The AI Boom Just Went BOOM!

Whoo! That was fun! What a Halloween roller coaster ride the past week was if you like spooktacular rides perfectly timed for your entrance into the Halloween weekend. I hope you were following the forecasts here in The Daily Doom so you could just enjoy watching the flailing hands of screaming billionaires from the sidelines of this week’s theme park as another 1.5-trillion dollars evaporated from stocks on Friday.

The late October surprise

It wasn’t a surprise here, where I have been warning that this blowout was imminent since September, but it seems to have caught stock investors by surprise … unsurprisingly, since their mania has kept them blind.

As I just wrote about, a handful of AI stocks went down hard on Thursday, with Alphabet putting in a crash for the record books, as a clear foreshock for Friday’s bigger AI rumble. On Friday, just about EVERYBODY toppled. All indices face-planted into the pavement hard!

• The NASDAQ fell 747 points.

• The Dow, 572, and

• The S&P 140.

After Thursday’s half-trillion crash for Alphabet, which just dropped another 1.4%, Friday’s tech wreck wiped out another full trillion just in the tech industry. The rest of the stock market tallied up another half trillion in net losses.

Taxpayers also had a bad ride Friday as the government’s fascist shares in Intel took a dive so big it made Alphabet look like a warmup act in terms of the percentage lost and how far back in time that reached to find a match:

Intel shares fell 29% on Friday, posting the stock’s worst day since the 1970s.

Yikes! A crash at intel worse than anything it experienced during the dot-com bust or the Great Financial Crisis! Almost a third of the company’s stock value flushed away in just one day! That event also brought the kind of cross-contagion between AI-related stocks I’ve talked about …

Nvidia also took a big stake in Intel, and its stock dropped by about $6 billion [4%] in value.

Intel’s stock had been way up because AI was way up, and Intel makes chips for AI. Suddenly, on Friday, the big stock bulls who couldn’t say often enough how strong the economy is “because the stock market is strong” were saying such things about Intel as …

It is hard to justify the current multiple when weakness is so significant.

Ya think? Where were you guys in telling us all about weakness earlier this year? How about even earlier in October?

Amazon shares also sold off, falling 1.4%. Why? Because of the same problem I wrote about on Thursday as being a major hazard for AI stocks that investors were finally responding to:

Amazon also reported negative free cash flow for the second consecutive quarter, and a big increase from the previous period.

Who could have seen cash becoming a problem for the undefeatable tech stocks of the mega giants about whom we kept hearing earnings were so amazing? If earnings, not just revenue, are so amazing, how have these companies had such negative cash flows for two consecutive quarters?

I do seem to recall someone around here reporting for months their earnings were not amazing at all because a lot of what they were reporting came from posting the gains they were realizing on their shares in each other … and pointing out that could be an incestuous weakness, rather than a strength. If the tech sector started to decline, those “earnings” would start becoming losses. I didn’t hear the mainstream financial press taking note of that critical weakness. I don’t know that this is where Amazon’s cash vanished, but it is a problem, and cash cushions from bond financing certainly didn’t save a single company in tech yesterday.

They are all bleeding money out their eyeballs as they rush like maniacs to build the AI that all of them say could put us into extinction! And only a few are showing any significant earnings from their AI operations.

The Permabulls in the Squawk Box on Friday were all saying, of course, “No reason to be too concerned yet.” All the more reason advisors like that deserve to experience a good flush like the one they just got. And they’re still at it:

“I don’t think this is a moment of reckoning but I think it’s a moment where investors should take a long thought about how positioning across the space still remains crowded even though the fundamentals are strong,” Matt Orton, chief market strategist at Raymond James, told CNBC’s “Squawk Box Europe” on Friday.

The fundamentals of the AI Ponzi scheme are strong? The whole scheme depends on guys like you continuing to recruit new rounds of bigger suckers, especially in the bond market. The stock market got a sucker flush yesterday, and your “fundamentals” went down the toilet with it.

I did come across one smart headline, but it certainly didn’t come from the mainstream financial clowns:

AI Bubble Burst: Confirmed By Alphabet, Caterpillar, ServiceNow, And Amazon

The AI bubble burst thesis has been confirmed by Alphabet … Caterpillar … and ServiceNow…. These companies are part of the different layers of the AI trade, but their recent quarterly reports, together, confirm that the AI bubble burst is unfolding.

That would be “a moment of reckoning.” In fact, speaking of the “strong fundamentals” of the market, this writer said these stocks are ..

the foundation [of] the AI infrastructure bubble burst.

