The AI Bubble in Stocks Just Delivered a Second Major Foreshock
And it was accompanied by a stock short for the record books. The ground is cracking beneath stocks as the economy, itself, gives way with major recession signs.
There are numerous stories today about falling stocks, especially AI stocks, and a badly failing economy. I’m going to hold off on the detailed analysis for my weekend Deeper Dive, but I want to give a broad-brush overview of how today’s stories all fit together around growing signs of an ominous crash in stocks, led down by AI.
The new jobs recession has arrived
The first three stories describe how we are losing tens of thousands of jobs. Of course, we all realize that doesn’t typically happen without falling into a recession. Recessions are the big job killers. Of interest to me, is Treasury Secretary Scott Bessent’s admission that many sectors of the US economy are already IN a recession. This underscores what I have been saying for a year as we looked at the continual decline in manufacturing over many months, but especially over the past eight months as tariffs began chewing down US industry.
Bessent, of course, is using the fact that he is now forced by numerous non-government reports to admit the serious decline in jobs, to start preparing the stage for blaming it all on Powell by noting how how the president has been pushing Powell without success to start stimulating the dying economy. Of course, readers here, who have the brains Bessent lacks or believes most people lack, already know that, if the economy were the greatest ever, as Trump continually claims, it wouldn’t need Powell’s Fed stimulus via easy, free-flowing credit.
The president’s best economy ever is now down a net 42,000 jobs since April, according to two non-government sources of information. Down 12,000 in August alone. Now this is a lot worse than the positive 150,000 it takes each month just to avoid recession by keeping up with population growth. Instead of positives so low they are recessionary, we have started seeing negative changes in the number of jobs since summer.
These reports also prove Trump’s firing of the head of the BLS for reporting “fake numbers” that made the president look bad was totally a case of looking for a scapegoat, as I’ve been pointing out. She should have been fired for reporting falsely positive numbers because the real news got revised worse agains and again. Now we are flushing away jobs. You won’t ever hear that kind truth out of Team Trump.
The manufacturing recession stretches beyond any doubt
At the same time as we get got these non-government job reports today, we have a report in hand from ISM, stating that US manufacturers are strongly complaining about the nation’s economic decline and their need to terminate people or not rehire to fill positions that open. That squares with the labor reports.
The CEOs are blaming it all on tariffs. Worse still, the whole world is complaining about manufacturing decline, and everyone in each instance is blaming it on Trump’s tariffs, which are not just damaging US manufacturing, but (as intended) also damaging all other nations. The problem for the US, is that it is being hurt just as badly. In fact, as we saw in my last Deeper Dive, China has actually increased its market share of all global exports by selling to all the nations that are doing less and less business with the US, while the US has significantly lost share for the same reason.
Other lesser factors included in this significant and protracted manufacturing decline are Big Beautiful Bill’s big beautiful spending that has phased out certain energy tax credits, and Trump’s strong stance against immigration taking away a lot of cheap labor, which isn’t being replaced with more expensive labor because, with prices going up so much, and American’s starting to fight back against inflation, there is no room (without dinging their own stock buybacks and dividends, of course) to pay more for labor. But those are the lesser factors. The big bogey man is the tariffs.
The uncertainty created by all the on-and-off tariffs is significantly worsening the situation by making the lay of the land so unpredictable that numerous CEOs say they are not about to hire in such an unstable situation where they have no idea what the future impact of tariffs on their prices and sales will be. So, they’re sitting all that out and, of course, may sit on all of that even after the dust finally settles if the final news is high tariffs for all the stuff they import. That seems the most likely outcome since Trump’s constant view has been that successful negotiations mean getting the highest tariffs possible on the foreign imports that go into US-manufactured products.
“Companies are uncertain about what’s happening,” she said. “Everything has been changing on a day-to-day basis, so it’s not clear what production should look like. That’s why they aren’t hiring.”
More signs of an imminent stock-market crash and the new big short
At the same time, the stock market keeps showing those signs of a dot-com-style bust that I’ve been repeatedly pointing out, and today delivered another tectonic jolt. With so many layoffs happening in white-collar jobs, investors are starting to wonder if AI is also responsible for some of the cuts. So far, however, it appears AI’s contribution to layoffs that have already happened has been quite small, while larger layoffs slated for a little further down the road, such as by Amazon, do lean in the direction of AI as a cause. Instead, for now, AI is an excuse:
Experts interviewed by CNBC said some companies could be “AI-washing” their job cuts, blaming layoffs on the new technology to cover up business fumbles and old-fashioned cost cutting.
You see, it’s much more attractive to blame layoffs on new efficiencies being realized due to new high technology than on fallen sales due to retaliatory tariffs and rising costs due to US tariffs. No one wants to blame the layoffs on decline.
“We spend a lot of time looking carefully at companies that are actually trying to implement AI, and there’s very little evidence that it cuts jobs anywhere near like the level that we’re talking about. In most cases, it doesn’t cut head count at all,” said Peter Cappelli, a professor of management at the Wharton School and director of its Center for Human Resources. “Using AI and introducing it to save jobs turns out to be an enormously complicated and time-consuming exercise. … There’s still a perception that it’s simple and easy and cheap to do, and it’s really not.”
Those days will come, of course, but the true blame right now lies at the foot of the stealth recession I said we were entering last year and that I predicted would be accelerated by the Trump Trade Wars this year.
Stock investors, however, have bought the baloney and used it to keep ramping up with hopes about AI, but that footing is now trembling and falling apart, as I’ve been indicating. In fact, today’s market drop was largely attributed to growing concerns about AI not actually paying off while investors are getting tired of waiting to see the money. So, the scenario I described in “Is This When the AI Bubble Pops?” was playing out already today. THAT FINAL IMPATIENCE BY INVESTORS TOWARD SEEING THE RETURNS ON THEIR INVESTMENTS IN AI, I argued last week, is the exact recipe for a stock bust that can match up to or exceeds the dot-com bust.
Besides seeing investors complain about AI failing to deliver financial returns today, we saw a truly enormous play in the market that should sound a major alarm. One of those major investors, famous for profiting off huge market crashes, just placed a $1-BILLION bet, shorting AI stocks! It was so loud it stirred the outrage of the CEO of Palantir, who complained the bet was unfair when his company actually is profiting; however, as I pointed out in that article about when will the AI bubble pop, the big leaders in the market that will eventually succeed also get to participate in the great crash when it comes to clear the table and make room for the final successors. So, it was almost funny hearing the Palantir CEO cry.
As I noted last week, even the biggies who succeeded fabulously after the dot-com bust, like Bill Gates, learned that recovery from these extinction-level events that take out all the small and least profitable players can take more than a decade to get the successors back to even (and that is without even factoring inflation, which would put that closer to a decade and half).
So, it is perfect support to my dot-com-bust thesis last week to see today that Big Short trader, Michael Burry, “believes that there is an AI bubble which is due to pop,” with such certainty that he placed $1-BILLION short against the AI boom. He particularly placed his chips on the fall of Nvidia and Palantir.
Last week Mr Burry returned to X for the first time since April 2023 to post warnings about a bubble. On Thursday, he posted a picture of Christian Bale playing him in The Big Short.
At least, one big name who has done extremely well with knowing when the biggest bubble is about to burst now confirms my own view that the time is not likely far off. Of course, if AI now controls all the algorithms, it may never let that happen.