Several news outlets were barred form the annual gathering … something I’ve never seen before and I’ve been to a few myself.

While the ministerial meetings, themselves, are generally closed to the press, there has always been relatively free and fair interplay among journalists, finance ministers and central bankers at these affairs.

For his part, after stiff-arming certain reporters from the New York Times, The Wall Street Journal and Bloomberg, Bessent did hold court with some journalists, including CNBC’s Sara Eisen.

Bessent offered a colorful assessment, to put it mildly, of the current trade war between the U.S. and Canada, suggesting to Eisen, that Canada can do nothing to hurt the U.S.

More specifically, he taunted Canada’s military noting that it’s “Very unfortunate that PM Carney has turned into a political shouting match. I mean we’re not at war with Canada. What are they going to do … take their two submarines from the Edmonton Mall and sic them on us?”

In all my years of covering events like these, I have never heard a Treasury Secretary publicly taunt an adversary, let alone a long-time ally, over a set of disagreements that could be solved relatively easily.

The bar for diplomacy, whether political or economic, has not just been lowered but has made limbo dancing look easy.

Debt and Taxes

The more critical commentary from Bessent revolved around the nation’s persistently large budget deficits and growing debt which, at $40 trillion, is now officially notably larger than GDP.

Current GDP in the U.S. sits at roughly $32 trillion.

$40 trillion is the nation’s gross debt, a portion of which is held by government agencies and not at risk of being sold into the open market.

The net debt, held by the public, is $32 trillion … equal to current GDP.

Bessent brushed off the notion that draconian spending cuts or tax increases will be needed to tamp downannual deficits and the debt, claiming, in that same CNBC interview, that the U.S. will simply grow its way out nearly $2 trillion annual deficits and that mounting national debt.

If you’ll recall, Bessent came into his position with the so-called “3-3-3” plan.

In it, he projected that the Trump Administration would deliver 3% real economic growth, reduce the annual budget deficit to 3% of GDP and add 3 million barrels a day of crude oil production to the nearly 14 million barrels already produced daily.

So far, he’s 0 for 3.

In order to simply stabilize annual deficits, and eventually bring them down to zero, the U.S. economy, according to multiple studies, would have to grow consistently at an annual “real” rate of 4.3% for a decade, or longer, just to bring annual budgets into balance.

That is highly, highly unlikely.

Never in modern history has the U.S. sustained growth rates that high except for brief spurts when emerging from recessions or immediately after the pandemic.

Even with a productivity boom from the rapid deployment of AI, the economy’s long-run potential growth rate is not expected to go much beyond 2.5% annually.

His projection comes on a day when President Trump said U.S. economic growth could expand by “14, 15, 16, or even 20%” without the Fed needing to raise interest rates.

Imagine the Fed, any Fed, sitting idly by as the economy expands 20% on a sustained basis!

Wowza! (Not gonna happen)

The bi-partisan Committee for a Responsible Federal budget, meanwhile, immediately responded to the President’s projections as “detached from from mathematical and economic reality.”

To be fair, Democrats have absolutely no credible plan, either, to address budget deficits that continue to expand or a national debt that the Congressional Budget Office projects could reach 120% of GDP by 2036.

Some $8-10 trillion in deficit reductions would be needed just to freeze the debt-to-GDP ratio at 100%, according to the bi-partisan Committee for a Responsible Federal Budget.

There are no serious efforts by either party to even acknowledge the problem, leading some economic and market experts to predict a day of reckoning.

The Treasury-Federal Reserve Discord of 2026

Under some similar economic circumstances as today, sans the Iran War and on-going tariff and trade battles, the U.S. Treasury and the Federal Reserve reached an inflection point over who was more in control of interest rate policy … a question that is resurfacing, to an extent, today.

In 1951, the Treasury (read Truman White House) and the Fed were at odds.

The Korean War was stoking inflation, it peaked at an eye-popping 21% in February of 1951, leading the Fed to favor hiking rates to knock prices down while the Administration, via the Treasury, was, at that time, partly responsible for conducting monetary policy.

The Truman White House and Treasury were opposed to any such action, which led to a series of heated, but private, exchanges between the two institutions.

The Fed revolted and refused to continue keeping rates down while inflation surged.

It averaged almost 8% that year.

In short, the Treasury and Fed reached an agreement in March of 1951 in which the Fed would oversee the conduct of interest rate policy while the Treasury would oversee debt management as it financed the war.

It was the agreement that led to the modern-day, and much-cherished, independence of the Federal Reserve that we have adhered to for 75 years.

But is that accord about to be torn asunder?

Bessent noted, today, that he and Federal Reserve chairman, Kevin Warsh, have no daylight between them when it comes to interest rate policy.

But, in this case, actions speak louder than words … to a degree.

Two weeks ago, with long-term Treasury rates hitting levels not seen in over 20 years, Bessent intervened in the long-end of the bond market, buying up some bonds to take pressure off long-term interest rates … which dictate the cost of money … mostly mortgages, car loans and the prices of other forms of consumer credit.

He said the Treasury would continue doing so to maintain “liquidity” in the market.

Meantime back at the ranch, Fed Chair Warsh, who spoke at the central bank’s annual symposium in Jackson Hole, Wyoming, on Friday, reiterated the Fed’s intention to get inflation entirely back to its long-stated 2% target … a hint that short-term rates may well go higher.

Markets immediately priced back in greater than 50% odds of a rate hike in September and yet another in December.

It appears the Fed and Treasury may well be working at cross-purposes for a time as the Fed, at least prospectively, prepares to raise short-term interest rates while the Treasury works to lower longer-term rates.

All of this is taking place before the mid-term elections … which could create some rather dynamic tension in financial markets, and in official Washington, to be sure.

Today, the 10-year Note yield hit 4.76%, the highest level of the year, as oil prices rose and inflation, as measured by last week’s data, remained above 3%.

A battle, Bessent’s comments notwithstanding, is shaping up between the Treasury and Fed to determine who controls, most certainly, the near-term direction of interest rates … a la 1951.

Get your popcorn ready … this is going to be a double feature that lasts through November.

Until next time …

Before I review Nvidia’s earnings, as promised, I’d like to discuss CIA Director, John Ratcliffe’s hastily arranged trip to Moscow to meet with his Russian counterparts, though there was reportedly no meeting with Russian leader, Vladimir Putin as part of that quick trip.

I spoke to two former high-ranking intelligence officials in the last 24 hours and they shared their view with me about the Wall Street Journal’s report that Ratcliffe was delivering a warning that Russia stop, or not start, any incursions into NATO territory.

Both former senior officials found this story quite plausible noting that unscheduled meetings, like this one, which also included travel via a C-17A military transport was, in and of itself, something of a message to Moscow.

The Director has access to private aircraft, like G5s, which are often used on official trips, but jumping on a military transport conveys a more serious tone to the visit.

There have been mounting concerns that Putin wishes to test NATO cohesion and resolve should he venture beyond Ukraine and set foot into either the Baltics or Poland to determine if his attempts to resurrect the old Soviet sphere would be met with force.

It seems to be the consensus among my sources that a warning against such an attempt would be met with a serious and unified NATO response.

There was also the possibility of other issues being raised from prisoner swaps, Russian assistance in getting Iran to open the Strait of Hormuz or, much more concerning, issuing a warning to Putin to abandon any thoughts he might have of using a tactical battlefield nuclear weapon to end the war in Ukraine.

That possibility was buried in a recent Bloomberg report discussing the likely intensification of hostilities between Russia and Ukraine as the winter draws near.

In any event, it appears western intelligence has a new set of worries on its hands with respect to Putin … none of which are reflected in financial markets, save for the price of wheat which is at multi-year highs … wheat of course being a principle commodity and a Ukrainian staple … so keep an eye on the breadbasket of Europe.

Whither wheat could be an important tell.

“Nvidia, Nvidia, Say Have You Met Nvidia?” (Sung to the music of “Lydia” by Grouch Marx and Bing Crosby)

There’s no doubt you all know by now, that Nvidia, reported blowout quarterly revenues and profits yesterday (8/26) with precious few blemishes on their numbers.

Revenue growth was astounding, and profits outpaced expectations, as well.

Nvidia expects 70% revenue growth in fiscal 2028, well ahead of the 44% recently penciled in. That type of forward guidance was well-met on Wall Street.

Nvidia shares gained nearly 9% on Thursday and boosted the AI sector once again.

Nvidia is one of many to report exceedingly strong numbers among 2nd quarter reports and only reinforced the trend that earnings strength, barring unexpected events, will continue to grow strongly for some quarters to come.

This quarter’s S&P earnings have, indeed, been stellar … up over 50%.

Excluding profits from Amazon and Alphabet caused earnings to balloon … both of which booked one-time, unrealized investment gains.

But even excluding those two, 2nd quarter corporate earnings were still up more than 30% and well above historic averages.

86% of the companies reporting profits also handily beat expectations, as well, far in excess of the 70+% that typically outrun estimates.

So, to borrow lyrics from another oldie but goodie … “the beat goes on.”

Of course, as you may well surmise, my concerns about AI, broadly speaking, are not in the here and now.

While the infrastructure buildout is driving both corporate profits and economic growth, there are legitimate questions around the sustainability of these compounded growth rates; the returns on invested capital (ROIC); the political and community backlash against data centers and the impact of AI on future employment, cybersecurity and national security writ large.

An S&L Crisis in the Making?

My more immediate concerns center on Nvidia being, as it’s now being described, the central bank of AI.

Given the amount of vendor financing they are offering to the buyers of their expensive chips and their willingness to backstop the credit being used to further expand the buildout of AI infrastructure, one can’t help but wonder if they are like, with credit to Jim Cramer for this analogy, a 1980s Savings & Loan that extended vast amounts of credit to commercial real estate projects that never delivered on their promised returns.

I like the analogy because we cannot be certain that all AI efforts, as cheaper open-source models emerge, will be as profitable as currently envisioned.

Nor can we be certain that the bi-partisan political backlash that is gaining steam before the November mid-terms won’t slow the process down and leave some potentially income producing properties in limbo.

Should that happen, Nvidia, and other companies like it, along with private credit lenders, could be on the hook for hung projects, leading to balance sheet impairment and a credit crisis of sorts, given the trillions of dollars in on and off-balance sheet commitments made by so many.

It’s currently a hypothetical concern, given the continued surge in both spending and revenues, but, for me, it’s a concern none-the-less.

The hyperscalers, as I’ve written before, are burning rapidly through their cash flows and borrowing hundreds of billions of dollars, ANNUALLY, amid expectations that it will all payoff in the long-run.

The total price tag for all these projects to be completed is between $5-7.6 trillion by 2031, before upgrades that extend beyond that period.

Revenues, let alone cash flows and profits are most certainly surging … but … they are not in the trillions of dollars … at least not yet

The Revenue Race is On

As Anthropic prepares to go public, likely in October, it is being reported that the AI giant is expected to tell investors that the total addressable market (TAM) for the products and services it provides is $30 trillion.

That’s according to a report in the Wall Street Journal.

Anthropic is expected to go public at a valuation of $2 trillion, eclipsing the market cap of SpaceX when it went public in June.

SpaceX estimates that it’s own total addressable market, which includes space exploration, is $28.5 trillion.

Of course for that to be meaningful as a forecast, the revenue estimate would have to assume that Anthropic, or SpaceX, capture the entire market share of all its business opportunities.

For argument’s sake, let’s say Anthropic’s revenues do, in fact, reach $30 trillion some years down the road.

The company is expected to be valued at 10X expected 2028 revenues.

If Anthropic captured its entire TAM, or $30 trillion … that would, over time, push its market value to $300 trillion, or roughly 10X current U.S. GDP!

We have entered the realm of science fiction, not science fact.

Of course, AI is real.

