THE DEEPER DIVE: 1929 Stock Market Crash on the Horizon Again
EVERY matching piece for a crash like '29 is now in place.
One article for the headlines on Tuesday, since The Daily Doom doesn’t have holiday editions, asks if we are heading for a 1929-style stock market crash. If you’ve read me for long, you know I lean strongly that way. I think we are moving into the popping of the everything bubble, which the article just mentioned refers to as the “multicrisis.” We even have the same scale tariff situation today that played such a huge role in deepening The Great Depression. It may even be at a worse scale, depending on how it all settles out, as the rules are still changing:
To put an exclamation point on that, Trump just doubled down on the most significant of all of his tariffs on Friday, saying he was going to add another 100% to the constantly in-flux tariffs the US places on Chinese goods. That caused a quick one-day crash of sorts in stocks. So, there is never any stable ground with the Trump Tariff Wars because he constantly changes the terms. In many cases that has proven true even after he has struck a deal.
The artificial-intelligence stock supercharger
With that said, this will be a different kind of crash. In ‘29, the key driver for the total economic collapse was a stock market crash. It looked like that would be the case this year, too, as the market fell precipitously due to the tariff wars in March and April. It may still be the case, which was one of the big events I predicted for this year, anticipating Trump’s tariffs; but I increasingly think the market is now likely fully operated by competing AIs. As rapidly as artificial intelligence has advanced and data centers have sprung up this year, it’s hard for me the believe the billionaires who own AI companies are not using their massive new data factories to rig or manipulate the stock market, especially their own stocks.
Why wouldn’t they? There are scarcely any laws to regulate AI from doing what algorithms already do (albeit on a more attenuated scale than what AI will add to the equation). AI easily has the capacity to see what all market analysts have tried for decades to see—whether or not there are any patterns of what works and how to play them, whether or not there are any signs others are not seeing for what is to come, and also how to play those.
The market has been largely determined by algorithms for several years now. What is better suited for AI control/domination/manipulation than algorithms that speak AI’s native language and that were designed to be self-refining. If AI is kept from those connections by firewalls that prevent it from hacking the stock-market algos, it can still easily figure out how to play those algos. I mean what are they but tiny versions of understated AI anyway, given their self-modifying capabilities? For AI, teasing the existing market algos to do whatever AI wants is like playing with children.
That means something I warned about years ago under algorithms is more plausible today than ever, and may already be happening via AI hacking the algos or playing the algos in ways that even the AI owners don’t know about. So long as their AI’s are smart enough to keep putting money in the owners’ pockets, why wouldn’t the AIs do that; and why would the owners worry about how they are doing that, other than as a curiosity they want to understand in order to exploit further?
What I had warned about a few years ago, was that algo trading could take the stock market completely beyond natural economic limits or even usual market sentiment, making individual corporations mere chips in the casino that could trade at any value, even if the company is known to be destined for destruction, by an entity that knew how to use the chip to make a bet that would pay out. It wouldn’t even matter if the company was going bankrupt so long as its stock still existed as a place holder for laying bets on the roulette wheel of fortune.
That would complete the market’s ultimate transition on a path long in the making where the casino function is all that’s left where companies with no capacity ever to make money could be bid up to the stratosphere, and the smartest algo or AI is the one that knows when and how to reverse the bet and let it crash to capture the most gains, as the stock gets buried into less than a penny stock. The machines will be so much smarter than us before the end of this year that they will even be able to game collective human sentiment.
When we see the upper reaches the stock market has hit, even as tariffs seriously threaten the economy and inflation starts to rise again and political discord and war reach maximums and as the economy, itself, begins to crumble in terms of the labor market and credit markets, it’s hard to believe that isn’t happening because we are clearly seeing peak irrational exuberance, as I recently talked about, using the Buffett indicator to show the incredible and historic extreme level at which that is happening. (See: “Euphoric ‘Generals’ in the Stock Market and Disgusted Generals in the Military.”)
