I just added this one. They have lots of good financial perspective and resources but also are big on health and wellness as well.
Here is a good video they just uploaded.
If The BIS Is Concerned... Listen
Nothing in this program should be considered investment advice. It is for educational purposes only. Please hit pause and read this disclaimer in full.
That’s a major warning, and something that unfortunately passive investors and those caught up in the hype are not even going to take into consideration because it’s either not on their radar or it’s not what they want to hear.
Chris Martenson: Welcome everyone to this episode of Finance U. I’m your host Chris Martenson where we endeavor to do everything we can to make finance and economics and portfolios as understandable as possible. And back with me of course is my weekly side guest here every week, Paul Ker of Kiker Wealth Management. Hey Paul.
Paul Ker: Good to see you Chris. It’s such an honor to see you on a weekly basis. It really is.
Chris Martenson: Indeed. All right. Well, Paul, I want to talk about this AI superbubble. Unfortunately, I was in a little bit of a scramble, so I didn’t get to put slides together for this. So, what I’m going to have to do is turn instead to my source for these things where I would have put the slides together. Anyway, you probably saw this. This was in Bloomberg. Chinese hedge funds warn the AI super bubble is ready to burst. And they just say they’re looking at this thing like, “This just doesn’t make any sense.” And it’s because of concerns over valuations and lack of a long-term moat for some AI infrastructure companies.
I’ve been tracking this pretty closely. What we’ve been seeing a lot lately is that Anthropic and OpenAI have to charge for the tokens. And it turns out that China’s got these open-source models where the token costs are just a fraction. Plus, we’re starting to see things like Ford rehiring a bunch of engineers because they thought they were going to replace them with AI. It didn’t quite work out, so they brought the humans back. Companies are starting to find out what AI can and can’t do realistically. And also, there is no moat for these companies. The whole thing is progressing so quickly.
Paul Ker: Right? But they’re just pointing out there really isn’t a business plan here that anybody can sink their teeth into that squares the circle.
Chris Martenson: No.
Paul Ker: At present.
Chris Martenson: I pay attention to the Chinese hedge fund managers. They have the reputation for being the best at math, best at engineering, the best at long-term thinking because that long-term thinking is just built into their culture from a young age versus the short-term thinking inside the United States. So, that’s a major warning. And you’re right, the nature of technology is always going to be aggressive because as we’re seeing right now, on any given day some new advancement can make the current process or technology obsolete and it’s moving so fast at this point. There’s just a matter of time. And I’m seeing reports all over the place that it’s too expensive for the data compute cost and hey, we made a mistake, we need to bring some employees back online here. And that may be good for employment kind of like 2000 to 2003. That was a pretty major recession. Markets responded dramatically but the average person didn’t really feel that recession. We could be back in that situation where employment holds up, unemployment stays relatively low, but information technology stocks which are the market at this point — they’ve never been this high a percentage of the S&P 500 ever nor any other sector this high. If that was to go down back to normal levels, you’re talking about major declines in the overall indexes.
Chris Martenson: Jeremy Grantham had some pretty pithy warnings. He was all over the news recently. No less than the BIS came out. And this was in a Financial Times article and I also read the BIS report. They said quote, “Financial stability because of the AI bubble could be at risk in the event of an AI bust.” When the BIS says financial stability, they’re talking like a great financial crisis kind of moment. They’re talking systemic risk. They said, quote, “Should hyperscalers slow or even halt the aggressive pace of capex deployment, many borrowers across the supply chain could struggle to replace lost revenue and service their debt.”
Paul Ker: So yeah, let me put it in simple terms what BIS is saying here. The AI bubble is now a self-feeding disaster that can’t be rescued. Hyperscalers must borrow and keep increasing capex higher every quarter for eternity. Every quarter the situation grows more disastrous, but the entire financial system risks collapse the second the debt ends. It’s unavoidable. It’s a pretty stern warning. I’m not used to the BIS giving warnings about things like this.