And, of course, it’s going to have a dramatic and transformational impact on our work lives and our personal lives, as well.

But every transformational technology has been accompanied by fantastical claims in the financial markets.

I know I sound like a broken record (recording devices were once a transformational technology, by the way) but this will, one day, not end well for investors even if the ultimate promise of the technology is realized.

These forecasts may not be worth the code they are written in, which suggests the stocks, especially as more and more of them go public, will be wildly overvalued.

Maybe not today, maybe not tomorrow, but soon and for the rest of your life. (Humphrey Bogart in “Casablanca!”)

This is fast becoming the biggest speculative episode in financial market history.

Enjoy the ride but act accordingly.

Until next time …

No sense speculating about the numbers when they’re only 24 hours away!

Until tomorrow …

A besant was a gold coin minted in Byzantium.

So his surname, according to an etymological analysis, was historically used to describe a coin minter!

And, of course the U.S. Treasury controls, you guessed it, the U.S. Mint, among other important economic functions.

That, of course, is just an interesting sidebar to Bessent’s identity.

Far more interesting were his comments in an interview on CNBC earlier today (8/20).

A Fiscal Fundamentalist

One of the answers he gave to a question posed by CNBC’s, Sara Eisen, caught my attention … well, several did, but let’s focus on this one.

Bessent made a rather bold assertion, one day after announcing a Treasury plan to buy long-dated bonds in an effort to bring down rising yields, that Treasury bonds are not currently trading on economic fundamentals.

I, for one, have absolutely no idea what he meant by that.

If it’s not trading on economic fundamentals, then what is it trading on?

While claiming economic growth was strong, core inflation is retreating and the war-induced energy price surge is only temporary, the bond market, by his account is mis-priced and that long-term interest rates are too high … hence the effort to buy those rates down over the next few months.

While much higher than they have been in the post Great Financial Crisis/Pandemic world, they are roughly in line with historic norms and reflective of the very fundamentals that characterize the current economy, in my humble opinion.

It’s true that yields on 30-year bonds recently touched the highest level since 2007 and 10-year note yields, just yesterday morning, touched multi-year highs of 4.75%.

That spike caused some upset in financial markets and exacerbated concerns about whether or not U.S. debt is becoming less attractive to overseas investors and/or anyone else worried about the sticky inflation that is still dogging the economy.

Bonds are, indeed, trading on those very fundamentals that Bessent seems to ignore … sticky inflation, uncertainty around the rate of economic growth (some measures show strength), rising deficits and record federal debt, not to mention fiscal policy initiatives that may further exacerbate both inflationary pressures and federal indebtedness.

Those are all legitimate factors pushing bond yields up at the moment.

After diving yesterday on the announcement that the Treasury would be buying in some more long-dated Treasuries, rates bounced back up today as oil prices shot up on president Trump’s threats to “crush” Iran’s economy, claiming it was D-Day for Iran in that regard.

Economics versus Politics

The Treasury plan that Bessent announced yesterday goes into effect on September 9th and lasts until November 4th, coincidentally, one day after the mid-term elections.

Bond market “vigilantes” a nickname for bond investors who protest poor policies by selling bonds and pushing up rates, may have well seen through the temporary and, perhaps, solely political motives to bring rates down as the GOP is in danger of losing the House and, possibly, the Senate 75 days from now.

Lower long-term rates would push down mortgage rates, which have been pushing back towards 7% of late, car loans and the cost of other corporate and consumer credit at a time when everyone seems to be borrowing money … from the big tech hyperscalers to struggling consumers to the federal government.

The brief reprieve, if there is one, could help consumer sentiment in an election year .. but that does not seem to be holding up today as it appears the relief was very brief, indeed.

Not only did rates rise, but oil prices rallied, exacerbating inflation worries and stocks fell sharply amid those self-same concerns.

The Odd Throuple

The combination of conflicting comments and policies goals among President Trump, Besssent and Fed chair, Kevin Warsh, is exacerbating the unpredictable nature of this Administration’s economic plans.

Trump, wants to expand spending next year, including adding a half trillion dollars to the current one trillion dollar defense budget … deficits and debt be damned.

Kevin Warsh, the Fed chair, presumably, wants to reduce interest rates but could actually be outvoted to by other Fed officials who fear inflation and move to raise them instead, come the fall

And there’s Bessent, who wants to shave some basis points off long-term yields even if the Fed has to hike short-term rates … thus creating a flatter yield curve which, often, presages slower, not faster, growth.

That could create a potentially toxic brew of policies, all working at odds with one another, which would explain the reticence of investors to buy long-term U.S. bonds who view all these factors as fundamental and unwelcomne to the current state of the bond market.

The Return of the Rosy Scenario

When probed by CNBC’s, Sara Eisen, about how to reduce the nation’s annual deficits and gross national debt, the latter of which which crossed a record $40 trillion yesterday, Bessent fell back on Reagan era-supply side reasoning … that the U.S., aided by a much-anticipated AI productivity boom, will simply grow its way out of the problem.

Sadly, this is much easier said than done.

Annual deficits are running above either war-time or recessionary levels, as the debt continues to climb.

I used Claude to research just how fast the economy would need to grow just to stabilize America’s debt-to-GDP ratio and justify Bessent’s optimism.

Claude, citing a Wells Fargo analysis, illustrates what it wold take to ultimately flatten deficits and keep the debt to keep from growing beyond its current size:

Growth Rate Deficit as % of GDP Debt-to-GDP

1.6% (pessimistic) ~10% ~140%

2.1% (baseline) ~8% ~126%

2.6% (optimistic ~6.5% ~114%

3%+ (required to stabilize) flat ~120%

4.31% (deficit elimination) 0% declining

Bessent, when taking the job as Treasury Secretary, offered a plan to grow the economy by 3% per year, bring the deficit down to 3% of GDP and produce 3 million barrels of oil today.

Thus far, all of that seems to be an almost utopian view of where this economy is today and where it’s headed tomorrow.

A version of this kind of optimistic thinking during the Reagan years, when budget deficits were just beginning to expand, was referred to by President Reagan’s former OMB head, David Stockman, as a “rosy scenario.”

We’ve moved past the “Rosy Scenario” to the “Panglossian Paradigm.”

Even Voltiare wouldn’t vouch for his central character in Candide on this one.

“All is for the best in the best of all possible worlds,” proffered Dr. Pangloss.

Not today.

Until next time ….

It’s been a longer process than anticipated, with some interruption in a variety of services along the way.

Beginning in September, I’ll be publishing two reports a week and then when Wall Street returns from summer vacation … fully about two weeks after Labor Day, I’ll be adding new features to the site, as well … stay tuned.

And thank you for your patience and continued support!

On the Origin Of Specie

With apologies to Charles Darwin, Vice President Vance opined this week that he would prefer that the U.S. dollar NOT be the reserve currency of the world.

The evolution of this thinking leads him to believe that the dollar’s central role in the global economy hurts American manufacturing, as a relatively strong dollar makes U.S. goods more expensive in export markets.

That’s true … up to a point as quality goods find their markets, often irrespective of just one factor like exchange rates.

Further, a steady to stronger dollar dampens inflationary pressures at home … for the most part.

Additionally, he noted that the dollar’s strength encourages U.S. consumers to spend more, rather than save.

I’m assuming he’s talking about American’s appetite for cheaper foreign imports, the result of globalization which both he, and President Trump, oppose.

Weaker foreign currencies make imports less expensive than good manufactured at home … again … not the sole factor in consumer decision-making.

But here’s the problem.

With the U.S. dollar having obtained and continuing to maintain the status of the world’s reserve currency, it allows the U.S. to issue debt denominated its own money, something few, if any, other countries can do.

Why is this important?

Because, should the dollar de devalued, something Vance and President Trump appear to desire, the cost of funding our external debt would go up as the dollar is declines in value.

In addition, foreign holders of bonds, who see the value of their treasuries being inflated away, might dump both their treasury securities and the dollar simultaneously, creating a run on both.

This is a dangerous game the V.P. is contemplating, especially if the U.S. attempts this unilaterally and not in coordination with our trading partners and other allies.

It’s a dangerous and disadvantageous game to play with our money.

The Recent History of Currency Crises

Think of the Asian Currency Crisis in 1997 or Russia’s ruble devaluation and subsequent debt default in 1998.

Add to that the myriad other currencies crises that have hit Latin America and Africa in decades past.

As currencies collapsed, in some cases by 50% or more, the countries in question watched their external debt burdens double, forcing all manner of “shock therapies” imposed on their economies in an effort to right size their external deficits while stoking both inflation and recession at the same time.

The dollar’s reserve status affords the U.S. more global economic power, and a unique position at the center of global finance, a position the U.S. should not willy-nilly give away, as it has taken nearly the country’s entire history to enjoy such status.

At the height of the British Empire the Pound Sterling was the world’s reserve currency which allowed Great Britain to dominate global finance until the Empire splintered after World War II.

Voluntarily giving up that status may well make it harder for the U.S. to borrow funds abroad and, arguably, deter U.S. consumers from engaging in conspicuous consumption, the latter of which the V.P. appears to desire.

But this would hurt the very people that Vance, a self-declared champion of the common man, has proclaimed he has wanted to help.

So far, tariffs and other protectionist measures, and this would be another, would make life far less comfortable for middle and lower income consumers by risking an economic crisis that would affect them most.

Is There and Earnings Bubble?

Second quarter earnings among the S&P 500 have been, simply put, spectacular.

Earnings among the nearly 90% of companies reporting to date are up 50%, while roughly 86% of companies beat profit estimates.

Even without Amazon and Alphabet (Google’s parent company), which boosted profits substantially, S&P profits were up 32%.

Amazon and Alphabet’s profits were inflated by as yet unrealized paper investment gains that were not a result of continuing operations … so there’s a bit of an asterisk there.

Additionally, while eight of ten sectors also beat expectations, there were other factors boosting profits.

Tariff refunds added to the bottom line of companies who reaped over $100 billion of givebacks from the government, while immediate expensing and bonus depreciation from the One Big Beautiful Bill also boosted second quarter profits, on an accounting basis.

The net effect was to lower price earnings ratios of recently richly valued companies as earnings rose faster than prices, making stocks cheaper than they have appeared for the last couple years.

When E goes up more than P, multiples fall and make stocks less expensive on a “P/E” basis.

The question around all this is pretty simple, is this surge in profits both repeatable for the remainder of 2026 and also durable beyond this year.

As frequently stated here, most every other valuation measure of the market, and every other behavioral feature from Wall Street to Main Street, appear closer to a top than a bottom, all else being equal.

If the economy remains resilient, AI investments continue to expand and high-end consumers continue to spend, then the answer is yes.

if something gets in the way of those factors, the market is in for a shock.

From CDOs to CCO’s

The latest wrinkle added to what appears, to me anyway, speculative froth in the market is the creation of asset-backed securities collateralized by Nvidia computer chips.

In a truly breathtaking roundtable on CNBC last week, Nvidia CEO, Jensen Huang, and the leaders of six major asset managers, from Blackrock and Brookfield and from Blackstone to Apollo, joined together to announce an effort to raise another $500 billion to expedite and accelerate the buildout of additional AI infrastructure.

These “Collateralized Chip Obligations,” (CCOs) as I call them, are not-so-cautiously reminiscent of the Collateralized Debt Obligations (CDOs) that were at the root of the Great Financial Crisis in 2008.

These CCO’s use the monthly rental prices of Nvidia chips as the base of the calculation to value these engineered securities and assume that rents will remain stable or increase over time, creating a new asset class that allows investors another vehicle through which to reap the rewards of this new technological revolution.

It also aims to quiet critics of the so-called “circular financing” in which major tech players are buying and selling equal amounts of products and/or services to one another and counting the exchange as revenue.

One of the main concerns around these soon-to-be issued CCCOs is the fact that all computer chips lose value over time as new chips replace them and wear and tear reduces their performance capabilities.