The foundation sounds pretty fundamental to me! Caterpillar, a company who’s success is usually associated with fundamental strength in the overall economy, actually saw strong growth earlier in the year from the AI trade because all of those massive data center buildouts were requiring a lot of new heavy construction equipment. Suddenly, the big yellow stuff isn’t selling, and the Cat got flushed, too:

Caterpillar, one of the key beneficiaries of the AI infrastructure capex, showed the increase in inventories - this supports the thesis that AI capex is slowing.

That is because the whole AI buildout that has been the only big driver in the economy has been hitting more and more walls of resistance for the past several months, as I have been constantly reporting here. Those were fundamental problems for AI, which I’ll lay out in review at the end of this article.

Also, relating back to Thursday’s editorial,

ServiceNow, a provider to AI tools to enterprises adopting AI, provided weak revenue guidance - this suggests that AI monetization is lagging AI adoption, which is the key element of the AI bubble burst.

That has been a problem for many months.

This guy goes on to identify a dynamic like what I’ve brazenly called the Ponzi nature of the AI beast:

The bubble is in AI capex projections. The AI bulls assume an infinite rise in AI capex, thus buy the AI beneficiaries. The first indication that this assumption is incorrect bursts the AI infrastructure bubble.

The only way to sustain belief in the “infinite rise” is to keep the cheap loans coming that were funding each new round of expansion because operating income certainly wasn’t up to the job. That is where the negative cash flows were. Those days of cheap loans, however, are over. (Major profits to create strong, positive cash flow have been elusive so far.) This writer points to some of the same “fundamental” problems that I’ve called out—the kind of “fundamentals” the Squawk Boxers CLEARLY don’t understand:

AI capex faces three major limitations:

The energy and water bottlenecks - there is simply no energy to power all of the planned data centers, so the projected capex will be impossible to implement.

The political and consumer backlash - more US states and other countries are delaying the permits to build data centers due to consumer backlash. This also suggests that the projected CAPEX will be impossible to implement.

Financing is becoming limited, as hyperscalers report negative free cash flows and are forced to issue debt and new equity to finance capex. This limits AI capex given the rising interest rates and widening credit spreads.

Then he notes how the Ponzi crumbles for lack of cash:

The AI bulls assume that AI will be widely adopted and it will massively increase productivity [at] the firm level and the economy-wide level. However, the AI adopting firms (outside tech) don’t see any financial benefits from AI adoption, yet. This points to less usage (compare what’s needed), and lower willingness to pay the premium price for the AI tokens and the AI cloud services. Thus, the entire “house of cards” collapses.

If a company cannot MAKE enough money to create the cash it needs to continue its obsessive expansion in order to even get to production of services and cover the cost of its operations, and then the cost of the debt feeding all of that becomes prohibitively expensive, then the company is a zombie, and the Ponzi scheme crashes. No cash from revenue, and no cash from credit. Zombie corporations are the walking dead because financially they are already dead in terms of profitability, but they continue walking only by endless rounds of new debt. When the debt streams dry up, the zombie is doomed.

And what timing could be more apropos for the death of the zombies than Halloween?

Note, Alphabet and Meta both recorded the second consecutive negative free cash flow quarters, and this is a financial limitation for the AI capex. Microsoft announced the need to raise debt and announced a major reduction in the labor force.

Those are the mournings and moanings of AI zombies. Some of these massive corporations will likely resurrect themselves in the brave new world someday, but their stocks are going to take a zombie head-lopping just like they did during the dot-com bust.

Amazon just reported the Q3 earnings, and it missed on revenues and earnings, as well as the guidance, and also confirmed a stall in AI capex. This is consistent with the AI bubble burst thesis.

So much for all the lies about strong fundamentals that we are unfortunately still hearing from the Squawk Box crowd and all their crowing kin. I’d consider earnings and raw revenue both pretty fundamental to the health of a corporation, and I’ve pointed all along the way to the weakness underlying earnings as the mainstream financial media missed it entirely. So, I have a hard time fathoming the vacuum inside the heads of these guys.

Bonds, of course, pumped, as I’ve pointed out they do whenever there is a major stock crash, especially a plunge in all stock indices, because money becomes desperate for a place to flee to. So, bond yields, again, caught some reprieve. Having restabilized at the 5% Maginot line for the 10YR for a few days earlier this week, Thursday and Friday saw the US10YR drop back below that line as stock investors sought refuge in Treasuries.

Investors certainly weren’t going to turn to cryptocurrencies for refuge on Friday:

The crypto crush

To make Friday turn into more of a Halloween thrill ride, a massive crypto-currency hack also robbed the Binance bank:

The world’s largest cryptocurrency exchange just suffered what may be the single largest heist in financial history. Early reports point to a staggering $6.3 billion in losses, and the fallout is still being tallied.

