CALAMITY COMES: Mammoth AI Bust and General Stock Collapse Forecasted as War Delivers Nightmarish Blows to Trump's Dreams
A tech expert with half a century in the field lays out the certainty of an historically enormous stock collapse. IBM hits as an 8.0 foreshock, and that is just the tip of today's troubles.
This was the worst day ever for one major tech company. IBM just took a plunge for the record books, crashing 23% in one day, wiping $68-billion off its value, and the scariest part was the reason for the biggest one-day crash in IBM history. It wasn’t just that IBM’s earnings missed expectations; it was the reason they missed expectations. IBM warned that AI is eating its business alive.
“In the last few weeks of June, we saw clients shift their quarterly capex spend toward servers, storage, and memory purchases to secure supply-constrained infrastructure ahead of expected price increases,” [CEO] Krishna wrote in a letter to IBM investors.
But why is that a problem for IBM, which manufactures servers?
For years, the market has operated on one simple assumption: AI spending would lift everything around it. Every new data center, every chip order and every infrastructure buildout was supposed to create a ripple effect that benefited the entire technology ecosystem.
But what if the opposite is starting to happen? One unexpected event this morning may have revealed the first real crack in that narrative, raising uncomfortable questions about whether AI’s massive capital spending boom is beginning to cannibalize the very companies investors expected it to enrich.
The questions raised this morning could wind up being contagious and spreading to other AI names…at a time when the market is already arguably the most overvalued its ever been in history….
[IBMs] infrastructure miss was particularly striking….
That reprioritization left customers with less money, and apparently less management attention, available for IBM’s z17 mainframes and the transaction processing software attached to them. Krishna said IBM had anticipated some supply chain disruption but “did not anticipate the magnitude of the capex reprioritization.”
Wrong kind of servers, I guess. The focus other companies on computers that are data servers for AI or that serve AI to the public and to businesses cannibalized IBMs business of making computers that serve up internet sites, etc.
The question is whether a hiccup this big that comes from capital spending rushing into AI raises the kinds of questions that can pop something that increasingly looks like the most outrageous tech bubble in history. Adam Taggart has posted an interview today with a guy who has been covering tech stocks since the flash crash of 1987 to predicting the dot-com bust and all the way into the present with his high-tech publication. He’s had a front-row seat to the tech world for almost half a century, and he is certain AI armageddon is coming to the market soon at a level that will make the dot-com bust look like a warm-up act.
Fred Hickey says the economic model (“if one ever even existed for AI”) is disintegrating as people realize there has been a massive overbuild of AI data centers, relative to how much money you can actually make from AI or relative to how many competing AI wannabe deities one really even needs. He calls it “the greatest stock bubble in US history.”
The market, he points out using Schiller’s CAPE ratio that I covered last week, is more overvalued relative to forward earnings than it has ever been in its history—far more overvalued than it was even in 2000 at the top.
And here is the major fly in the ointment:
There’s a huge gap between what companies are reporting right now for revenues and earnings and what they really are expending.
Yet, it’s worse than that.
40% of the growth in AI earnings in the first quarter was actually from gains on stock investments made by one AI company into another company’s AI stock on a mark-to-market basis. Those aren’t real AI earnings from doing their own AI business. They’re just more speculation in what looks like an incestuous circle. It presents an extremely fragile situation when a company’s expenditures are already gapping far above their earnings but those “earnings” are also largely gains made off of stock speculations (buying the stocks of the AI companies or software companies that a corporation wants their AI or software company to be in bed with). These earnings are just circular deals on each other’s stocks, which means the earnings plummet when the stock speculation turns down.
Yet, it’s worse than that:
If this one-of-a-kind “earnings bubble,” as he calls it, collapses, that can be a 40% vortex down in earnings that are already way overstretched by historic comparisons. Since those capital gains on speculative AI stocks are being reported as “earnings,” it means, if the stocks go from one-time gains to losses, that CAPE ratio that I pointed out as being near its worst historic high will suddenly blow way past that EXTREME because the earnings denominator will collapse into its own nothingness.
Yet, it’s worse than that:
In Hickey’s final analysis, all of the massive spending (beyond any CAPEX spending ever seen) on AI data centers by numerous corporations was never based AT ALL on earning’s studies. It was all, to put it bluntly, based on proving the size of the CEO’s balls. It was all egos of corporate executives wanting to end up being the one who could say he had the biggest and best AI on the planet. It was a space race to the moon. And they overshot far beyond what any revenue model can possibly deliver.
The collapse has already started
Microsoft stock has fallen by a third from its high. Oracle is down 60%! So, the crash is already underway. The “Mag Seven” has now become known as the “Lag Seven.” While Hickey believes Microsoft is making the right changes now, such as offering low-priced AI to its customers to become a survivor like it proved to be in the dot-com bust, he also believes all of these companies will take an enormous dive beneath where they have already fallen. At that point, they will be buying opportunities, but it will take them years to recover to where they are now (even in their already falling state) just as it did after the dot-com bust. (Sound like a thesis you’ve heard here?)
He doesn’t know when the big crash will get fully underway as in when it will become an unstoppable avalanche. He just knows that it is a baked-in certainty because of the huge and unsupportable misallocations of capital on top of phantom earnings that are already hugely overstretched, even if they were real. Look at just the margin debt on all stock purchases right now. It’s higher than we’ve ever seen!