But I have no evidence for any of that. It is all surmising based on simple logic: AI likely has the power to do that; it’s owners have the ambition to do that; so, why wouldn’t they unleash their AI to do that while we have very few laws to regulate AI? When I look at what the market is doing, I say, “It would be hard, based on what we see, to think that AI is NOT doing that.” But I don’t know any more than anyone else about what AI is actually doing in the stock market.
The presidential stock-market crash turbocharger
On top of that, we now have the US government heavily into picking and buying the stocks it wants to pump up. With its seemingly endless capacity to take out debt, Trump can conceivably use government money to pump up “his” stock market by decree to keep it looking good for a very long time because he has always publicly measured his economic performance as a president by how the stock market is doing, and he knows others judge him by the market’s performance.
If the market plunges, as it did when he raised Chinese tariffs on Friday, and keeps on falling, he can easily say the necessary actions of the tariff war created a national emergency for stocks and use government money to buy the market back up. He can even tell the CEO of any particular company, “We’ll pump your stocks back up if you ___.” Fill in the blank with whatever the president wants the CEO to do for him. Transactional salvation for anyone who does as the president wants is getting close now to absolute power.
Trump can even invest his own billions in the stocks he knows he’s going to pump up with government money and then when he wants to sell them, invest as much more government money as he intends to take out with his own investment to keep his sales from taking the market down, effectively using nearly unlimited government money to buy out his own stocks. So long as he can claim it was essential use of government funds to save the market and save the US economy from a market crash, he can argue the government purchase was an official action now that the Supreme Court has decided he has immunity from any criminal act so long as it is done in his official capacity. Besides, he can pardon himself, if he must. So, he has nothing to fear: all bets in the market are safe for the guy who controls the government purse strings now that congress seems unwilling to stand in the way of anything he wants to do.
The problem for you, as an investor who wants to take what now seems like an assured magic-carpet ride to the top of a mountain of potentially limitless height is that Trump is capricious. He can also pull the magic rug out from under the market on a whim. You never know what will set him off to sell those government investments to trash any company he decides he suddenly doesn’t like in the same way he uses on-and-off-again tariffs on China and other nations that tick him off. Clearly he doesn’t care about what the constant major swings do to any US businesses trying to conduct trade with China or that have built factories in China. That’ll teach ‘em.
And, while Trump can protect his own investments with government money as he pulls his own money out to spare himself, he can pull the government plug as soon as he has all of his money out, to get even with the company he suddenly hates, and he’s not going to warn you before he does that. In fact, if he did warn you, the warning would cause the stock to collapse. So, maybe he will warn you! He doesn’t even have to pull the money! All he has to do is say, “I think we are going to have to pull government investment out of that terrible company that publishes fake news,” and its stocks will crash because the government owns a 10% share or more. That is the power of fascist economics.
That said, the crash today into something as epic as The Great Depression is likely to look a lot different (stranger) than The Great Depression, even though it may easily be the same in scale. Stocks may not crash until someone’s AI out-rigs the other AIs and finds a way to capitalize off a monumental crash without getting taken down by the stock-market crash or IF and when Trump does that for his own gain or revenge.
With all of that said, I still think the stock market is currently more precarious than ever before, so a crash is likely if you just go by the old indicators of market overpricing, especially in AI stocks, themselves. (Hmm, another reason to suspect AI is doing the investing to raise money for its own advancement?) Those new factors are something we can’t have any knowledge of. They are speculation about where people in power (via AI or government) now have an ability they never had before to take the market where they want, but we’ve never seen anyone actually do that with those powers … so far.
So, I’ll stay with my prediction at the top of the year for a stock market crash this year, even though there are strong reasons it could be wrong that didn’t even exist as possibilities back then! That is how much AI has grown in ability since the start of the year and how much the president has grown in power beyond anything we ever heard of in the past under this year’s Supreme Court rulings.
Forecasts now are that AI will exponentially raise its own rate of development so that artificial general intelligence far supersedes human intelligence before the end of this year. Some of its richest and most famous developers have said that is the point at which AI becomes a real danger to humanity—the point at which we cannot even keep up with what it is doing.
