Today looked a lot like the start of the long avalanche in stocks that became known as the dot-com bust.
Yesterday, I wrote the following …
The internet was transformational. AI will be, too. Maybe on a bigger scale even than the internet eventually; but the same rules of needing to make a profit still apply, and on that critical note Powell was painfully wrong….
High-valued startups OpenAI and Anthropic have been burning cash as they develop and expand their services….
That is what everyone was doing in the lead-up to the dot-com bust, constantly excusing their lack of profits as being driven by the opportunity to grow and the need to excel quickly at that growth to get a head-start over all the competitors….
The problem is … when the mountain of giants slides, everything goes down with it. Now, when it will fall, that’s harder to say. I had put my money on this year, reaching its perilous heights and then crashing with the help of economic and dollar destruction from the tariff wars.
… and today the AI stocks started to move downhill … quickly … again … like we saw in March. I won’t say this is it, because March wasn’t either; but I’d like to point out that what we are seeing in this move looks like the way I remember the dot-com bust beginning, and it certainly rebukes Powell’s claim that the AI bubble is nothing like the dot-com bust when the bubble can move with this much volatility in one day.
The trouble started awhile back as talk about whether making a profit mattered right now for these stratospheric companies since they were building as quickly as possible in order to capture the bigger profits that would be coming. The problem with that view is that it is the exact same question and same response given to the dot-com companies that were delivering the internet but not yet with any profits to show. Impatience for those profits has recently grown as the talk spread. That’s what happened back then, too.
In 2000, the tech companies of that day continued reporting negative cashflow in order to keep reaching for the brass ring, thinking investors would stay with them; but their stocks started taking hits as investors grew impatient. That seems to be what happened today. It didn’t take long back then for momentum to swing completely once everyone realized the “loans were being called.” It was time to put up or shut up—show them the money. When that turn came, the two-year avalanche began (and then a decade of recovery for those that survived).
We saw that same kind of impatience today. The grand marshall of high-tech, Nvidia, plunged 2%, but others among the generals fell much harder. Microsoft fell 3%, but Meta both took a swan dive for the history books, as the multi-TRILLION-dollar company each lost 11% of its value in one day!
The important thing here was the reason given for the big drop. Meta CEO Zuckerberg announced Meta was going to increase its spend on AI development. Investors said, “Enough already!” and delivered Meta its worst day in three years. 11% of trillions of dollars is a lot of loss. That decapitating fall came, despite Meta reporting “strong third-quarter results.” It came despite Zuckerberg’s best pitch about how Meta was seeing returns in its core business and “aggressively” preparing for superintelligence. It is a bit chilling to see a 10% increase in projected spending to build the future of AI bring a 11% collapse in the total value of the company.
Shares of Meta and Microsoft tumbled more than 11% and roughly 3%, respectively. Investors grew worried about the increased spending outlooks for both Meta and Microsoft.
This looked like investors saying “show us the money…. Start turning an AI profit,” in spite of the fact that Meta’s earnings beat Wall Street estimates.
This may be nothing and may all flip tomorrow. As I recall there were some big jolts back and forth at the start to the 2000 avalanche, too; but the reason for Meta’s plunge halfway into a bear market in a single day is what is worth noting. This is what it looked like when the hysteria that built up the dot-com bubble finally gave way. All the big-tech that fell hard today announced an increase in spending on AI development.
But then we have to speculate on why Amazon’s stock shot up like a volcanic explosion. Amazon has been criticized for developing its cloud services but not capturing enough AI use of those servers. Yet, it saw a massive 13% gain in stock value today above already massive valuations. What made the difference? While I’m not certain, I’ll point out that the biggest news out of Amazon this week was the massive labor cuts they are making as they now begin to harness AI to replace tens of thousands of human workers.
A penny saved via AI is a penny earned in profits. In this case we’re talking a mountain of pennies now being realized in savings due to the application of AI. So, the difference may be application toward something that will significantly raise profits in the near future by saving costs in immediate employee layoffs. Companies that can do that may do well. Companies that just keep trying to spend their way to seeing some visionary profit that is still far off may now be hit if today marks the turn in sentiment.
While Amazon remains the leading provider of cloud infrastructure technology, it’s been battling the perception that it’s missing out on a flurry of highly lucrative AI deals for cloud services. That concern has weighed on Amazon’s stock, which is up roughly 1.6% year to date, trailing its Magnificent Seven peers.
But not today. Today, the company facing ridicule soared right past those that were heavily investing all year and that announced further diversion of cash toward AI development. It may be time to start showing the gains. When that time came in 2000, it was game over for all who could not do that. The long decline began.
The new bipolar world
One other interesting little confirmation of major prediction I’ve made in the past couple of years where no one agreed with me was in my claim that we are NOT seeing a global division into a multi-polar world, as everyone has been saying, nor a division into the north hemisphere versus the south. I have claimed all along we are seeing a division into a bipolar world again of East versus West. Instead of the divisions falling to superpowers Russia and the US; it is falling to superpowers China and the US.
Throughout the time I’ve been making my claim, Zero Hedge has made the multi-polar claim. Today, they ran an article that leans into my view, which is that a world of East v West is what we see forming. The article based that in good part on the “deal” Trump just made with China’s President Xi, which is something I anticipate picking apart in my Deeper Dive to find out what it reveals.
Here is the first drift in my direction:
We Are Drifting To A 2-G World, One US-centric, Another Chinese
… a warm-up for today’s critical Trump–Xi meeting, before which Trump posted, “THE G2 WILL BE CONVENING SHORTLY!”