome to a very very special episode of Markets Weekly.

So, many people are wondering is it over? Is the bubble imploding? So, first off, let's talk about why I think the bubble is imploding, although it was something that I think will happen over a period of time, say several months.

And secondly, let's look ahead because we have some big big catalysts coming up next week. We got the US midterm election and potential strikes on Iran and let's think about how how midterm elections could shape asset prices going forward.

So, as we've been discussing actually for the past 2 weeks, we've seen the AI trade gradually implode from the outside in. A couple weeks ago, the most peripheral part of the AI trade, the neo clouds, were imploding. So, neo clouds are are basically speculative businesses bunch of these guys often times from what I hear are not as well run as the hyperscalers go out and borrow tens of billions of dollars and go and build data centers and then lease out compute.

Now, this is a speculative business model because you don't really know what the price of compute will be in a few years. So, you have this huge huge huge you bought a whole bunch of money to build a data center that's going to be around for a few years, but you don't really know what your return is going to be for it. So, it is a speculative endeavor. And now, a couple weeks ago, we saw the stocks of these neo clouds tank. We saw their financing rates surge and we saw Elon, I guess, go and uh kind of give the thumbs down on the Neo Cloud ecosystem. Now, part of this, of course, is higher interest rates, and sure worth would approve calling it tightening financial conditions, but overall, the the the market is just a lot more skeptical and concerned about this corner of the AI trade. Again, that is the most speculative part of the AI ecosystem.

Stock down 6%. Microsoft, well everything seems fine, stock up a few percent, and the day afterwards, got it also down. So, that's a big big big shift. Now, let's taking a step back, these Mac 7 companies continue to spend several hundred billion dollars in their AI buildout, and they've spent all their free cash flow, their free cash flow negative now, and they're borrowing money to do this. In the past, the market would have applauded this, right? Participating in AI, all great, but now now things are different, and the market is definitely becoming more skeptical about the viability of these financing projects.

But there are also many accounts that over the past 2 months, that is to say, after the third quarter, uh the revenue growth has stalled significantly in Athlon Optics. So, obviously, these guys are trying to IPO. They're going to put their best foot forward. But, there are many accounts that suggest that revenue growth have has actually flatlined. And for a company that has hundreds of billions of dollars in commitments to buy compute, if your revenue is not growing, you are going to be losing money. So, that is a big problem for them.

Sure, they're still valuable, but, you know, you have to wonder, is it 2 trillion? Is it 1.5? At the end of the day, it's going to It's a very speculative endeavor. So, I think that created concern among some people in the market.

Now, disruption, of course, is good for the consumer, but not so good for the incumbent. So, one of the things that uh investors did not like about Google earnings is that it seems like Google's core business, its search business, it's decelerating in growth. So, Google is basically an advertisement company, right? So, you search in Google and it shows you advertisement sponsored links. And if you click it, they get paid. So, that's how That's how Google makes its money. So, the internet is a ginormous ginormous database. Google helps you organize that database by helping you find what you're looking for.

But, if you have AI now, which trained on that same monstrous database, the AI can also provide you answers as well. So, more and more people, and I do this myself, when they want to know something, they just ask the AI and the AI will organize it for them. They don't need to go to Google search. Now, the AI could be Gemini, it could be Open AI, it could be Claude, it would be Grok. But, at the end of the day, that is cannibalizing some of Google Search's business. And that that's going to be a fundamental problem for Google going forward. And not just that, if you think about the rise of AI agents, Muse for example, by Meta, maybe that's going to make shopping on platforms like Amazon more competitive. Maybe your AI agent will compare what's on Amazon with, you know, Walmart and whatnot. And so, these technologies are going to benefit the consumer, but they are going to be disruptive for the incumbents through competition. And so, you're going to see that a little bit. And of course, some of the most profitable companies with the biggest moats, these are the Magnificent Seven companies, and it looks like they're going to be disrupting themselves.

You know, it's going to be a process. It's going to be a process. As I believe Kevin Muir said this on his show once during the dot-com boom, many people went broke selling it. A few years later, even more people went broke buying it. There will be many people who buy it all the way down. Now, I don't think we're going to have this 90% implosion like we did in the dot-com because fundamentally many of these businesses are are very good businesses. Uh but, you know, 20-30% that would be, I think, totally reasonable.