*I’ve already discussed the other risks building among giant tech companies … the use of off-balance sheet financing to disguise the amount of debt they are using to finance the AI buildout … (currently estimated at $1.65 trillion).

Just Another Asset Class

Nvidia & company, however, argue that these are much more like traditional asset-backed securities that are packaged and sold to investors which use auto loans, credit card receivables, heavy machinery or other financial or physical assets as collateral for securitized investments.

They are also arguing that the chips, which are presumed to depreciate in value in 3-5 years, have a much longer useful shelf life and, thus, are solid backing for the financial engineering of AI infrastructure development.

Bloomberg reported this week that the sale of these securities has gotten off to something of a slow start as investors are somewhat skeptical that the AI boom, like the housing boom before it, won’t result in some sort of doom loop of over-investment and, ultimately, underperformance of said packaged securities.

From Billions to Trillions

Unlike the housing bust, $500 billion in securitized computer chip rental revenue is not, by itself, enough to topple the economy in the same manner that the collapse of trillions of dollars worth of CDOs did 18 years ago.

But, as was the case with real estate, CCOs assume no loss of value over the maturity of these investments despite the risks that cheaper chips from places like China could one day flood the market and drive down “rents” of the securitized chips.

Photonic chips, which use light rather than electrons, may soon compete with today’s dominant chips, offering more speed, less energy consumption and more power … factors that adversely affect the value of today’s most commonly used semiconductors.

Some of these CCOs are being marketed to institutional investors and some may make their way into retail pipelines.

So even individual investors may get a chance to buy some of these bonds.

For the sake of irony, I asked Gemini, Google’s AI tool, to assess the risks of chip-backed bonds.

Here’s what AI had to say:

⚠️ The Core Risks of Compute Bonds

1. Rapid Hardware Obsolescence & Depreciation

Unlike a house, which historically appreciates, computer chips suffer aggressive physical and technological depreciation. If Nvidia launches a significantly faster architecture (e.g., transitioning from Blackwell to next-generation chips), older GPUs still serving as collateral will lose their rental and resale value practically overnight. If an AI startup defaults, a bank cannot easily liquidate obsolete chips to recover the full loan value. [1, 2, 3, 4, 5]

2. Illiquid Secondary Markets & “Shadow” Guarantees

If a borrower defaults, there is currently no deep secondary market for used enterprise-grade AI clusters. To make these bonds attractive, Nvidia provides Residual Value Guarantees (RVGs), backstopping up to 25% of the loan value. However, bond traders warn that this creates a highly interconnected network of off-balance-sheet “shadow” liabilities. A widespread systemic crash in AI cloud startups could trigger domino-effect default claims directly back onto Nvidia. [1, 2, 3, 4, 5]

3. Geopolitical and Supply Chain Shocks

The global AI hardware ecosystem is intensely concentrated. Analysts warn that if geopolitical tensions shift, or if foreign competitors flood the global market with low-cost, alternative computing chips, the premium pricing power of existing Nvidia hardware would dissolve. This would instantly crash the underlying value of the collateral backing the debt. [1, 2]

4. The “Telecom Bubble” Demand Analogy

There is a fundamental risk that current AI infrastructure demand is being artificially pulled forward by easy credit. If the software companies renting these GPUs fail to generate sustainable revenue from end-users, venture capital funding for AI cloud providers will dry up. This echoes the late-1990s telecom boom, where billions in debt were raised to lay fiber-optic cables that ultimately sat unused when the internet economy didn’t scale as fast as the infrastructure. [1, 2]

Ironic that both human and artificial intelligence arrived at the same conclusions.

In short, caveat emptor should a bond salesman come a callin’.

Until next time …

Treasury Secretary, Scott Bessent, hurled an insult at one of my brethren, the Wall Street Journal’s, Nick Timaros, but also impugned the work of many of my colleagues who work tirelessly to help Wall Street and Main Street better understand the policies and inner workings of the nation’s central bank.

For no good reason, Bessent asserted the following this week:

“One of the highlights of the Warsh Fed has been watching stenographers posing as journalists, like the WSJ’s Nick Timiraos, reduced to reporting Fed backroom gossip because they’re incapable of performing real economic or monetary policy analysis without being spoon-fed.”

Having covered the Fed for 10 years myself, visiting the central bank several times a year for off-the-record meetings with everyone from the late Alan Greenspan to Ben Bernanke, Larry Meyer, Alan Blinder and others, covering the Fed is not a job for mere stenographers.

It requires not just taking copious notes of Fed news conferences but building a deep knowledge of how the Fed sets policy, how the “fractional reserve” banking system works, how policy affects markets and the overall economy, and how decision-makers arrive at their conclusions about economic growth, inflation, unemployment and, this is extremely important, how they deal with all too frequent shocks to the economic system.

It’s no easy task and I applaud not just Nick’s work but, most certainly, the outstanding work of my colleague Steve Liesman, a Pulitzer Prize-winning reporter, and the others who have had the difficult job of covering the central bank going back to the Volcker days, from John Berry to Jerry Seib, David Wessel, Greg Ip, Jon Hilsenrath and myriad others who do their damndest to get it right and share important information with those who need it most.

It’s ironic to note that Bessent accuses those who cover the Fed as being “spoon-fed,” when his hedge fund, when not operating under the tutelage and umbrella of legends, George Soros and Stan Druckenmiller, fell from $5.1 billion in assets under management in 2017 to $577 million.

People who, themselves, are spoon fed should not throw utensils.

The Secrets of the Temple

Back when I began covering business and economic news in 1984, the Fed was far from transparent.

“Fed Watchers,” as they were called then, divined policy changes from a wide variety of market-based signals, daily additions or subtractions of liquidity to the money markets by the Fed, newspaper leaks from inside the central bank and other forms of divination that made it very hard to understand what the Fed was up to.

So much so that it led Rolling Stone correspondent, William Greider, to pen “The Secrets of the Temple: How the Federal Reserve Runs the Country.”

A bit overwrought, but it was in response to the veil of secrecy behind which the Fed operated until Alan Greenspan took over and, slowly, began to offer more public explanations of Fed policy.

Glasnost at the Fed continued to expand under Ben Bernanke, Janet Yellen and Jay Powell, offering both Wall Street and Main Street a more vivid picture of not only what the Fed does but how and why it does it.

It appears that Kevin Warsh wants to go back to the future, to put it mildly.

As new Fed chair, Warsh, appears to be moving to make the Fed less transparent, getting rid of so-called forward guidance, the process by which the Fed signals the direction in which future policy is headed.

He also seems keen on reducing the number of speeches given by the chair and other Fed officials, and, quite possibly and much more important, reducing the number of policy-setting meetings undertaken by the Fed.

Such a move will have investors and consumers guessing as to the Fed’s next move for a much longer time than is currently the practice.

Those who cover the Fed will be forced to going back to reading the tea leaves of Fed open market operations, the weekly increases, or decreases, in the size of the money supply and obtain news from Fed members who are willing to leak information from inside the Temple to bolster their points of view without being named … the very anonymous sourcing Bessent is criticizing.

In other words, we go back to the days when the Fed told us little to nothing and kept markets guessing about policy changes in rates, or other actions, until they were confirmed well after the fact.

The Temple Sequel

Kevin Warsh’s second news conference was an unwieldy affair, to say the least.

He avoided answering pointed questions from reporters, failed to offer any insights into the Fed’s future policy-setting goals, or processes, and used the word, “remit” an ungodly number of times.

He has been criticized by former Fed officials and economists for obfuscating and failing to clarify the rules around which he hopes to base Fed policies going forward.

Some have suggested his lack of clarity indicates that he retains the desire to lower rates while simultaneously committing to reducing inflation to the Fed’s 2% target, the latter of which would require raising them.

This brings to mind F. Scott Fitzgerald’s famous quote that “The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.”

We’ll soon see if he can.

And, this may well be the underpinning of Warsh’s biggest economic and political challenges.

The Good Family Fight

It appears a growing number of current Fed officials are increasingly open to raising rates as inflation remains stuck around 3%.

It also appears they would rather do it now than be forced to raise rates more aggressively later if inflation should accelerate further.

This is leading to quite an interesting dynamic.

What will happen if a brand new chairman is outvoted by the Fed’s policy-setting arm this early in his term?

Will it render him less potent and will it lead to the displeasure of the President at whose pleasure he serves? (at lest sort of).

Warsh’s contention that there will be “good family fights” at the Fed could turn into estrangement among its members and the type of familial dysfunction that leads to less than optimum outcomes or, worse, a series of grave policy errors.

Political problems could ensue, as mentioned above, if Warsh cannot get rates down as President Trump has openly campaigned for him to do.

The Wall Street Journal reported this week that Trump has called Warsh numerous times since he ascended to the chair, something past presidents, at least since Nixon left office, have been loathe to do for fear of appearing to politicize monetary policy.

If nothing else, the coming reduction in transparency at the Fed, the reliance on leaks by disaffected members to air their views, or grievances, and the reduction in the number of policy-setting meetings (should that come to pass) suggests the Fed is about to make financial markets and the overall economy more volatile, less predictable and, perhaps, less stable that anytime since the 1970s.

Pressure from the President could make it even more so.

Let’s hope not …

Reporters may no longer be “spoon-fed,” as Bessent suggests but the economy may, instead may now be staring at the sharp end of a knife.

Until next time …

Three members, nicknamed as the “Heartland Hawks,’ as my colleague Steve Liesman noted on CNBC, voted to raise rates today, given that inflation, no matter how it’s measured, remains uncomformably above the Fed’s stated 2% target.

Chairman Warsh, in his subsequent news conference, reiterated the Fed’s rock-solid commitment to bringing inflation down to that target.

That, understandably, led to questions, from at least two journalists, as to why the Fed is waiting to raise rates if the commitment to “price stability” is baked in.

Warsh noted that the bond market had already tightened financial conditions, as both short and long-term interest rates have risen, since the last FOMC meeting, doing some of the Fed’s work for it.

To me that was an unconvincing remark, especially since the market tightened further after the news conference was over, with the yield on the 10-year note jumping to just a whisper below 4.7%, while the 30-year Treasury bond hit 5.22%, its highest level since 2007.

Oh yeah, and the Dow suffered its biggest decline since April of 2025 (“Liberation Day Tariff Debacle), while the S&P dropped 1.5% and the NASDAQ, which briefly popped into positive territory after the decision, slid 1.74%.

Markets are growing nervous over the new uncertainties about how this Fed will operate, although concerns about another imminent bombing of Iran tonight and the crash in the chip-heavy South Korean market also added to the selling pressure.

The Message of the Markets

What was confounding to me was Warsh’s assertion that the Fed is listening to the “message of the markets” (yes I wrote a book with that title) but went on to add that market signals can oftentimes be difficult to interpret … not a particularly comforting thought when the Fed’s so-called “reaction function,” its response to changes in the economy and subsequent response by markets themselves, requires a solid read of the market’s signaling capabilities.

There was some curious gobbledygook about reducing the number of news conferences and eliminating “forward guidance” on which the markets, businesses and consumers have come to rely.

We are all coming to the very true realization that a major reordering of how interest rate policy is set and conveyed is about to go through a notable change, perhaps to our detriment.

What it means to me is a less transparent Fed and a chairman who is talking the talk on inflation but probably doesn’t want to walk the walk … as intimated to me by two prominent economists with whom I had private exchanges.

The Coming Productivity Miracle

Warsh is expecting that the surge in AI investments, from the buildout of data centers, to the ever-increasing expenditures on expensive computer chips and software, to lead to a productivity surge in the economy which, he believes, will be disinflationary.

That may, or may not, be true in the long-run.

In the short-run, demand for these centers is rapidly pushing up the cost of “compute” (I hate this new jargon that comes with each new tech cycle!).