That means when that incestuous stock speculation that makes up 40% of the “earnings” reported by high-tech collapses into its own black hole, all of these stocks are in a precarious position and are likely to join the vortex down as margin calls force sales. They’re all just chasing the growth in each other’s stocks.
Yet it’s worse than that … because even those corporate “earnings” we just talked about that are fleshed out with speculative stock bets are often bets made with debt. So, it’s all a rickety scaffold standing over a cavern of debt, but we always allow this kind of stock trading because greed loves it, adores it, worships the ground it walks upon. Greed likes the rocket ride up, and the fear of missing out on that ride drives the ride into higher strata in the atmosphere.
Hickey cannot predict when the great collapse will be fully under way, but what a rush it will be!
The Iran war is becoming Trump’s nightmare
Meanwhile, touching back on the rapid re-escalation on the war front that I covered yesterday, the temperature rose a lot more in the past 24 hours. Trump reimposed his blockade of all ships inbound or outbound from Iran and imposed a 20% toll on the traffic of ALL other ships from other nations that the US is trying to escort through the southern Chanel of the strait.
That drove the price of Brent immediately up to $86/bbl. Ukraine, then, attacked two Russian oil tankers in the Black Sea, and that drove the price up even higher to $87/bbl. Trump took tons of heat from his own people for imposing the same kind of toll that he had ridiculed Iran for imposing. Seeing oil prices rise so high because, of course, those selling oil will add the cost of those fees to the price of the oil they are selling, just as merchants do with tariffs, Trump TACOed on the same day again and removed his tolls before they were 24 hours old. That dropped the price of Brent, as of this writing to $85/bbl.
Naturally, gasoline prices are back to rising for their first time since the latest, failed schmeasefire was established in May. That brings us fully back to the escalating fuel prices I have promised were coming. And that means, while inflation dropped in todays’ CPI report, it will be right back up in next month’s report because the drop was attributed entirely to the decline in energy prices that happened briefly during what did enventually turn out to be just one more schmeasefire, though I gave it a SMALL chance of enduring just because Trump loathes becoming known as the guy who brings genocide to a nation, becoming an international war criminal and, most of all, knows Iran is bringing certain economic destruction upon the world in response to his war. Trump’s whole dream of a “golden era” is evaporating right before his closed eyes.
In fact, that the certain resurgence of inflation now that the war is back on is so true that even his newly installed Fed chief, who was supposed to be a monetary dove, just promised today that fighting inflation will become the Fed’s job one, promising a “regime change” at the Fed that no longer tolerates the “symmetrical” formula for inflation that Powell introduced. His boss may not like that, but the certainty of inflation is forcing it. Warsh said no one at the Fed stands outside of that new regime now. He said there is full agreement that the Fed must fight inflation back down to its 2% target.
“The members of our Committee have no tolerance for persistently elevated inflation. And we share a resolute commitment to restoring price stability,” he said….
“It has been a tax on the American people and businesses. We plan on getting rid of that tax,” he said. “That means we need a regime change in policy, and we need new consideration of practices, some of which have been working, some of which haven’t.”
We’ll have to wait and see what he actually delivers, but he’s sounding a lot more hawkish than Powell ever did right now … like he just got religion. Like the whole Fed did because the resumption of full-on war around the Strait of Hormuz is likely to grind on for a long time, and the US will lose much during that war of attrition. Intense stagflation, beyond anything seen in the 70s or early 80s is almost certainly on the menu.
Unfortunately, for the Fed, there really isn’t much it can do to bring that kind of inflation down so long as fuel shortages are building. The higher price of fuel is being determined by Iran as the cost to be paid for Trump’s war. And Iran isn’t letting go. It’s not rushing to make a deal. Iran is using deals to stall in order to give attrition the time it needs. The oil shortages are building, and they will soon start to really eat away at our wealth.
The Fed cannot turn that off. It can only rush to look like it is trying to do something. For the most part, raising interest rate “targets” will be essential because interest rates will raise themselves in order to compensation for inflation eating the interest as it accrues. So, the Fed will have to rush with higher targets just to look like it is the one still in charge. Otherwise, it will be sitting way behind in a cloud of dust and a pool of its own blood as it becomes known that the Fed is no longer in control of rates or money.
Things are not going well for Donald Trump as his golden era disintegrates all around him into the smoke of black gold burning across the Middle Eastern landscape—a war he started that has destroyed his highest ambitions.
And, oh, the instant return to rising energy prices sure isn’t going to help those energy-starved AI data centers turn out any earnings from their revenue stream. Good luck with that pipe dream. So, there goes his favorite proof of a strong economy—his beloved stock market as a gauge of his success.
(If you want to see an impressive video of nature’s calamities, to top off today’s theme, I just posted one below that shows the global catastrophes that hit in the single month of June. The scenes are impressive for both the scale of the events and the sheer quantity of events. It’s a big world, of course, with huge natural events all the time; but, having watched the whole video, I couldn’t help but think all these huge earthquakes, volcanic eruptions, severe floods, and numerous fireballs streaming through the sky all around the earth night after night, certainly feel like far more than your typical June. Maybe if you assemble them all, this is how every month looks, but it is quite the recap.)