I also thought it was very interesting to see gold basically implode as well. Big lately. Now, gold lost all its moving averages long ago, and now has lost the $4,000 mark. So, I I I I would expect it to continue to trade very poorly until the market is at a time where it begins to price in rate cuts, and that could be um you know, that could be in a few weeks, could be in a few months. It really I think depends on how the equity market performs.

If we have a significant decline in the equity markets, the market will begin to price in cuts, maybe as soon as December, depending on what happens. And I think a lot of what happens to the equity markets, again, not We see the AI trade imploding on its own, but it could accelerate with what happens next week.

So, at the moment, uh the betting odds betting markets are saying that there's a 70% chance of a Democratic sweep. I personally think that we will get a Democratic sweep and it will be a huge huge tidal wave. And that uh and that's going to have implications as to what happens. So, if you Okay, so I mean, you don't have to believe polling data, but you can just look at the president. He is in Kansas this weekend, right? Kansas. Kansas is a very very red state. Uh but what's happening is that So, these are also farming states. So, the farmers are getting hit from tariffs. Again, tariffs up, China retaliates. Now, they don't want to buy as many US agriculture goods. And of course, Iran war, diesel prices up, they're getting squeezed on costs. So, this uh all these things are actually policies that the president himself put on. So, he kind of doesn't have anyone to blame, but he is really paying a very steep electoral price.

So, if you do have Okay, and that's something else they've been talking about, of course, is complaining about, you know, data centers. Now, in the US, data centers are not popular. These people look at these things as, you know, noisy machines that drive up electricity costs and probably are going to take your jobs. So, they're not popular.

And, you know, in some states, not just say blue states, in New York, there's a moratorium on data center construction, but also red states like Texas. So, this is a very much a popular issue. I don't know if the Democrats a Democratic Congress can do much about it. A lot of this is local, but, you know, again, you have a major political party making noises to that extent.

Now, think back to why the Fed is hiking rates. One, tariffs. Two, AI build-out. Three, energy costs, right? These three things are going to be heading towards a different like retreating. I should we have a Democratic sweep. So, I think that this will be very good for bonds, right? So, interest rates lower.

It all depends on how much how big a lead it is, whether or not the president will veto their actions, but spending more money combined with higher taxes, that's that's a different thing now. And, if you raise taxes though, I think right off the bat, you're going to have, you know, weaker consumer spending and lower corporate profits. So, it's probably not that good for for for the equity markets. Now, in addition, we also know through Trump 1.0 that there's going to be a lot of investigations. And to be clear, there is a lot to investigate, right? So, there's this new book out, for example, Jared Kushner, President's son-in-law, just just going out, just kind of just raking in the cash. Not just him, but of course the President's family has has made billions of dollars, right? No one has monetized the presidency like the Trump family in the history of the United States. So, the Democrats will be investigating that. There will be a lot of acrimony. It will be a whole mess. And I think that's going to impact sentiment as well.

In addition, you know, if you have all this policy uncertainty, that's going to be chilling business investment, consumer sentiment, and all that. So, it looks to me like we will probably be in a recessionary climate, whereas risk assets will perform poorly, bond market will perform better.

And rem- recall, right after Tuesday, everyone is going to be thinking about 2020 presidential elections. One party will want to tank the economy. And uh you know, and the President will will try to want to uh get the economy good so that his successor, whoever it may be, will have something to run on. But So, anyway, it looks like it's not going to be good.

Um but we'll find out on Tuesday. I will also note that historically speaking, uh I government with gridlock is good for the markets. But we are also at a time where I think there's just so much polarization. I don't know if it will be good. But we'll find out in a few days.

Um so, my personal view is that I I don't think that will happen. Uh the reason being that the President has had so much opportunity to do this over the past. He just keeps turning it down all the time. So, it doesn't seem like he wants to and so I don't think he will. But if he does, it will be a huge mess. I do think that from everything the Iranians say that they have been preparing for this. It would just be huge retaliation. Oil prices will spike and that is again another reason to think that the economy will not be good in the coming months. All right, so that's all I prepared for today. Thanks so much for tuning in. Talk to you guys next week.