Storm Clouds

“Big storm coming…” was how our builder greeted us. Back in Ireland, dark clouds rushed in from the Atlantic. Treetops rustled…rain came down, lightly…the big blast was still ahead.

He was putting plywood over the window openings…and battening down the hatches.

The stock market is a lot trickier than the earth-bound weather. Here in Ireland, a meteorologist can look into the North Atlantic and see the storms coming days…even weeks…ahead of time.

In the markets, on the other hand, we only see the storms after they’ve passed. Then, we’re able to say…‘I told you so.’

Of course, we never know what will happen, but if ever you wanted to say ‘I told you so,’ this is probably a good time to set it up. Sooner or later, the stock market bubble has to deflate. It can develop a slow leak, with rising inflation gradually undermining real values. Or, it can just go ‘pop.’

One or the other. Or both. And now, both the economy and the stock market look like they are ready.

Here’s today’s headline, Money Talks News:

Average American Household Debt Just Hit $138,000 As Borrowing Costs Squeeze Budgets Tighter

Record-breaking debt levels are squeezing American families as credit card balances hit $1.21 trillion with punishing 20% interest rates.

All up and down Main Street, the economy is softening. Big revisions show employment weakening. Real GDP growth — setting aside outlandish AI capex, along with misleading import and inventory adjustments — is sharply negative. And inflation is not at all ‘beaten.’ It is still running 50% ahead of the Fed’s target. Most likely, it will increase as the tariff tax comes fully on-line.

There is also the political context. The federal government is now ‘shut down.’ When and how it will resume spending with its customary recklessness, we don’t know. There is also a hot war on Europe’s eastern front…a mass murder taking place in the Holy Land…POTUS proposes to ‘train’ federal troops against civilians in US cities…and US debt is set to explode to over $50 trillion by 2030. It wouldn’t take much of a misstep to set off a panic; and POTUS is famously spastic.

Over in the stock market meanwhile, it’s hard to imagine a better time for a crash. Repeating, from Friday:

Stocks are outrageously valued, with the highest price-to-sales ratio ever recorded for the S&P 500, at 3.3. The price-to-peak earnings is also the highest in 25 years. The Buffett Indicator — comparing the value of stocks to GDP — is now at a record high. And the Yale Professor Robert Shiller’s Cyclically Adjusted Price Earnings Ratio (or CAPE ratio) above 40, has only been topped once, in 1999 (when it was 44). And you know what happened next.

What’s more, long-term bond yields are rising all over the world. In Japan, for example, the 30-year government bond yield is at a 25-year high. This is sure to lead to major bankruptcies as large institutions find it more difficult to refinance debt.

And this from MarketWatch:

The AI bubble is 17 times the size of the dot-com frenzy — and four times subprime, this analyst argues

Artificially low interest rates have stimulated investment into AI that has hit scaling limits, says research firm.

That’s from MacroStrategy Partnership’s Julien Garran. He argues that the AI bubble is much bigger than the bubble of 1999. We saw last week how GDP went from positive to negative, largely on the strength of capital investment in the AI sector. . We saw, too, how enthusiasm for all things AI has lifted the entire stock market.

Without AI, in other words, both the stock market and the economy would be dropping.

But don’t worry about that, says Jeff Bezos, speaking at the Italian Tech show last week:

“This is an industrial bubble, as opposed to a financial bubble. The banking bubble, the crisis in the banking system, that’s just bad. That’s like 2008. Those bubbles society wants to avoid.

“The ones that are industrial are not nearly as bad; they can even be good. Because when the dust settles and you see who are the winners — society benefits from those inventions. That’s what is going to happen here too. This is real. The benefits to society from AI are going to be gigantic.”

Probably not, is our guess. Like the dot-com bubble, there are bound to be some useful applications for AI…and bound to be some companies that survive and flourish.

But most of investors’ aspirations will turn out to be vain and hollow. And when the dust does settle, it will be thicker than expected.

Back to the weather.

The storm grew on Friday, as predicted. By afternoon, rain was coming down in torrents — horizontally. Trees bent over. Signs had blown down and foot traffic leaned into the wind to keep on their feet.

We drove over to Cork Airport to rent a car. Elizabeth is taking her driving test to get an Irish driving license and needs a car with the steering wheel on the right-hand side.

By the time we were ready to leave the airport, the wind was blowing so vigorously that we couldn’t close the car door. We had to push it with both hands to keep it from bending the hinges…and then wait for a break in the wind to slip quickly into our seat.

We made our way home…dodging fallen tree limbs.