The price of GPUs, CPUs, TPUs, NPUs, DRAMs and HBMs are surging as much as 300%, increasing the cost of data center construction hurting the hypescalers but boosting the fortunes of chipmakers.

Electricity costs are rising as a result of the pull on the grid, while technology costs are increasing more broadly, a form of consumer inflation we’ve not seen in prior cycles as input costs rise for desktops, laptops, iPhones and other products.

The real question here is whether all the investment will yield so much powerful new “inference,” credible and reliable responses to your AI queries, and deliver enough revenue and profit from the sale of that “intelligence,” that the multi-trillion investments being made will be worth the effort.

We simply don’t know … certainly not yet.

Every tech boom has led to over-investment and a subsequent “repricing,” to put it mildly, be it in railroads, automobiles, electronics, computers, the internet and, just as likely, artificial intelligence.

Coming Full Circle

Amid these questions, Wall Street has begun to cast some doubt on whether revenues and profits will live up to the hype or whether there will be some casualties along the way … companies which have overspent and may one day underdeliver.

Major technology companies, the so-called AI “hyperscalers” literally plan to spend trillions of dollars on this buildout, financing it with a combination of cash, equity and debt.

But a funny thing has happened on the way to the AI Quorum.

*Big AI players are now vastly underperforming the S&P 500.

*Software stocks have fallen on hard times though they have rebounded from their lows earlier this year.

*Chip stocks have begun to crumble after a parabolic move upward.

Investors have begun taking steps to protect themselves from a 1999 or 2008 scenario.

The price of Credit Default Swaps (CDS) are surging on household names with AAA credit ratings and on some with lesser reliability.

The South Poll

Meanwhile, across the world, another warning sign is beginning to worry investors.

After shooting up more than 100% in the first six months of the year, and 76% last year, South Korea’s market, the best performing market in the world, is heading southbound.

The South Korean market, represented by the KOSPI Composite, has crashed.

And even more insanely, over 50% of the KOSPI’s market capitalization is comprised of only two chip stocks … Samsung and SK Hynix.

So, far the reverberations have been felt mostly in chip stocks … but Asian markets, save for Japan, are underperforming the rest world by a wide margin.

Burying the Lede!

As noted above, this bears repeating!

*Credit Default Swaps (CDS) on a variety of big spenders in the space are blowing out.

This, to me, is the single most worrying development in the markets.

Some analysts, traders and money managers are suggesting that investors are using these instruments simply to hedge their exposure to AI-related tech companies.

But Credit Default Swaps, (CDS) historically, have been used to hedge against the risk of a company, quite literally, defaulting on its debt.

Some say that it’s inconceivable that these behemoths would ever default … I heard that in 2007 too, by the way and look how that worked out.

So, I did a little digging, via Gemini, on how much debt major technology companies are carrying … both on and off their balance sheets.

Here is the troubling truth of how much is being borrowed to build out AI capacity.

“Five major tech giants—Alphabet, Amazon, Meta, Microsoft, and Oracle—hold an estimated $1.65 trillion in off-balance-sheet commitments and hidden debt driven by AI infrastructure, surpassing the $1.35 trillion they officially report on their balance sheets.”

Scale by Company

• Meta: Carries approximately $420 billion in off-balance-sheet debt (nearly triple its recorded debt), including a $27 billion joint-venture/SPV project in Louisiana backed by Blue Owl Capital. [1, 2, 3, 4, 5]

• Oracle: Accumulates roughly $273.3 billion in hidden liabilities—a 30-fold jump over four years—largely tied to massive data center buildouts. [1, 2]

• Alphabet, Amazon, and Microsoft: Account for the remaining balance of the $1.65 trillion aggregate through multi-year data center leases, joint ventures, and GPU supply contracts.

Total debt of $3 trillion, to date, as these companies are also, on a net basis, burning through the entirety of their free cash flows (FCF) today and going forward.

Some may raise more debt, or sell more equity, to keep the perpetual motion machine going.

After the close Wednesday, shares of Meta tumbled on an earnings miss and on word it is raising the floor on how much it plans to spend on AI going forward, another sign Wall Street is reaching the limits of its patience with respect to the ever-increasing spend

Returns are going to have to be astronomical if all this can be financed and deliver ever larger revenues and profits in order to benefit shareholders at the same time.

I don’t doubt the coming power of AI to disrupt this economy and create, as yet, unimagined opportunities.

But, should the companies building so-called expensive “frontier models” be displaced by inexpensive, open-source competitors, the tech sector may be facing its own Great Financial Crisis, failing to cover the spread, as it were, and creating a cascade of companies falling on hard times.

This could all be either triggered or, exacerbated, by a less friendly Fed, hot wars in Eastern Europe and the Middle East, and/or an inability of a heavily indebted government to do a damn thing about it.

It seems doubtful, IMHO, that this scenario is being seriously contemplated in Silicon Valley, on most of Wall Street and, most certainly, not in the nation’s capital.

I sincerely hope I’m wrong.

But there are myriad canaries flying in the coal mines. They haven’t fallen to the ground quite yet.

But no one seems to hear the increasingly faint fluttering of their wings.

Until next time …

I am entirely perplexed by the state of the financial markets and the resilience of the U.S. economy.

Despite the most recent 10 days of bombing Iran and retaliatory strikes by Tehran; the Houthis threatening to cut off additional shipping routes for oil from the Middle East, oil prices rebounding $85 per barrel; President Trump threatening 50% tariffs on Canadian goods and the U.S. Trade Representative promising a new round of global tariffs, the stock market keeps going up with only occasional interruption.

Add to that the extraordinary volatility in AI and computer chip stocks and I am scratching my head over a market where the S&P 500 is up over 9% YTD, the NASDAQ is up 11%, chip stocks are up 73% and oil stocks are up 25%!

Oh, and we have a new Federal Reserve chair who is promising large-scale changes in the setting of interest rate policy.

To be honest, I have no idea what to make of it all.

Talking to a billionaire investor the other night, he noted that if I had told him at the beginning of this year that all this would happen, including an intensifying war between Ukraine and Russia to boot, he would have assumed the market would be down 50%.

Instead, the major averages look just fine and he noted that the U.S. market and economy have both proven themselves to be quite resilient, despite everything being thrown at them from everywhere … all at once!

Even the volatility index, or VIX, sits at 17 … a very comfortable level showing very little investor fear of a stock market drop.

Add to that the fact that interest rates and the dollar are range-bound, for the most part.

But … but … but …

Despite the relative calm in the market, I can’t help but notice the continuing build-up of yellow flags that have historically, at least, presaged either a meaningful correction, or significant top in the market.

Valuations, by important measures, are quite lofty …

Retail investors are speculating with reckless abandon … whether using margin debt, leveraged Exchange Traded Funds (ETFs) or speculation in stock options relative to other global markets.

Add to that the record concentration of technology stocks dominating the S&P 500 and computer chip stocks becoming even more dominant, as as single sector, within the major averages, as well …

Tech has also dominated the stunning rise in corporate profits, as well, though it should be noted that financial companies, industrials and several other sectors are profiting handsomely, as well.

In the past, of course, these have all been warning signs that the market has gotten frothy, at best, bubblicious, at worst.

Even overseas investors, often late to the party, have been throwing money at the U.S. market …

So, that’s what is keeping me up at night.

But come tomorrow, I’ll highlight what’s right with the U.S. market and a lot of it has to do with the profit potential of American companies which continue to score record results in spite of everything mentioned above!

Until tomorrow …

The last time this happened was 1997 when the value of assets owned by U.S. investors topped the value of their homes.

I remember the day quite well because I was live on CNBC when the headline crossed, citing Federal Reserve data showing that shift in the relative value of household assets.

I also remember I jumbled my words when reading the headline noting that “asshold housetts” were in flux.

Needless to say, I received a series of computer messages from my colleagues asking if I said what they thought I said.

Such are the risks of ad libbing news as it comes across tape.

Seriously, though, there are only three occasions in which this occurred in modern market history.

Third Time’s a Charm?

The first time was in 1968 at the peak of the so-called “go-go” era of mutual fund investing.

Mutual fund titans, like Peter Lynch at Fidelity and Gerry Tsai at The Manhattan Fund, were becoming Wall Street legends as Americans switched from more conservative investments into rapidly appreciating mutual funds.

Names like Xerox, Polaroid and Avon were the so-called “glamour stocks” of their day.

While the mania actually peaked in 1966, the first time the Dow touched 1,000, equity ownership did not peak until two years later, only to be followed by a savage bear market that wiped out most of the bull market gains of the prior years.

The 18-month bear market that began in 1969 drove the S&P 500 down 34%, peak-to-trough, before the bull market resumed in 1970.

The 1990s Comparison Returns

Similarly, in 1997, the value of stocks owned by American households exceeded their real estate holdings just as we approached the peak of the internet bubble.

Obviously, the bull market in technology lasted until the year 2000, aided in large part by easier Fed policies in the wake of the Asian Currency Crisis in 1997 and subsequent rate cuts in 1998 after the collapse of Long-Term Capital, the product of highly leveraged bets that were unwound when Russia defaulted on its external debt and devalued its currency.

While the market swooned during that crisis, the “bailout” of LTCM, cleared the way, via lower interest rates, for the market to soar for another 18 months fueling the speculative fever in internet and telecom stocks, in particular, before the bubble burst early in Y2K.

That was Then

It’s been almost 30 years since we’ve witnessed peak stock owndership, as it was 30 years between the peaks of the 1960s and 1990s.

We just, again, reached a similar cross-over in recent weeks where household exposure to stocks exceeds the value of the real estate holdings … an amazing fact since real estate prices are also at a peak and have, like the stock market, gone parabolic in a post-pandemic world.

The new record also corresponds with record stock market valuation, as measured by the “Cyclically Adjusted Price/Earnings Ratio (CAPE), suggesting a yellow caution flag is flying.

Home may be where the heart is, but Wall Street is where the wallet resides.

At least for now.

The World is Not Enough

Domestic issues, of course, are of principal concern to U.S. investors, but it’s also important to note that the U.S. market is setting records around the world.

The value of the U.S. stock market accounts for almost half of the world’s total market capitalization.

That’s new.

There’s some good news embedded in that, though there should be some caution about the massive valuation difference between the U.S. market and the rest of the world.

As seen above, the “Mag 7,” alone, have a greater market value than China, the second-largest equity market in the world.

Once again, the last time the U.S. market was equal to, or greater than 50% of total global market cap was, I’m sure you guessed it, the year 2000.

The good news, at least for now, is that the U.S. is also printing millionaires faster than any other country on the planet.

That U.S. figure means 7% of the U.S. population can claim a seven-figure net worth.

That, by the way, has never, ever, happened before!

Here’s hoping that, at this theoretically late stage of the bull market, they can hold on to those once-in-a-lifetime gains.

KOS-Playing

I’ve been keeping a very close eye on the South Korean market which has been the best performing market in the world, both this year and last.

As recently discussed, the KOSPI Composite Index, at the midpoint of 2026 was up more than 100% after a 75% gain in 2025.

Of late, that market, not surprisingly, has corrected 26% from its peak.

It fell nearly 9% on Monday with SK Hynix, along with Samsung, is one South Korea’s most prominent computer chip makers, falling over 15%.

Samsung fell 10%, as well.

You’ll no doubt recall that SK Hynix just listed its American Depositary Receipts (ADRs) in the U.S. on Friday.

The ADRs are down nearly 5% today after soaring in their U.S. debut on Friday.

In any market, a decline of more than 20% is traditionally defined as a bear market. But the time period in which the KOSPI has fallen so far, so fast, doesn’t fully meet the criteria of a full on bear.

Typically, a bear market also lasts for 12-18 months, according to market analysts, so this market is being tested to determine if this is merely a large correction after a nearly unprecedented run, or the beginning of something much more ominous.

This Korean canary in the coal mine may well dictate the direction of U.S. chip stocks, as well, if the declines should continue, unabated, from here.

We’re Back on Fed Watch

With Consumer and Producer Price reports coming out on Tuesday and Wednesday, this key inflation data may well determine what the Federal Reserve does at its next policy-setting meeting on July 28th and 29th.

Interestingly, both CPI and PPI are expected to decline by 0.2% each thanks, largely, to the big drop in energy prices since the peak of hostilities between the U.S. and Iran … when oil approached $120 per barrel.

Oil fell into the 60s recently, but with a battle now raging over the Strait of Hormuz, oil has rebounded in the U.S. to $74 per barrel while Brent Crude in London is back above $79.

Gasoline prices have come down as well, but not to pre-war levels, while other prices have remained relatively sticky, in both goods and services.

The Fed, and its new chairman Kevin Warsh, has a bit of a dilemma, acknowledging that falling energy prices have taken some pressure off the consumer, which is good news on the affordability front, or, instead, focusing in on the underlying rate of inflation which remains above the Fed’s stated 2% target.

Warsh has said he will not adjust that target upward while several officials, many of whom are speaking this week, have expressed concern that the Fed’s work in returning inflation to target has not been accomplished.

Most expect the Fed to leave rates unchanged at the end of the month.

Regime Change

In this new regime, will the Fed offer any hints of what’s to come or, as Warsh seems to desire, will the Fed fully eliminate its “forward guidance” and offer no clues as to what comes next.

While this will be the second decision over which Warsh presides, it is likely the first at which we will see how he wants to communicate with markets and consumers.

Hopefully, we’ll get a clear, concise view of what’s next at the Fed.

If not, expect market volatility to reach across stocks, bonds, commodities and the dollar.

Should be fun.

Until next time …

They were up over 100%, but have pulled back in recent weeks.

Interestingly, the good news from Wall Street has not brought smiles to the faces of everyone on Main Street.

While Americans are getting a break from the 40% decline in oil prices from the peak, hit at the height of the Iran war, and a coincident drop in gasoline prices, they are still grappling with inflation that remains too high, a job market that appears to be slowing and an uneven economy that is benefitting the wealthy far more than the average Joe or Jane.

Jobs, Jobs, Jobs

Thursday’s release of the June unemployment report spoke to this issue directly, as the economy created 57,000 jobs, less than half of what economists expected.

Further, the prior two months job gains were revised downward.

Perhaps more important, the labor force shrank by over 700,000 individuals, pushing the labor force participation rate down to 61.5% which, outside of the pandemic, is the lowest participation rate since 1976.

The gains in jobs growth, since 2024, have been concentrated largely in health care and support services, home care and the like, and, to a lesser extent, private eduction.

As this chart shows, without growth in those sectors, the U.S. economy would have shed jobs over the last two years.

To add insult to injury, wages, included in the employment report, are growing more slowly than inflation, meaning the purchasing power of American salaries is declining and making it much harder for middle and lower-income individuals to make ends meet.

This phenomenon has been quite pronounced since the start of the war with Iran.

The drop in gasoline prices may help ease that pain, but inflationary pressures are moving beyond just energy … beef, and other grocery prices, are going up rapidly while the cost of services are also advancing, offsetting any improvements in energy costs.

Income and Wealth Inequality Persists

Amid the on-going bull market in stocks and lofty home prices, giving some the comfort of a large equity cushion, that comfort, in this “K-shaped economy” is supporting only a precious few, both in terms of income distribution and by generation.

That income and wealth disparity is having an impact on the real economy, as the top 20% of all wage earners account for the great bulk of consumer spending, one of two key props holding up the economy, along with spending on AI infrastructure.

And while the spending on data centers and AI infrastructure, more broadly, is also supporting economic growth, that spending is “crowding out” investment in other areas which are, critically, in short supply, like housing.

It is no wonder why there is a persistent and wide gap between the succession of record highs we see on Wall Street and the dour mood among consumers on Main Street.

It is true that consumer confidence has rebounded a bit since oil and gasoline prices have dropped, but there are longer-term structural issues in the economy that need to be addressed for there to be a more shared prosperity than exists today.

We have yet to see any enlightened proposals emerge from Washington.

I would recommend a book by Oliver Libby, a venture capitalist and, yes, largely a supporter of Democrats, but in his book, “Strong Floor, No Ceiling,” he lays out a practical and pragmatic vision for restoring the American Dream where he takes good ideas from wherever they originate.

Such an approach should play a critical role in policymaking in the future.

If the market takes a dive, or AI spending dries up, the U.S. economy, already dealing with a mini-stagflation of sorts, (inflation that’s too high and a labor market that is in danger of weakening) we’ll need some new ideas to solve economic problems with the surging national debt limiting the government’s options to “prime the pump,” and a Federal Reserve whose future policy decisions may become more opaque and less helpful to the cause.

The Enlightenment should not have been just a one-time intellectual event that helped give birth to our nation 250 years ago.

We need a little more enlightenment today as we celebrate this milestone 4th of July.

Until next time …

Since 2010, there have been only two negative July’s … back in 2011 at the depths of the European debt crisis, led by major fiscal problems in Greece … and then again in 2014 when the Fed curtailed its bond-buying program for a time and amid a so-called “flash crash” in Treasuries that rattled markets that month.

That was Then

Back to the present … the second quarter gains were led largely by semiconductor stocks, especially Micron, which surged during the period, as a shortage of memory and other chips critical to the AI buildup pushed up semiconductor prices and dramatically boosted profits.

You can see just how much semis outperformed, not just the S&P 500 but the Mag 7, as well, which, ironically, struggled mightily in the quarter amid worries about overspending on Capex.

In addition, the concentration of of information technology has now achieved the highest weighting of any industry group in just over 50 years.

This all comes as speculative activity, as I have mentioned ad nauseam, continues to climb as investors and traders use more and more margin debt (borrowed money) and levered ETFs to make bets on ever-rising prices for IT.

This comes as equity financing costs are rising … that could spell a little trouble for highly leveraged traders should the market encounter its frequent seasonal autumn swoon.

This year has already been a bit more volatile than markets of recent vintage, despite how quickly the VIX retreats after each pullback comes to an end.

Citadel Securities shows that there have been more down than up days this year as the geopolitical environment and coming changes at the Federal Reserve, among other uncertainties, have caused the market to gyrate all year long.

Earnings, of course, have been a big driver of the gains, however, the bulk of S&P profits are coming from AI and, tech more broadly, suggesting that there is some vulnerability to the market should any of the major tech companies disappoint with their 2nd quarter results … which start coming out early this month.

If there’s a big miss AND the Fed starts to move toward raising rates, given that inflation, despite falling expectations, remains sticky there would be a solid case for July to be the last up month before the August/September/October turmoil rears its ugly head, as it has in years gone by.

That could have a pronounced effect on Main Street, as we will show tomorrow, given the massive exposure that big income earners have to financial markets and how they support consumer spending in a very big way.

In the meantime, please review these charts.

I am not telling anyone to sell, as I often say, but given the risk of resumed war with Iran, higher interest rates and one big earnings miss … the ingredients for a little market mayhem may be in store come the fall.

Until tomorrow …

Of all the markets in the world, the gains over the last 18 months have been nothing short of astounding.

The KOSPI Composite Index, which gained 75% in 2025 and then more than doubled through Monday’s session, tumbled last night.

It fell 10% overnight, leading to the Tuesday sell-off in tech elsewhere in the world.

Semi-conductor stocks took the biggest hit with some the biggest names in the group declining double-digits at the time of this writing (around 2pm on June 23rd).

The South Korean government proposed taxing unrealized gains which helped lead to the sell-off, if it was not the outright cause of it.

The KOSPI, however, was extremely overbought and there was a great deal of speculative fervor in two chip names in particular, Samsung and SK Hynix.

Like the KOSPI, the Philadelphia Stock Exchange Semiconductor Index (SOX) has also gone “parabolic,” or vertical, a chart formation that is rarely sustainable, as we have warned on several different occasions.

The (SOX) was up 104% at its peak with less than half the year in the books before sliding more than 7% today.

The folks at BarChart point out that the SOX Index is the most “overbought” it has ever been, as the chart below illustrates.

There are many reasons for the surge in chip stocks of all kinds, from the GPUs that Nvidia produces to Intel’s CPUs or the Micron’s memory chips (Micron reports earnings on Wednesday btw).

All are essential to building out so-called “compute” capacity to power artificial intelligence tools.

Beyond that, however, has been a flurry of speculative activity in which investors and traders, both at home and in South Korea, used borrowed money (margin) to buy into the AI trade and toyed with so-called “levered ETFs,” Exchange Traded Funds that use borrowed funds to amplify daily gains, especially in that sector.

They, sadly, also amplify losses … an experience investors are struggling with today.

Position Squaring

To be clear about my position on the current state of the stock market, and on specific sectors that have enjoyed spectacular runs of late, I do not advocating selling out of individual positions or the market overall.

What I attempt to do is bring attention to episodic periods of excess so that investors and traders can protect hard-won gains, either through re-balancing one’s portfolio to minimize excess exposure to a single stock, sector or market index, or take other protective measure that mitigate losses.

There are a variety of strategies that can be used to do this and it is best to consult one’s financial advisor to find the most cost-effective form of protection for an individual portfolio, based on the many factors that determine how one’s investments should be structured.

Having said that, I also believe there are times when warnings about “irrational exuberance” to borrow an expression from the late Alan Greenspan are both important and useful, in order to bring awareness to periods in stock market history that are indicative of speculative excess as forewarned is forearmed.

It Is What It Is

I know it may get tiresome to hear warnings of impending doom about the performance of financial markets broadly and the stock market more specifically.

And, no doubt, the Tuesday sell-off may only be a blip in an on-going bull market.

But after 42 years of covering markets, today’s Wall Street action meets, or exceeds, the speculative excesses of other major market bubbles or manias that I’ve covered, studied or written about.

While it is undeniably true that AI is a transformative technology that, no doubt, will have a profound impact on how we work and live, it is also true that the investment in that technology has eclipsed any other investment cycle we’ve seen in U.S. market history.

Whether it was railroads, electricity, automobiles, radio, electronics, computers, the internet or even residential real estate, and the credit derivatives that were associated with it, the trillions of current and planned investment into AI infrastructure dwarfs anything that has come before.

It may well be necessary and, in the end, money well-spent. We’’ll see.

However, as we have learned from past experience, technological revolutions may live on and bear fruit, but the the stocks or bonds used to finance that investment have always met their terminal values well before the full potential of the revolution is realized.

That is not an opinion … that is a historical fact. Look at this …

And this …

There are those who argue that, unlike the internet bubble, companies today have real revenues and rapidly growing earnings.

That is true right now, but that same claim was made for the seemingly most stable, big companies of the internet era, as well.

Earnings for the S&P 500 companies are expected to grow by 23% going forward, more than double the average rate.

As this chart shows, earnings estimates appear to peak just before the market does and long before new technology indelibly affects our lives.

That earnings, though, growth may be more difficult to come by as some of the “hyperscalers” burn through their free cash flow (FCF) and borrow heavily as they plan to spend trillions on the buildout … meaning that that cash needs to be replaced with ever increasing revenues and profits, both to rebuild those balances and pay down debt.

We all wish them luck and good fortune.

See You on the Other Side

The flip side of all this is that even after bubble bursts, if that is indeed to come, there are always stocks to buy as investors rotate away from the objects of speculation to more traditional and stable options, as we saw in the wake of the .com bust.

To illustrate the point, I’m certain not everyone recalls the Cisco versus Sysco comparison in the year 2000.

