AI Bubble Or Boom? Spotting The 'Scent' Of Wishful Excitement In Markets

Key Concepts

• Casino Licenses in New York City: Recommendations for three casino licenses in NYC, with bids from Steve Cohen/Hard Rock, Resorts World, and Bies.
• Kalshi Funding Round: Prediction market platform Kalshi raised $1 billion, valuing the company at $1 billion and making its co-founders billionaires.
• Credo Technology Stock Surge: Shares of Credo Technology, a data center cable manufacturer, soared due to the AI boom, creating two new billionaires.
• Market Indicators and Bubbles: Discussion of traditional and unconventional indicators for potential market bubbles, including the Cape Index, gold and stock correlation, and the AI craze.
• AI Spending and Risks: Analysis of the massive infrastructure spending on AI and its potential risks, including capital diversion and increased borrowing costs.
• Yield Curve Inversion: Examination of the yield curve as a recession indicator and why it may not have predicted a recession in recent years.
• Magnificent 7 Concentration: The significant concentration of the S&P 500 in the "Magnificent 7" tech stocks and its implications for diversification.
• Bitcoin as a Liquidity Indicator: Bitcoin's role as a potential "canary in the coal mine" for market liquidity.
• Personal Investment Strategy: Advice on personal investment strategies, emphasizing self-knowledge, diversification, and avoiding market timing.

Casino License Recommendations in New York City

The New York State Gaming Facility Location Board has made its recommendations for casino licenses in New York City. The board has put forward three bids:

• Steve Cohen and Hard Rock: Proposed for a location next to City Field in Flushing, Queens. Steve Cohen is the owner of the New York Mets.
• Malaysian billionaire Lim Cocktail: Associated with Resorts World at the Aqueduct Racetrack in Jamaica, Queens.
• Bies: Proposed for a location in the Bronx. This bid is notable because if Bies secures a license, they will have to pay former President Donald Trump $115 million as part of a deal for the adjacent golf course, which Bies acquired in 2023.

These three were the only remaining bids in the race. The New York State Gaming Commission is expected to hold a formal vote to issue the casino licenses by the end of December.

Kalshi's Billionaire Founders

The prediction market platform Kalshi has announced a significant funding round, raising $1 billion. This funding has valued the seven-year-old company at $1 billion, catapulting its co-founders, 29-year-old Tar Mansour and Luana Lopez Lara, into billionaire status. Each co-founder reportedly owns an estimated 12% of the company, giving them a fortune of $1.3 billion each. Notably, Luana Lopez Lara, originally from Brazil and an MIT alumna, is now recognized as the world's youngest self-made woman billionaire.

Credo Technology's AI-Driven Success

Credo Technology, a company that manufactures cables for data center connectivity, has experienced a remarkable surge in its stock price. Shares have climbed by nearly 250% over the past year, largely attributed to the ongoing AI stock boom. This impressive performance has created two new billionaires:

• Lawrence Chang: Co-founder and Chief Technology Officer of Credo, now estimated to be worth $1.3 billion.
• Hanta Sutara: An early investor and director at Credo, now valued at $1.8 billion.

Both Chang and Sutara have a shared history, having begun their careers at Marval Technologies, a semiconductor giant co-founded in 1995 by Sutara, his brother, and his sister-in-law.

Market Dynamics and Potential Bubbles

Brandon Kutkoden, a staff writer at Forbes, discusses the current market environment, noting that it's an "interesting time" with all-time highs across asset classes despite inflation remaining above target. He contrasts this with his earlier career, where the absence of inflation was a concern. The current situation, with rate cuts occurring while inflation is still elevated, is described as "uncharted territory."

Kutkoden recently wrote about potential market bubbles, including gold, Bitcoin, junk debt, and the AI craze. He posits that "bubbles kind of give off a scent" and discusses indicators used to identify them. However, he emphasizes that these are clues, not ironclad laws, and that no one can perfectly predict market tops.

Unconventional Market Indicators

Kutkoden highlights a surprising indicator: gold and stocks reaching all-time highs simultaneously. He explains that typically, stocks perform well in good times, while gold is seen as a safe haven during times of uncertainty. Their concurrent rise is difficult to explain, though a common theory suggests it's a "bet against the dollar" due to concerns about US debt and tariffs. However, the dollar's performance hasn't fully supported this explanation, suggesting it might be a forward-looking expectation.

AI and the Stock Market

Regarding the stock market's all-time highs, Kutkoden notes that while there was volatility earlier in the year due to tariffs, the current strength in big tech stocks is largely supported by strong fundamentals. He contrasts the current situation with the "meme stock" phenomenon of 2020, where speculative pumping was more prevalent. While AI is a constant topic, the public companies involved are generally "really good companies" with the capacity for significant AI investments. He expresses more caution regarding private markets, citing headlines about companies like OpenAI reaching trillion-dollar valuations without readily available financials.

Kutkoden believes that while multiples are stretched, there isn't the same "bubble fervor" in the overall stock market as seen in previous peaks, though individual names might experience such phenomena. He differentiates the current AI boom from the 2021 SPAC boom, which involved more speculative newer firms and biotech companies. The current focus on established giants like Nvidia and Google, he argues, makes it a different scenario.