Chris Martenson: Me either. But that’s a major warning. It really is and something that unfortunately passive investors and those caught up in the hype are not even going to take into consideration because it’s either not on their radar or it’s not what they want to hear.
Paul Ker: Yeah. I mean, we’re struggling. I struggle, Paul, to find the right words because how many times can you say unprecedented? It’s like we’re in territory which is just so… let’s put it this way. Here’s a nice little chart. Select historical technological investment waves. Here’s the railroad coming in. This is percent of GDP. We had the railroad. This is the telephone bubble. It was a big thing. Doesn’t look so big on this. Cars, semis and semiconductors back here in the 90s, 2000 coming up into 2000. But look at this AI software now clocking in at more than 8% of GDP. Just to put it in perspective, we’ve never seen a bubble like this before. We’ve never seen a rush into a technology like this before, ever.
Paul Ker: And the railroad bubble was massive. There was tons of wealth and it was dramatic in its impact and change of the underlying economy. But we’re yet to be proven on the AI software investment in this bubble where we are right now. I mean, if it’s 50% of what they anticipated with the way that they’ve gone in, yes, it’s going to change the way we do business. The tools are incredible and how they’ve helped us to be more efficient in certain sectors, but they’re not the holy grail that it’s been projected to be at this point.
Chris Martenson: We keep talking about it, but there’s the Buffett indicator. It just hits new highs every time. Every week it’s hitting a new high. Buffett says we’ve never had people in a more gambling mood than now.
Paul Ker: Yeah. Never.
Chris Martenson: So we saw that with the margin debt spiking. People are going all in on this and that’s why that chart over your shoulder, that’s why you get that spike at the end. People get greedy. They just can’t miss out on it. Everybody’s in. I can’t resist anymore. One of my favorite stories was way back in the South Sea bubble, Isaac Newton — pretty smart guy, invented calculus — he saw the bubble for what it was and he got out. Then he got back in. He couldn’t resist. He probably went to one too many parties. It was a nice attractive young lady asking him how many South Sea shares he held and he realized he was left behind. So he got back in and he lost all his money.
Paul Ker: Yeah. Being smart is no defense.
Chris Martenson: No, it’s not. And we’re all susceptible to this, Chris. It’s just human nature. And that’s the reason these bubbles and cycles continue. And then yes, it’s different in some ways. It’s going to rhyme. It’s going to be different because it’s not an exact repeat, but it’s those human emotions that push things to the end and we can’t help it. And I would venture to say if we could go back and interview him when he sold and then things took off. When he got back in, he’s like, I’m not going to make the mistake this time. I’m not going to get shaken out. And that’s what makes it so painful on the other side because when the last bit of people come in and that and you get that burst of people that are in, they’re not willing to sell. And then you’ve got that last margin that jumps into the game. They can’t take it anymore. That’s that moonshoot that you get. And then those same investors are like, I’m not going to make a mistake and get shaken out. So it sells off and you get a little bit of a rally and it sells off and you get a little bit of a rally and then all of a sudden, you know, they’ve got decades of underperformance and they’re down 50 60%. Before they realize that they made a mistake.
Paul Ker: I mean, Stan Druckenmiller, one of the most legendary successful investors of all time outside of George Soros, Warren Buffett, and I know George Soros I’m not a fan of his, but he was a legendary investor. Druckenmiller worked for him. He shares in the year 2000 how he got sucked in just because of emotions. He got tired of watching all the younger guys make all this money in the interim period, right? I think if I remember correctly, he top ticked the turn of the market. And they asked him, “What lesson did you learn?” And he said, “I didn’t learn the lesson cuz I knew I shouldn’t have done it anyway. I just let my emotions take control.” And the good thing is he reacted quickly on the other side. But it was still a very painful experience for him.