Cisco Systems, one of the bellweather stocks of the internet boom, peaked at an intra-day high of $82 a share at the height of the internet bubble. The maker of routers and switichers had a peak market value of nearly $600 billion at the top.

It finished the year 2000, just below $25 per share and only recently took out its highs of Y2K.

Sysco, a wholesale food distributor, on the other hand, gained 56% in 2000, as investors moved into reliable, old and safe dividend paying stocks.

There’s always a bull market somewhere.

Transitory Transparency

Alan Greenspan, who sadly passed away this week at age 100, was the first Federal Reserve chairman to bring a degree of transparency to the decision-making process at the nation’s central bank.

While known for his purposeful obfuscations in testimonies before Congress, which many of us found quite amusing, he was also instrumental in laying the groundwork for a Federal Reserve that explained itself to the markets and the public at large.

Greenspan was somewhat sparing in his remarks, fully understanding his ability to move markets and alter business and consumer behavior, but his unlocking some of the “secrets of the temple” were indispensable to peeling back the curtain on how the Fed conducts policy.

I bring this up because his most recent successor, Kevin Warsh, seems intent on bringing the curtain back down on the Fed.

Warsh, in some ways rightly, frets that the Fed talks too much.

Federal Reserve governors and district Fed presidents often speak candidly without vetting their public comments within the walls of the Fed, as was often the case during Greenspan’s tenure, leading to confusion as to what’s coming next with respect to interest rate policy.

Ben Bernanke and Janet Yellen allowed for much greater freedom for Fed officials to speak independently while also creating new methods of communication, like post-decision news conferences and the Fed’s Summary of Economic Projections, a collection of forecasts from each Fed member that resulted in the so-called “dot plots” that often confused the market as to the future direction of Fed policy.

While Warsh appears to want to eliminate some of that noise, he may also be eliminating some of the signal in the process.

Clear communication from the Federal Reserve, both about its current decisions and its potential plans for the future need not remain confusing, though Warsh seems interested in forgoing “forward guidance,” the Fed’s policy of revealing its most likely future policy path which markets and companies use as a guide post to make future planning decisions.

I believe this to will prove to be a critical error, especially at a time when other areas of finance may become increasingly less transparent, as well.

Markets need guidance, from Fed policy-makers, to the White House and Congress and from corporate America too.

From the SEP to the SEC

The Securities and Exchange Commission has proposed a major rule change which, in my view, is not getting nearly enough attention in the financial press.

The SEC is exploring giving corporate America the ability to file earnings reports only twice a year instead of quarterly as has been the practice for decades.

While it has been argued that quarterly reports force companies to focus too much on short-term results and place a costly compliance burden on firms, quarterly reports also force companies to keep investors up-to-date on potentially meaningful shifts in their businesses and makes it much more difficult for them to hide bad news, as would semi-annual reporting.

When combined with less guidance from the Fed, I believe the combination of these two developments, should they come to pass, will greatly increase financial market volatility and lead to less favorable outcomes than the proponents are willing to acknowledge.

Investors should voice their concerns. You can never have too much information at your disposal, even if it appears a bit confusing in the short-run.

In the longer-run, we’re all better knowing more, not less, about the world around us.

The Maestro

I am deeply saddened by the passing of former Federal Reserve chairman, Alan Greenspan, whom I was privileged to know well during the period in which I covered the Fed at CNBC.

But that introduction I fully expected to be a one-off event.

Greenspan delivered his famous ‘irrational exuberance” speech on the evening of December 5th, 1996.

I was setting up to appear on Brian William’s 9pm show on MSNBC that night when Greenspan’s comments crossed the tape.

I told the team we had to discuss it during our planned segment as it would no doubt affect the markets the following morning.

The Dow fell 55 points (back when that meant something) or 2.3% the next morning and world markets also declined on Greenspan’s questioning of how sustainable recent gains would be.

Shortly thereafter, I rang his chief communications officer at the Fed and asked if I could meet with the chairman, as there was a vigorous debate among some of my colleagues and me as to whether Greenspan simply posed a question about that sustainability or whether he intended for the market to take it as something of a warning.

Greenspan approved the meeting and I became the first CNBC anchor or reporter to visit the Fed for an off-the-record meeting.

The chairman welcomed me and made a point to note that this, and any future meetings, would be strictly off the record, though he did allow me to settle the debate internally at CNBC after that first encounter.

He no doubt intended the markets to take heed of the comment and vetted the speech among Fed officials before giving it.

They all expected the markets to react. By how much they did not know.

Of course, the speech would become famous, first for its prescience and second because it was very early.

The market would rally for another three years, albeit with some very meaningful interruptions, before the internet bubble finally burst.

On a more personal note, as I continued my meetings with chairman Greenspan for nearly another decade … he was both generous with his time and patient with me as I worked to understand how the Fed functioned and what drove the decision-making process under his leadership.

I’d meet with other Fed officials while I was there, as well, getting a broad perspective on monetary policy, various crisis that emerged along the way and even be entertained, on occasion, by Greenspan’s extremely dry and wry sense of humor.

At one meeting, which came as I was buying a house, I asked him to cut rates by a half point. He said, “how about a full point, instead.” (He didn’t).

Crisis Management

The collapse of Long-Term Capital in 1998, a very large hedge fund that made some extraordinarily bad bets that were triggered by Russia’s debt default and currency depreciation, caught the mega-fund entirely flat-footed and rocked Wall Street.

LTCM was highly leveraged, filled to the gills with borrowed money from major banks, which it used to speculate on interest rate and currency movements that the entire banking system faced serious risks.

Many economists and some Fed officials wanted Greenspan to let LTCM fail, in an effort to teach speculators a lesson that the Fed was not there to bail out their mistakes, despite all the attendant risks to banks and the broader economy.

Greenspan disagreed.

I still can quote Greenspan from memory on this topic … and remember he was a unreconstructed free-marketeer for most of his life.

He said that, “In theory I agree. In practice, it’s not a social experiment I’m willing to undertake.”

He may have been an Ayn Rand libertarian at heart but he was a pragmatic chairman who once joined Bob Rubin and Larry Summers, after that debacle, on the cover of Time Magazine as the one who led the “committee to save the world.”

And for that moment, they did.

That is how I will remember him.

Rest in Peace, Maestro.

However, unlike most of his other predecessors, Warsh also promised major reforms at the Fed that could to lead to lower rates in the long run upending time-honored traditions at that venerable institution.

Before we get to all that, Warsh first appearance at the Fed chair’s podium did, indeed, lead to some surprises.

First, the hint of impending rate hikes and Warsh’s subsequent news conference, seemingly supporting that reality, shook the stock market, drove interest rates and the dollar up while gold and silver tumbled.

Warsh said that, first and foremost, that of the Fed’s two mandates, stable prices and maximizing employment, getting inflation back down to the Fed’s 2% target (stable prices) is taking priority over any other concern.

Warsh promised that the Fed’s primary directive, at least right now, is to do just that.

That was not expected by markets who had expected Warsh to give a nod to lingering inflationary pressures but also make a case that once the war-induced price shocks abated, rate cuts could be forthcoming.

12 Angry Feds

While Warsh sees ample room to dramatically alter the way in which the Federal Reserve makes decisions on interest rates, the twelve voting members of the Federal Open Market Committee, (FOMC) the Fed’s policy-setting arm, unanimously (including Warsh) voted to leave rates unchanged.

But many of them indicated a desire to raise interest rates judging from their forecasts of where rates need to be to tame inflation even if … and this is very important … energy prices continue to plunge as the U.S. and Iran end their war.

Nearly half of the voting members of the FOMC predicted at least one rate hike by the end of this year while an outlier penciled in three rate hikes before the Fed stops raising rates.

That may, or may not, be the base case but it shows where most Fed officials sit and the hefty boulder Warsh will be pushing uphill to make the case that, eventually, an AI-driven productivity boom will lead to disinflation and room for the Fed to cut rates.

Inflation Contagion

The reason those nearer-term rate hikes is so important is that inflation appears to have spread beyond energy prices and has further made its way into the cost of other goods and services, putting the Fed’s currently favored inflation gauge much closer to 4% than 2%.

Hence, Warsh’s very hawkish statement that the Fed needs to bring inflation down before doing anything else.

President Trump who doggedly derided Warsh’s predecessor, Jay Powell, for not cutting rates, and who is now back to being a governor at the Fed, said “whatever” when asked about the outcome of today’s meeting, adding that he still favors lower rates at some juncture.

It seemed the President was willing to tolerate today’s decision as it was Warsh’s first meeting as chair. Whether that remains the case if rates go up, rather than down, in the near future, will be yet another test of the Fed’s independence from political pressures.

And Now for Something Completely Different

Warsh’s news conference, following the Fed’s decision, was different than the others, as was the Fed’s statement released at 2pm EDT.

The statement was short and to the point, removing quite a bit of FedSpeak from the usual announcement.

Meanwhile, Warsh demurred on several questions posed to him and pointed to some big changes coming to the nation’s central bank before the year is out.

In his news conference, Warsh announced the planned formation of five different task forces that will examine how the Fed currently conducts itself and how that may change going forward.

The five task forces focus on the following:

1.) Communications

2.) The Size of the Fed’s Balance Sheet

3.) Productivity & Jobs

4.) Inflation Frameworks

5.) New Tech/AI Economic Implications

What It’s All About, Kevin?

Communications and Transparency

The task force on communications, it seems to me, will determine how the Fed communicates with other policy-makers, financial markets and the general public and, reading between the lines, will likely lead to the elimination of the post-meeting “Summary of Economic Projections” (SEP) put out by each member of the Fed, outlining their expectations for growth, inflation and interest rate moves.

Warsh has long held that the Fed talks too much, whether by using an array of forecasts known as “dot plots” that chart each member’s economic projections … which admittedly can be confusing to markets.

He, himself, did not plot anything out, indicating the dot plots may soon be forgot.

He also indicated that he might reduce the number of news conferences he holds.

Currently there’s one after each meeting.

Warsh says he may speak only when he has something important to say, a tip of the hat to both the Greenspan and Volcker Feds of days gone by where public commentary was limited to necessary communications only … for the most part.

Does Size Really Matter?

The size of the Fed’s balance sheet, for now stays the same, but Warsh has argued that the Fed’s purchases of treasury and mortgage bonds distort market prices and, sometimes, encourage riskier behavior by keeping liquidity far too ample.

I would disagree with him here.

The Fed’s balance sheet has already been shrunk significantly.

Further reductions could create a shortage of liquidity and harm the plumbing of the nation’s financial infrastructure at a time when any market mishap may only be one adverse headline away … a mishap that may force the Fed to inject large amounts of liquidity into the system to keep it functioning properly.

The Fed’s balance sheet, which was $800 billion before the Great Financial Crisis, forced the Fed to surge liquidity into a financial system that was on the brink of failure, as would the Covid pandemic 12 years later.

It was the start of a process that extended through the pandemic to radically boost the size of the balance sheet to keep the financial system from imploding and the economy from crashing

With the growth of financial institutions also exploding in recent years, reducing the Fed’s balance sheet would make the Fed smaller, in terms of assets, than the firms it regulates.

That could be a fatal flaw in the event of a future crisis if a too-small Fed could no longer be the facto “lender of last resort,” to much bigger institutions, leading to additional crises in the system that would require extraordinary all-of-government measures to counter.

Productivity, Jobs, AI and Automation

As for productivity and jobs, Warsh believes that AI and accompanying new technologies will lead to a disinflationary productivity boom, much as the internet did in Greenspan’s day, but there’s scant evidence of that yet and Greenspan also had other disinflationary forces at his back, from globalization to additional automation, free trade agreements, the collapse of labor unions and falling budget deficits.

The policy environment is far different today, save for that transformational technology wave, as protectionism, tariffs, de-globalization, demands for higher wages and surging deficits and debt at the federal level underpin an inflationary impulse.