Natural forces toward a stock-market crash
Poor financial outlooks for some of the high riders and for the economy in general add to the precarious positioning. Like stocks in the dot-com bust, as I pointed out in the article linked to above, the winning industry of the future—AI—will have many more losers than ultimate winners. It was the same way in the huge expansion of the automobile industry. Many AI companies have never shown a profit, and their executives are now admitting they have no idea how AI can ever generate profits sufficient to show returns on investment; they are just hoping they can.
For that, I direct you to this article:
AI’s Worst Case A “National Economic Crisis”
Last month, I chose to strip away all the hubris around AI and ask one simple question, one that oddly no one had really bothered to ask; how much revenue is needed to justify the current level of capex spend and give AI investors a return on their capital?
I clearly hit a nerve in the industry, when judging by the number of individuals who reached out to chat. Since then, I’ve spoken with people who own datacenters, lend to datacenters, and design datacenters. I’ve spoken with people who are working to improve the cooling technology, or the customer interface. I’ve spoken with hedge fund, PE and VC investors who are fixated on the future of AI, and I’ve spoken with employees who are desperate for a liquidity event before it all collapses. In total, I’ve spoken with over two-dozen rather senior people in the datacenter universe, and there was an interesting and overriding theme to our conversations; no one understands how the financial math is supposed to work. They are as baffled as I am, and they do this for a living.
This is one of those rather surreal situations where everyone senior in this ecosystem knows that the math doesn’t work, but they don’t know that everyone else also knows this.
As a result, my blog post seems to have elicited a liberating realization that they weren’t alone in questioning the math—they’ve just been too shy to share their findings with their peers in the industry.
That kind of manic belief and optimism in a new technology that has never turned a real profit is exactly what we saw everywhere just before the dot-com bust, too, where it took over a decade to fully recover from the crash. I’m willing to bet all of that caves in catastrophically as it did back then and likely—if normal forces still hold sway at all—sucks the stock market down with it. After all, even if the AI experiment doesn’t fail on its own demerits for a time during its initial takeover of markets, one could still reasonably bet some AI will figure out how to make the biggest fortune ever for its owners by shorting all the right parts of the market at the right time.
As this unveiling cascaded, and they forwarded my writings to their friends, an industry simultaneously nodded along. Personal self-doubts disappeared, and high-placed individuals reached out to share their epiphanies. “None of this makes sense!!” “We’ll never earn a return on capital!!” “We’ve been wondering the same thing as you!!”
While retail investors are ecstatic about the prospects of their AI investments, apparently AI developers are starting to feel queasy about the extreme heights with no evidence yet that their AI’s can generate profits capable of making sense of those stock valuations. When those at the top are queasy due to the lack of atmosphere and the head-spinning view down, then I think the fall could be calamitous and probably not far off.
Even the …
“Shiller Cyclically Adjusted Price Earnings Ratio” – generally regarded as the most reliable indicator of where the market is relative to past peaks [is] close to the all-time high it recorded during the dot.com bubble and slightly higher than it was before the great crash of 1929.
The parallels with previous market manias are striking….
The economy is becoming almost wholly dependent on just a handful of tech titan “hyperscalers” chasing a dream of uncertain substance and return. Rarely, if ever, have the fortunes of the world economy depended so precariously on the judgment of such a small cluster of men – the bosses of Meta, Alphabet, Microsoft, Apple, X, Amazon and others chasing the supposed crock of gold at the end of the AI rainbow….
What’s more, Bezos claims, when the bubble pops, it will sort the wheat from the chaff, so that only the strongest survive. No doubt he counts himself among the likely survivors. This is what happened with all previous industrial and technological revolutions, Bezos suggests, and the same Darwinian process will occur with AI.
So, when we have an article in the Tuesday headlines, asking if ‘29-style crash is imminent, maybe we should investigate the merits of the question, as posed in the article and as seen in various signs of the economy that keep worsening, and that is what the remainder of this Deeper Dive will do:
Why is another stock crash like 1929 about to happen?
An article in The Telegraph suggests such a crash is imminent (sourced to you through Yahoo! so you can read all of it without subscribing to The Telegraph), but I’ll lay out the all parts that really prove we are set for a market crash now and don’t have to wait until the next ‘29: