The State of The Imploding Economy

Up until now I have been focused mainly on the AI asset crash. With this post, I will focus more on the economic consequences of AI.

But first an update on the rolling asset crash. Research firms have been putting out articles recently predicting industry after industry that will be "disrupted" by AI. I call it "AI panic". It started with software but has now spread like wildfire to other sectors and stocks both within Tech and other industries. The disruption within Tech has pit AI firms against the rest of the Tech industry. In some cases it has pit one division of a company against another. Think Samsung which is both a leading AI memory company AND a global leader in consumer electronics. Or Microsoft which is both an AI hyperscaler AND a software company. Nevertheless, Microsoft stock is imploding because the value of the software business is deemed far greater than the non-existent AI revenue. Whereas Samsung is going parabolic because the value of the AI business more than offsets its decline in consumer electronics AND because Samsung benefits from the memory price hikes that are imploding the consumer Tech industry.

The chart below shows software stocks (red) overlaid with Momentum Tech, the latter of which is being led by an ever-narrower handful of AI hardware winners which are listed in blue. Then I list in red all of the sectors imploded by AI which is getting longer by the day.

All of which means that "AI panic" isn't just about AI anymore, it's about the end of the cycle. Because it's turning into a self-fulfilling collapse. AI fear is causing industries to go bidless and lose access to capital which has a feedback loop to the economy, hiring, and unemployment.

AI is accelerating the end of the cycle.

AI is also accelerating the collapse of credit markets.

Just yesterday the CEO of America's largest bank warned of 2008-level risk in credit markets:

When you read it, the article is complacent about Dimon's concerns, saying that he has warned before - the last time being last Fall. What happened last Fall is that a couple of subprime auto lenders imploded in the private credit market. This week another private credit company called Blue Owl which primarily lends to software companies tanked and gated their fund to prevent redemptions deja vu of Silicon Valley bank which attempted to halt a bank run back in 2023.

These are all just canaries in the coalmine that were likewise ignored in 2007.

As we see via Regional Banks, private credit (NDFI) loans have DOUBLED since Silicon Valley Bank imploded in 2023.

Which gets us back to the economy.

AI is a profoundly deflationary technology. It replaces humans with automated "Bots" and algorithms but it doesn't add anything to the demand side of the ledger. In other words, every human worker displaced by AI REDUCES GDP. This is something economists are only slowly starting to figure out - GDP is on the verge of total collapse.

Consider that the U.S. budget deficit is 6% of GDP, so a 1.4% GDP growth rate implies that the REAL economy is growing at -4.6%. Yes, you read that right. A recession is hiding behind a massive government deficit.

In summary, on the economic side, what we are witnessing is the worst jobs growth since 2008.

The worst deficit adjusted GDP in U.S. history outside of an official recession.

The worst consumer sentiment in 50 years.

Persistent inflation at 3%, which remains well above the Fed target.

Labor share of the economy at the lowest level in U.S. HISTORY.

An AI bubble that is threatening to destroy ALL remaining white collar jobs.

Tech oligarchs who are demanding that all workers return to the office so they can complete their AI tasks of putting themselves out of a job.

And a president who claims sole credit for the entire disaster. Why? Because Trump is not aware that he is coming at the end of a multi-decade Supply Side super-cycle that has imploded the middle class and is now in late cycle over-drive.

But mostly because his political base trusts a billionaire to inform them about THEIR economy.

Any questions?