AI Spending and its Macroeconomic Implications

The discussion shifts to the significant infrastructure spending on AI, estimated to reach up to $5.7 trillion. Kutkoden identifies the primary risk as the diversion of a "limited amount of money in the world" into this highly concentrated bet. He notes that AI is a binary proposition: it will either work or not, and many companies are pursuing similar strategies, requiring GPUs and data centers.

A key concern is that if AI is successful, a few companies might achieve a monopoly (e.g., reaching Artificial General Intelligence), preventing others from catching up. Beyond AI's potential failure, the risk lies in the opportunity cost: "money's all a lot of money is going all into this one spot. So, where isn't it going? And it's who's going to starve?"

Furthermore, the need to borrow trillions for AI development will likely drive up effective interest rates. Companies like Meta, Google, and Oracle are already paying more for bond interest, even as overall rates are decreasing. This increased borrowing cost for major tech companies will, in turn, raise rates for other borrowers, as lenders will demand at least the same return from less secure entities. This creates a dynamic where the Federal Reserve's efforts to lower interest rates could be counteracted by the borrowing demands of AI development.

Impact on Industries and Companies

Kutkoden suggests that while spreads are widening, affecting borrowing costs across the board, even companies in seemingly insulated sectors like consumer staples might eventually be impacted. When blue-chip companies are willing to pay higher rates, it sets a precedent for others.

Government Backstop for AI Companies?

The idea of a potential federal government backstop for large private AI companies like OpenAI, suggested by an OpenAI executive, is discussed. While the initial reaction was largely negative, with many calling it a "bailout," Kutkoden clarifies that the suggestion was for a "government guarantee." He believes this is not entirely off the table, especially if AI is considered a "national strategic priority," citing the government's investment in the "Manhattan project for AI." Precedents for government guarantees exist in the housing market and student loans. The administration's recent stakes in critical industries like semiconductors and rare earths, framed as national security investments, could also provide a similar argument for AI. Such a guarantee could lower the cost of capital for American companies to compete globally.

The Yield Curve and Recession Predictions

The conversation touches upon the yield curve as a historically reliable recession indicator. The inversion of the yield curve for nearly two years, which typically portends a recession within 24 months, did not materialize as expected in recent years. Kutkoden acknowledges that there have been debates about which specific yield curve is most predictive and that sometimes data is "cherrypicked."

He recalls writing about the yield curve's failure to predict a recession a few years ago. While the AI spending boom is offered as an explanation for this deviation, Kutkoden suggests that from a broad lens, the fact remains that a recession either occurred or it didn't, and the source of the spending doesn't fundamentally alter the predictive power of the indicator. He believes a more nuanced approach would involve examining specific sectors of the economy, noting that while tech is thriving, manufacturing is facing different challenges. However, he questions the overall impact on the economy if the "financial economy" is performing well.

Concentration in the S&P 500

The significant concentration of the S&P 500 in the "Magnificent 7" stocks, now comprising around 40% of the index, is discussed. Kutkoden views this as a factual observation rather than inherently positive or negative. He notes that these are high-margin industries and are expected to outperform. For investors, this concentration raises questions about diversification when investing in a broad-based index like the S&P 500. He advises investors to be aware of these implications and not assume that buying the S&P 500 is a "one-stop shop" for diversification.

Bitcoin and Market Liquidity

Regarding potential market corrections, Kutkoden notes that Bitcoin has seen some decline, though it remains high relative to previous years. He attributes this to several factors:

• Institutional Adoption: Increased involvement from institutions.
• ETFs: The approval and trading of Bitcoin ETFs.
• Managed Portfolios: Inclusion in managed investment portfolios.
• Legal Changes: Pro-Bitcoin regulatory shifts that make holding it easier.

Kutkoden views Bitcoin as a "canary in the coal mine" for market liquidity. He believes it will rise when liquidity enters the system and fall more quickly than other assets when liquidity tightens. While acknowledging Bitcoin's unique characteristics due to its professionalization, he also sees it as an indicator of broader market liquidity trends. He suggests that while liquidity is currently tight, it's unlikely to remain so indefinitely, which explains why a major crash hasn't occurred.

Navigating Uncertain Markets: Personal Investment Advice

While emphasizing that he is a financial reporter and not a financial advisor, Kutkoden offers general advice for navigating uncertain markets:

• Know Yourself: Understand your investment timeline. Short-term goals require different strategies than long-term ones.
• Diversification: Question the diversification of your investments. For example, if the S&P 500 is heavily weighted towards tech companies with an AI focus, consider if a 40% AI bet aligns with your goals.
• Avoid Market Timing: Kutkoden quotes Peter Lynch, stating that "more money's been lost preparing for corrections than in corrections themselves." He stresses the impossibility of timing market tops and bottoms.
• Cash Buffer: Maintain a cash reserve for unexpected needs.
• Career Focus: For most individuals, investing should not be their primary source of wealth. Focus on career development and increasing income.

Kutkoden concludes by stating that they will continue to monitor these indicators and that further coverage of AI and market trends will be provided.