It’s hard to imagine that inflation can move as low as it did in the 1990s with only a single factor working in its favor.

A New Model for a New Era?

Inflation frameworks refer to the Fed’s use of, in Warsh’s words, outdated economic models, less-than-timely indicators and some numbers that do not accurately capture the real world as it is experienced by real businesses and real consumers.

He has a point, but private sector models have yet to prove superior to government data so the burden on Warsh’s team of consultants will be to find better sources of information to assist in the Fed’s decision making.

Good luck.

All of this points to Warsh’s laudable goal to update how the Fed makes decisions with the hopes of making them better and more helpful.

But it also hints at his desire to find justification to lower rates at some juncture because he, personally, believes them to be higher than necessary.

Independence Day?

Warsh’s first day at the podium was smooth, especially because he didn’t take too many risks on decision day.

No doubt he will face some institutional inertia at the Fed as you might expect at any organization that, for good reason, is somewhat set in its ways.

Having said that Volcker, Greenspan, Bernanke, Yellen and Powell all, over time, gradually made the Fed’s work increasingly transparent and, for the most part, effective at achieving its dual mandate, though at times it fell short.

Warsh envisions more of a revolution, than evolution, in both substance and style.

The markets may revolt if policy changes are too drastic or too elastic.

What’s key here is whether the man will re-make the institution or the institution will re-make the man.

The answer to that usually results in the latter outcome.

This time, I’m not so sure.

Until next time …

Read more

I believe there are important parallels to some offerings in the past that should be quite instructive to the investors of today and tomorrow.

If you are not a subscriber and interested in this analysis, feel free to sign up.

Past is prologue … especially when new frontiers are being explored.

Regards,

Ron Insana

The bounce in tech, such as it was, was fairly modest as the Dow closed lower and the NASDAQ closed well off the day’s highs.

Market breadth was negative while Apple, rolling out new products and features at its Worldwide Developers Conference, closed almost 2% lower on the day.

Despite that, the market was also helped, to an extent, by a cessation of weekend missile fire directly between Israel and Iran although it remains uncertain as to how the conflict and cease-fire negotiations proceed from here.

Oil closed off its highs but ended above $91 per barrel, a small net positive for stocks.

Late in the day, however, various reports out of Iran denied U.S. talking points that any kind of long-term deal to end the conflict was near.

That, notwithstanding, President Trump said the U.S. will declare “total victory” over Iran in two weeks.

Halitosis

On a more technical note, the internal measures of market health are starting to reek of bad breadth.

And, that is not the stuff, usually, that rebounds are made of.

We’ve seen a number or new all-time highs in the S&P 500 while the number of stocks within the average going down was higher than the number of stocks going up.

Technical analysts call this a negative divergence which can, at times, be a prelude to a meaningful pullback in the market.

In addition, we’ve also seen a sizable percentage of S&P 500 stocks make new 52-week lows as the average was making new, all-time highs, again, a yellow caution flag in any on-going bull market.

Other technical measures show a market that is seriously overextended … moving substantially above key moving averages … the S&P, itself, is substantially above its 50-day moving average while fewer than 50% of individual stocks, within the average, are showing similar relative strength … another sign of internal deterioration.

The folks at Elliott Wave International, who use a special brand of technical analysis, points out that bullish sentiment is at extremes rarely seen …

Another sign of speculative excess is the amount of margin debt taken on by traders and investors which now totals about 4.3% of U.S. GDP … an all-time high!

Captain America Issues a Warning

Bank of America told clients on Monday to take profits and rotate some of their funds into “defensive stocks” … stocks that are both recession proof and, generally, more resistant to market downdrafts.

Specifically, BofA said that 17 of 20 market indicators they watch are flashing warning signs of an impending top including a high concentration of stocks accounting for most of the market’s gains and rich valuations for the averages overall.

Here’s a look at what they mean by that …

And only a handful of stocks account for the lion’s share of S&P profits.

It’s also safe to say that American households and non-profits are heavily overweight stocks in their portfolios relative to other asset classes.

Merrill strategist, Michael Hartnett, also warned that this Consumer Price report could show inflation rising 5% year-over-year, a number that would likely push up interest rates and definitively put an end to any hopes of a near-term rate cut from the Fed and with good reason …

Don’t Cry for Me, South Korea

Others insist that Friday’s rather notable sell-off was a one-day wonder but we’ll see how South Korea’s KOSPI Composite fares going forward, which has led world markets up and down so far this year.

It has been the best performing market in the world, up over 100% at one juncture, just a few days ago, bit sold off nearly 9% Monday after a 5.5% decline on Friday, which led to the rout here at home before the weekend.

Burying the Lede

As we all know by now, SpaceX is going public on Friday, raising $75 billion with the offering pre-priced at $135 per share, valuing Elon Musk’s space, AI and satellite behemoth, at about $1.8 trillion which, likely, will make this interplanetary human the Earth’s first trillionaire.

30% of the offering is reserved for individual investors.

Wall Street firms are bending over backwards to get retail investors in, just as early investors will be cashing out on Friday and, in some cases, over the next six months, as various “lock-ups” expire.

Now, Anthropic has also filed to go public at about a $900 billion valuation and JUST TODAY (burying the lede) OpenAI also filed for an IPO.

This means the market could get hit with around $300 billion in fresh supply of new stock, not counting Alphabet’s $85 billion stock sale from last week, Amazon’s $14 billion bond float in Canada and an expected stock sale, one of these days, from Meta.

If supply should overwhelm demand, as the “hyperscalers” scramble for more funds to build out their infrastrcture, expect investors and traders to further exit some old holdings to buy what is shiny and new … despite what hot new issues often do. (Sorry for the rhyme, but history often does … as seen below!)

Until next time …

Doomerism is pervasive among financial observers, myself included, as stocks soar to record highs, despite an on-going war, stifling tariffs that linger in place, inflation that is stuck above 3% and the worst consumer confidence on record.

The gap between Wall Street performance and Main Street sentiment has never been more divergent.

And, yet, here we are.

Micron Technologies (MU) soared 19% on Tuesday, as it catapulted above a $1 trillion valuation, a single-session move never before seen in market history.

As The Wall Street Journal points out Micron’s run from a $500 billion to $1 trillion took a scant 48 trading days as UBS tripled its price target on Micron from $535 to $1,625 per share.

To put this in perspective, as Wall Street Journal graphically illustrates …

It took Nvidia 500 trading days to go from $500 billion to a trillion dollar valuation.

It took Meta and Google’s parent, Alphabet, 1,000 trading days to do it while Apple and Berkshire Hathaway took about 1,500 trading days to achieve the same feat.

I’ve never seen a move like this. No one has.

Cashing in the Chips

It seems memory chip prices are skyrocketing amid rapidly increasing demand as the AI buildout continues apace.

Other computer chip stocks joined the party, pushing the S&P 500 and the NASDAQ Composite hit new all-time highs twice this holiday-shortened week.

Analysts and investors are taking note of a shortage in memory chips which Micron, among others, produces and are becoming increasingly important to the build out of AI.

The Philadelphia Stock Exchange Index is up a little more than 79% year-to-date while South Korea’s tech-heavy KOSPI Composite Index is up more than 95% this year after surging 75% in 2025.

I’d be watching the South Korean market very closely here. It could be a canary in the coal mine if it breaks meaningfully before we see any weakness here at home.

The gains at home and abroad are already far outpacing the 85% rally in the NASDAQ back in, you guessed it, 1999.

It’s important to note that even as Wall Street analysts are raising their earnings estimates for the technology sector across the board, the pace of gains in chip stocks are far outpacing rising earnings projections.

We’ll know soon if that is sustainable.

A Stopped Clock

One could make the case that I’ve been bearish in the face of a still-vibrant bull run on Wall Street and I wouldn’t disagree.

But that has only been true since the start of this year.

I was not remotely bearish from 2022 through 2025.

But the mounting signs of what I consider speculative excesses are getting harder and harder to simply ignore.

We are beginning to see parabolic move in lesser-known names like Snowflake, which surged more than 35% after the bell on Wednesday on an earnings beats and plans to spend some $6 billion on cloud services from Amazon.

Don’t ask me why that’s bullish but investors believed the jump in every tech company’s Capex supports the bullish AI trade that has sent the major averages to new all-time highs.

Many companies are burning through their free cash flow (FCF) to do it while others are using an increasing amount of debt to fund the build out … showing up as “special purpose vehicles” (SPV’s) which are kept off-balance sheet, am old accounting trick that has caused trouble in past cycles.

Also, in my experience, when the soldiers start to surge like the generals, it can be a sign of speculative excess that suggests we are nearer a top than a bottom.

Of course, big name technology analysts say the backlog of orders for everything AI, from chips to data storage to power is so big, and stretches out so far into the future. that tech stocks, excluding some software names, remain undervalued relative to their revenue and earnings potential as far out as 2028.

Having said all that, similar claims, albeit at much loftier valuations, were made about Cisco, Microsoft and Intel, among others, during the internet era.

I realize that Price/Earnings Ratios are significantly lower among today’s hot stocks than they were in 1999 and early 2000.

But the thesis remains the same … the infinite potential of AI is not being fully recognized by those preaching caution.

That, too, was a commonly held point of view 27 years ago.

Rev Up the Way-Back Machine

Veteran technical analyst, Wall Deemer, showed this hand-drawn chart of one of the Roaring 20’s most popular stocks … RCA.

The Radio Corporation of America, which pioneered radio as a transformational technology 100 years ago, behaved much like today’s AI stocks are behaving.

Radio did have infinite potential and RCA shares rose exponentially from 1924-1929.

RCA remained a major force in radio even after the began to crash in 1929 and then bottomed three years later.

The stock and the company’s business fortunes diverged for decades, even as the company grew into an entertainment powerhouse.

Some 57 years after it peaked, it never really regained its all-time high, despite being a pioneer not only in radio but in television and, later on, in color TV too.

General Electric, another darling of the 1920s, bought RCA in 1986 at a price still below the 1929 high.

And Now For Something Completely Different

With this year’s budget deficit likely to hit $2 trillion and the national debt sitting at nearly $40 trillion, over 100% of the nation’s GDP, there are concerns that it might get increasingly difficult to fund on-going programs and the interest on the debt … which now tops $1 trillion annually.

Bobby Kogan, at the Center for American Progress, admittedly a left-leaning think tank, points out that were it not for the George W. Bush and Donald Trump’s tax cuts, the U.S. would actually be running a primary fiscal surplus today.

No doubt, the opposition, especially supply-side economists will take issue with this analysis.

But, as evidenced above, the cost of the cuts had an important role in bringing the U.S. fiscal position to where it is today.

We have over 40 years of empirical data that show that tax cuts do not pay for themselves.

There … I said it.

Certainly, other government spending programs have played a significant role in deficits and debt while entitlement programs add to the government’s long-term unfunded labilities which now total well in excess of $100 trillion.

There’s currently no viable solution being proposed to reign in the debt, control spending, or fund future liabilities.

If only the late Wyoming Senator, Alan Simpson, and his co-author, Erskine Bowles, could team up again to offer another in-depth assessment of our fiscal predicament which was introduced in 2010 as the Simpson/Bowles report.

Their plan was brilliant and elegant and, sadly, no one listened to their proposed solutions to modernize the tax code, control spending, invest in education and infrastructure and bring the budget much closer to balance.

If no one teams up to devise another plan like theirs, a debt crisis may still be an issue we’re forced to confront.

And after ignoring Alan and Erskine … that day may come sooner rather than later.

Until next time …

Bezos, the world’s 4th richest human, with a reported net worth of $250-260 billion, can quite comfortably tell everyone to not worry and to be happy.

It’s nice advice, but that’s not quite the crux of my disagreement with his assessment of whether or not the development of AI is creating a bubble on Wall Street and whether or not we should worry.