Chris Martenson: Yeah. Well, that’s why it’s best to have a plan. You know, you got to have a strategy for this stuff. What else can I tell anybody listening? Paul, we’re in a bubble. We’re clearly in a bubble. And lots of people know it and we’re getting all the warning signs. So, again, if or when it breaks, people will look back and go, “Oh, if only there had been some warning signs.” There are plenty of warning signs.
Paul Ker: What I would tell people is say, “Hey, look at your current investment strategy.” If you got an advisor and you’re concerned about all of these warning signs in context of history, they are warnings. You cannot say that you haven’t been warned. If you’ve heard this information, you have been warned. Now, to lay the backdrop, talk to your adviser and say, “Hey, at what point do you have a strategy to sell? If it’s not different this time and we are in the midst of a bubble, can you demonstrate to me how you would sell and move into a defensive mode or capital preservation mode?” Now, that adviser may say, “I’m not. We’re going to be passive. We’re going to stay invested at all times.” They’re going to give you all kinds of statistics which will be true in the context of history. They’ll probably say something like there’s never been a 25-year period of time in history where the markets didn’t go up. Okay, so that is true. But the question is if you’re 65 or 70, if you’re 60, how old are you going to be at 25 years? And if there is a 50% decline in there and you’re in the distribution phase of your investment life cycle, can that cause you to run out of money? Look, if you’re 25 or 30 or 35 and the market goes sideways for 25 years and you’re dollar cost averaging in, absolute single best thing that can happen to you because you’re buying massive numbers of shares over that period of time before the market starts taking off. So that’s the first question I’d ask. And if they don’t have a downside risk management, then you have to put yourself in a mental exercise and say, okay, what if it’s not different this time and we go back to normal valuations, which is 50% below here. How am I going to feel? Am I going to feel foolish? Because uh you know, and if that’s the case that concerns you or you stress test your situation and that could put your retirement at risk, then consider other alternatives. Okay. The alternative to a risk-managed strategy is when in periods of time like this, you’re going to dial that risk back down and you might miss a little bit of opportunity. Okay? So, it’s either a little bit of emotional pain on the front side and having the discipline to stay the course or it’s a lot of emotional pain on the other side. Investing, there’s no holy grail to investing. You’re going to endure some emotional pain and you’re going to have to have the discipline to go through that. The question is, what type of pain are you willing to endure? Okay, is that the pain of your retirement potentially being wiped out if valuations go back to normal? Okay, there are things if you want to stay passive, there are things that you can do to build resiliency in there, but implement those now. Implement them when it’s easy to sell, when valuations are high, and prepare yourself. On the other side, if you’re not okay with that outcome on the passive side, then find some people that run tactical strategies and interview them. Find one that makes sense that you’d like to work with and move forward in that because if you’re in the passive bubble, this thing will probably end quicker than you think it will. If you’re in a tactical strategy and you’re cautious, it’s probably going to last a little bit longer than you think it will. So, it’s going to take discipline on either side. And that’s what investors should be doing right now is examine your strategy. Put it in the context of your individual situation. Not what’s best for Wall Street, not what’s best for your brother-in-law, not what’s best for your best friend at work, what’s best for you and your circumstance. And that’s the reason why we do that retirement plan analysis is because I’m pulling people to their circumstance, not somebody else’s.
Chris Martenson: All right. Well, Paul, thank you so much for your time today. It’s been a pleasure talking to you again.
Paul Ker: It’s my honor, Chris. And uh yeah, have a great week and weekend and we’ll be back with you next week.
Chris Martenson: And yes, happy 250th Fourth of July.
Paul Ker: I just suddenly thought of all the stuff set up on the National Mall and I just had a little hitch. I don’t know if you’ve seen it.
Chris Martenson: I haven’t seen it yet. No, I’ll have to search it out after we get off here.
Paul Ker: It’s a little disappointing, but um that just to me. So, all right. Yes. Happy happy 250. Have a great Fourth of July. It’s going to be fantastic. Until next time. Bye everyone.
