Terminal Artificial Intelligence

For most people, it's hard to see a bubble when they're putting their entire retirement into it. Because at this latent juncture the AI bubble IS the stock market.

Before talking about the fabulous AI bubble, I will review the insanity of last week:

At the FOMC last week, Powell was hawkish on rates saying that tariff inflation was starting to show up in the data, contrary to what multitudes of pundit hacks have been saying for months. Then, right on time the PCE inflation rate on Thursday came out hotter than expected due to tariff effects. Then on Friday the jobs number came out weaker than expected, including a massive 258,000 jobs reduction for May and June. So Trump did what any responsible president would do - he fired the head of the Bureau of Labor Statistics (BLS) on the spot. Which means that Trump is now actively plotting to undermine Powell on the FOMC to ignore the burgeoning inflation increase, AND Trump is also seeking to manipulate his collapsing jobs numbers to show a positive result. Therefore, it falls on us once again to ask, what could go wrong?

The chart below shows that the two month dip in job creation in May and June was the largest since 2008 and before that 2001, both of which were recessions. Furthermore, we can likely expect the already weak July report will ALSO be reduced next month. Probably showing a freefall into recession.

Meanwhile, Trump's tariff deadline August 1st came and went and he had a tariff rate assigned for every country, but for some reason he once again kicked the "tariff effective date" can to August 7th, despite swearing August 1st was THE DATE.

Here we see European stocks are now below the 50 day moving average (blue line) and rallying modestly ahead of the new deadline. Which means they are even more precarious than they were back in April.

Which gets us to the theme of this post - the fabulous AI bubble.

The pattern in earnings calls this quarter has been to reward companies that have benefited from the AI investment bubble and punish companies that are not benefiting from this record misallocation of capital. As a result, the price divergence between the AI bubble and the rest of the market has continued to grow, as has the MARKET CAP divergence. Hard to believe, but it's true. AI has driven Tech market dominance to even greater extremes.

In other words, BofA's recent bubble warnings that I mentioned in my last blog post have been completely ignored.

In this chart I created an equal weight (geometric) index of the largest AI companies by market cap that are making new all time highs. Nvidia, Microsoft, META, Palantir, Oracle, Taiwan Semiconductor. These are the companies that are powering the major indices to new all time highs, while leaving the rest of the market behind. In addition, in black, we see the equal weight average U.S. stock is already imploding back to the levels that directly preceded the April crash. So the average stock has gone nowhere since April and the mega caps have reached even more parabolic heights than the last time they imploded.

In summary, regardless of who Trump appoints to manipulate markets, I predict the bond market is not going to like what Trump is attempting with this new lowest point ever for U.S. corruption.

Therefore, either stocks crash and forestall a bond market crash. Or the bond market crashes and stocks go along for the ride.

In the Artificial Intelligence bubble, all roads lead to crash.