Have We Seen This Bubble Movie Before...And Was It Ever Good?
1.) BUBBLE – Everyone keeps telling me that AI is a “bubble” in the investment world ready to pop. Maybe. Companies are spending like crazy on the buildout. What used to sound like a lot (billion) now is paltry compared to a trillion. But have we seen something like this before? Yes. When railroads were being built across the country in the 1800s, spending eventually reached roughly 25% of the size of the entire U.S. economy. Something similar happened during the internet boom. Barron’s calls this the “rule of 25.” Well, it’s not really a “rule.” No bells go off when that figure hits. But it’s an interesting way to compare today’s AI boom with some of the biggest investment booms in American history. If we use that same math today, we get a pretty crazy number. The U.S. economy is now roughly $32 trillion. Twenty-five percent of that is about $8 trillion. Barron’s estimates that more than $1 trillion has already been poured into AI infrastructure since 2024. And the spending is accelerating. Goldman Sachs estimates roughly $581 billion will be invested in AI in the U.S. this year alone. Is that a lot? Heck yeah! But now compare it with that $8 trillion historical mathematical measuring stick. Using that measurement, we have a long way to go! That doesn’t mean we’re definitely going to $8 trillion. It doesn’t mean stocks can’t crash before we get there. And it certainly doesn’t mean every dollar being spent today is going to produce a good return. But, it should force us to ask if all this spending that looks so crazy today is still just the beginning. As a good friend and client (Jared Z) said this morning, in market terms, Nvidia (NVDA) is likely the “canary in the coal mine.” Once they start missing earnings, the market party is probably over. We’re not there yet.
2.) COPPER – One commodity that is an excellent identifier of global growth is copper. It’s been very predictive over the years. So much so that it earned the moniker “Dr. Copper”…as in economic PhD. So, what is the Doc saying right now? Growth is still looking just fine. While it had a decent-sized sell-off yesterday, it found support right where I’d expect it to…the top of trend (shaded area). Copper futures are up over +15% so far this year and up over +42% over the last year. So far, there isn’t anything happening to price to suggest there is a serious slowdown in global growth…especially when it comes to the electrification of everything and the AI buildout.
3.) RATES – Yes, rates across the board are still in a bullish (upward) bias, and yes, markets are pricing a 90% probability of a Fed rate hike. I don’t like to disagree with the collective wisdom of markets, but I really don’t go against price and data. The fact remains that high rates are the cure for high rates. The fact also remains that Fed Chair Warsh has stated that he wants markets to do the work of the Fed. So far, he’s getting what he wished for: high rates. There’s nothing in the data that would suggest “monetary panic.” August CPI was lifted by energy, and rate hikes do not drill a single well, build a pipeline, or lower gasoline prices. Warsh knows this. What rate hikes do is raise mortgage, credit card, and business-financing costs, hurting families, investment, and small firms. The entire burden of higher rates falls on the shoulders of job creators and families, while government spending and energy prices will not be affected. Warsh also knows this. Sure, the labor market has improved, but not enough to move the needle. So, don’t confuse an energy-price shock with demand overheating. Hiking into a recovering job market would be a massive policy mistake. I think Warsh knows this as well. Yes, the 2 YR Yield has been telling the Fed that the Effective Fed Funds Rate (EFFR) is too low. Warsh is a former Wall Street guy...so he's well aware of what the bond market is saying. But he's also well aware of the fire power of the US Treasury and he also has other tools to reduce monetary inflation. From a trading perspective, the 2YR Yield is giving a sell signal. We could see that yield start to back off some soon now that the CPI and PPI catalysts for August are past.