The notion that no one needs to worry about it is where we part ways.

Party Like It’s 1999

In 1999, everyone was saying exactly the same thing about the internet and its infinite potential to change the way in which we work and live.

And, indeed, it did. But only after the bubble was deflated.

And there remains a quite reasonable question as to whether or not the enthusiasm for AI companies is similar, comparable or, quite possibly, wildly different from the enthusiasm, or “irrational exuberance” that gripped investors from 1995-1999.

IMHO: The Song Remains the Same

Let’s start with the similarities.

First and foremost is the fact that we are, indeed, experiencing a technological revolution that will have a profound impact on our personal and professional lives, as was/is the case with the buildout and deployment of the internet.

That revolution gave rise to the Information Superhighway, giving us unprecedented access to accumulated sources of information, access to online retail, ubiquitous forms of communication and entertainment for the first time in human history.

The sale of routers and switchers by Cisco, along with the laying of fiber optic cables by the giant Telcos, enabled everything from AOL’s dial-up service to Apple’s iPhone nearly a decade later, and reached levels of access that no one had ever anticipated in prior history.

Cisco Systems CEO at the time, John Chambers, was among the most vocal cheerleaders who often claimed the internet buildout was going to be transformative in ways no one imagined at the time.

His company was the Nvidia of its day, reaching a market value of $600 billion, then the most valuable stock the world had ever seen.

Intel, Microsoft, among others, were also seeing an explosion in revenues and profits and were also among the five most valued tech companies at the time, as well.

Together, tech companies, accounted for the largest weighting in the S&P 500 in over two decades, only to be eclipsed by the weighting of the so-called “Mag 7” within the S&P today.

It’s also a fact that five companies, just five today … Micron, Apple, Microsoft, Google and Nvidia account for 25% of the profits generated by S&P 500 companies, very much like the concentration in the S&P we saw 26 years ago.

Bubble, Bubble, Toil and Trouble

There are other similarities that are hallmark’s of an inflating bubble … lofty valuations for the market overall which, while true of the market averages, is less true for some of the big name stocks dominating the field today, about which more later.

The enduring belief among proponents of this technological change is that it’s like no other before it, hence, it justifies massive spending to bring it all to life.

Famed market historian, Charles Kindleberger, in “Manias, Crashes and Panics,” noted that one key feature of a speculative episode is “overinvestment” as an important precursor to financial crises.

The major players in AI are investing, in 2026 alone, are spending nearly $800 billion on data centers and other infrastructure to satisfy what’s being described as insatiable demand for computing power to drive AI capabilities toward super intelligence.

It, is in some ways, similar to the laying of fiber optic cables in the late 1990s in order to deliver broadband capabilities to internet companies who desperately needed bandwidth to make good on the internet’s promise.

Too much cable was laid, at the time, creating a glut of capacity that would not be fully utilized until a decade later.

The same was true of computer chip sales, disk drives and other computer peripherals, software products and personal computers.

We don’t know yet if the trillions of dollars in planned investment is too much or too little, but we do know that if a cheaper chip comes along that reduces the need for all that “compute,” the presumed need for an unlimited numbers of data centers could be called into question.

The investment in data centers, it is being reported, is eating nearly almost all the free cash flow of some “hyperscalers,” while others are financing the buildout with off-balance sheet debt … a risky and potentially costly proposition if things don’t pan out as expected.

The Intersection of Wall & Main

In addition to “overinvestment,” large-scale public participation in the market is also a feature of bubbles that every market historian identifies as a symptom.

When I first got into the financial news business, Wall Street condescended to Main Street by calling retail investors “the dumb money!”

And while that’s certainly not the case, there have been historical examples of individual investors getting into the market just as the professionals are heading to the exits … though there can be quite a lag between Main Streeters getting in and Wall Streeters getting out.

Bank of America reports that individual investors are raiding their cash piles and rushing further into stocks.

That is happening in spades today.

Individual investor cash levels have fallen to 3.9%, a level that BofA has preceded stock market corrections, or even bear markets, in the past.

Further, retail investors are trading in single-day stock options, while the notional value of options trading, mostly on bets that the market will continue advancing for some time to come, recently topped $2.5 trillion, an all-time high.

At the same time, there is some evidence that institutional investors and corporate insiders are selling stocks while individual investors are loading the boat.

That is not a slam. It’s a data point.

So, What’s the Difference?

It is important to note that are are significant differences between the internet experience and what’s happening now.

Valuations for the most expensive stocks are remarkably low compared to the internet darlings.

Nvidia, sporting a market value of nearly $6 trillion (10X Cisco’s $600 billion peak) is trading at around 24 times forward earnings while Cisco traded at over 120X its profits at its peak.

And that’s true for many of the other fast-growing AI firms today.

The price-to-earnings ratio of the NASDAQ today is far more modest than the triple-digit PE of the NASDAQ 100 in the year 2000.

Revenues and profits are also growing much faster for today’s major players than for the big cap names of 1999.

The IPO Craze

Another extremely important distinction between then and now is the supply of initial public offerings that hit the market in the late 1990s.

Hundreds of companies went public in 1998 and 1999, many of which were internet, or web-adjacent firms.

Some, if not many, of them went public with an idea, not a business plan or, in some cases, without even a product in development.

They used the proceeds from the sale of stock to attempt to build a business while spending money on advertising a product or service that was not ready for prime time.

Think theGlobe.com and Pets.com, among others, who became poster children for the mania that took hold back then.

Some struggling, or even failing, companies added .com to their names (K-Tel and Zapata Corporation come to mind) and watched their stocks surge based on the notion that their pivot toward the internet would rejuvenate their businesses .. it didn’t.

(Allbirds just tried something similar recently, pivoting from sneakers to AI, but that’s the only example to date.)

For now, there has not been a deluge of AI IPOs.

Many are choosing to remain private for longer as the need for access to public capital is not as necessary as it was back then, as private capital has been more than willing to fund AI firms at ever-increasing valuations.

Should we see a burst of IPOs, supply could overwhelm demand and alter the course of the market.

The greater the supply of any good, the greater the pressure on prices to come down .. we’ll see.

Mega IPOs

Having said that, we may not need a surge in IPOs to swamp the market but a more limited number of mega-offerings that overwhelm Wall Street.

SpaceX is planning to file for its IPO very soon, the Elon Musk-driven space vehicle is reportedly planning to raise $75 billion at a valuation between $1.75 to $2 trillion. potentially the largest IPO in history, topping Saudi Aramco’s $1.7 trillion initial valuation.

It will hit the Street in mid-June.

OpenAI and Anthropic may also go public, all drawing money away from other areas of the market drowning the market in oversupply.

Successful IPOs of these big three could, then, lead to hundreds of private AI firms going public … creating a true supply problem for the market to absorb.

Interestingly and, with a nod to 1999, Bezos told CNBC’s Andrew Ross Sorkin, that nearly every AI idea, today, is getting funding, good or bad, and will shake out at some point.

That sounds eerily familiar!

Finally … the Fed

At the end of the day, the true killer of the internet bubble was a tightening of credit conditions engineered by a series of rate hikes by the Federal Reserve.

The Fed’s renewed focus in both economic and asset price inflation caused the Fed to tighten policy and help trigger the collapse of the internet bubble.

From Alan to Kevin

Kevin Warsh will be sworn in as the new chair of the Fed on Friday.

He has indicated his desire to lower interest rates based on an expected disinflationary productivity boom resulting from the deployment of AI tools.

He’s comparing Alan Greenspan’s willingness to avoid raising rates thanks to the productivity boom that came from the emergence of the internet.

Sadly today, inflation is moving up, not down, due in large part to the war with Iran and the price surge in energy, fertilizer, helium and other key economic inputs.

Warsh may well want to lower interest rates, but the other voting member of the Fed’s policy-setting arm may want to actually raise them to slow the inflation that’s extending an affordability crisis that’s hurting the average American.

Financial markets are pricing in a greater chance of a rate hike by the end of the year and only a 2% chance of a rate cut.

Cut to the Chase

Bull markets and bubbles all end the same way after the initial burst of enthusiasm for new transformative technologies, be they railroads, radio, automobiles, electricity, the telephone, TV, electronics, computers, the internet or AI …

*The belief in new technologies overwhelms, at least for a time, its realized potential

*Terminal values in stocks are also reached before the real-world benefit arrives

*Overinvestment becomes unsustainable and, perhaps, unprofitable

*Valuations grow well beyond historic norms

*Public participation reaches record levels

*The Fed takes the punchbowl away just as many believe the party is just getting started.

That’s not opinion, that’s history.

Bezos says don’t worry, be happy.

I say be happy and protect your portfolio.

Until next time.

He feared that the internet bubble was getting ready to burst and that investors, many of whom had already profited handsomely from the run-up in technology stocks, should bank their gains and park those hard-earned dollars in the safety of U.S. Treasuries.

While he was early, Bob Farrell was also quite right.

Had investors sold their stocks and bought long-dated bonds, as I recall Bob recommending, they would have held on to their profits and then profited further when rates tumbled in 2000 as the internet bubble burst.

Such are the hazards of “calling a top,” if one would like to view words of caution in that regard.

A Topsy Turvy World

Today, there is a growing consensus that the stock market is behaving in very similar fashion to the bubblicious market of the late 1990s.

I, admittedly, was wrong about an impending bear market when stocks were in the throes of a correction at the onset of the war with Iran.

Instead of collapsing under the weight of rising energy prices, reaccelerating inflation and the threat of global supply chain disruptions, the Dow, the S&P 500, the NASDAQ and the Russell 2000 have rocketed higher for six straight weeks, scoring records and pushing the U.S. market back to the head of the global pack.

However, nearly every indicator that preceded an important top in stocks has reappeared in this iteration of “irrational exuberance.”

The Market Says It All

Rather than offering an opinion, I'm going to take the opportunity to offer a lesson in chart gazing.

Here’s a series of charts that make a compelling case to rebalance one’s portfolio, take some profits, play with house money, or hedge your bets … pick your cliché.

Now, on the more ominous side is the record drop in volatility in the overall market and the record surge in semiconductor stocks that has taken place in under a month.

The Philadelphia Stock Exchange Semiconductor Index is up about 60% in a month.

The only time that has ever happened before was during a six-week period that ended on March 10th, 2000 … the very day the NASDAQ reached its all-time high of that era.

It would then decline 70%, peak-to-trough, over the next few years.

On the flip side, while semis have been rallying, software has been rolling over, though it has rebounded of late.

The S&P dividend yield is near historic lows, as the Schiller PE ratio (seen above) is near historic highs.

And here’s something I’ve never seen in 42 years of covering the financial markets … an historic and parabolic increase in the volume of options trading that dwarfs anything that’s taken place since options were first introduced into the equation over 50 years ago.

The notional value of call buying on the S&P 500, implying that investors and traders expect the market will go even higher from here reached $2.6 trillion!

Meantime, the market has been making new highs while a growing number of stocks are hitting new 52-week lows.

That has happened much more often at tops than bottoms.

And amid all the enthusiasm over the AI infrastructure buildout, some $766 billion is expected to be spent on data centers, compute and software this year.

Those expenditures are eating up almost all of the free cash flow of the so-called “hyperscalers," so revenues and profits will need to accumulate quickly to replace those sunk costs.

Make of all this what you will.

Whether you believe history doesn’t repeat but rhymes, or whether this time is actually different, it matters not.

Whether this is irrational exuberance, a random walk down Wall Street or the product of a highly efficient market, one thing is certain, markets can inflate beyond one’s wildest imagination, come crashing down and still deliver on the dream.

It’s all, however, a matter of sequencing.

As the late, great, Rod Serling said in the closing narration of a classic episode of The Twilight Zone,”

“No comment. Absolutely no comment.”

Until next time …