Binance insists it will “cover all losses” and that user funds are safe. The self-insurance works this time only because the stolen sum, however colossal, represents less than 5% of the exchange’s total assets. That is the entire game: you are protected not by your own security, but by the exchange’s balance sheet being large enough to absorb a catastrophic loss. If the next hack is bigger, or if the exchange’s assets shrink, that guarantee may not be as strong. (John Rubino’s Substack)

It made for big headlines:

Crypto industry suffers ‘largest bank heist in human history’ as billions stolen in Binance hack

Something wicked this way came

October, in fact, has been economically ghoulish all month long. As John Rubino points out, October has abounded in major scary events. Of course, they were not surprises for readers of The Daily Doom. They were the something wicked that you saw coming this way all along:

• A major crypto platform was hacked, calling the safety of not-so stablecoins into question. (Did not see that one coming here, but you did see the rest:)

• Housing rolled over and inventory spiked as buying froze up even worse.

• Gasoline prices rose by 9%, sending inflation up at an annualized 6% rate.

• France descended into chaos as riots spun out of control.

• The US and Iran moved closer by the day to an intractable escalation that now threatens everything that is left of the Middle East’s energy infrastructure.

• Real spooky to some, the US mid-term election polls suggested that Democrats will easily gain full control of both the Senate and House in a tsunami-scale blue wave over America. (Of course, others see the post-Halloween election as hope of salvation from notoriously Halloween-colored, Epstained Trumpkin who haunts the White House.)

Even a number of Republicans have publicly fled their camp, saying they feel they have been betrayed, though I think what Trump is has always been obvious. Many former Trump supporters (even some Republican politicians) are saying a switch vote is a necessary tradeoff because the cowardly Republicans in congress has failed to rein in even the most outrageously unconstitutional moves of their president.

They are not talking about the weird little stuff of late at his campaigns. They’re talking about his penchant for declaring new forever wars, endless threats of taking over friendly nations, continually starting new tariff wars when both kinds of wars are the powers of congress. Jacking inflation back up with his two kinds of war, making it hard for them to afford life, even as he says he doesn’t care about fuel prices because they are making SOME people rich (as oil wars ALWAYS do; that’s what they are there for).

So, here is the biggest something wicked: Trump has, at this point, finally proved himself to be the wrecking ball for America and the rest of the world that I’ve repeatedly said almost since the start of his term he would prove to be. If anyone doesn’t see that today, they don’t know how to read the market tea leaves about the economic destruction that is now playing out right in front of everyone. There is no golden ear coming out of this train wreck.

Let me add it up: Over $2-trillion of market value lost in the last two days, and for Thursday’s contribution I’m only counting the half-trillion bite taken out of Alphabet because I don’t even need the rest of the losses to clear $2-trillion! And that is just for starters.

Before anyone points out the truth, which I would agree with, that Trump is not responsible for the mania that led up to this train wreck in the stock market, which will be playing out for months to come, let me remind them of the other truth I’ve been pointing out for months and months: His tariff wars and military wars are certainly responsible for the inflation that has made the AI Ponzi financing impossible now by jacking up interest rates, and he has certainly made big contributions in both of his terms to the toppling mountain of US sovereign debt that this soaring interest has pushed into sudden peril this October, and the higher interest that has come because of his inflation is now fully crushing the housing market. So, he’s had his hand in the overall economic train wreck that has begun, but the AI crash is certainly not all his fault.

What this past week should serve as is a warning of how truly imperiled the whole faulty economy has become, even though Trump promised he would turn it into a golden era. Another brazen promise badly broken. We are nearly halfway though his final term, and it has been looking a lot less golden everywhere; and now even the golden egg that is his favorite—AI—is looking like the rotten egg that is going to fail to hatch, other than as some kind of deformed, half-living, zombie chick, during his term.

AI has been the dying economy’s saving grace—not just the stock market’s. It has covered over a multitude of other weaknesses. This week’s reported quarterly rise in GDP was almost wholly attributed to vast AI construction all over the country, which has been making up for the huge downturn in the housing market that usually drives the US economy. That makes AI the last leg of what has become a teetering one-legged economic stool, and the last two days have kicked away at that leg pretty intensely.

In short, no one is thrilled with Trump’s economy. Not even his supporters are thrilled with it. In recent history, only Jimmy Carter came in this bad on the economy, and that was largely why he was voted out of office! (Conflict with Iran was the other main reason.)

How we got here and how certainly we could and did see it coming

For those new here, as a number have joined this month, let me recap the recent history of numerous warnings in The Daily Doom that this big crash was getting ready to rip through the economy. I’ll give snippets of each warning given for a little walk down memory lane as to how we got arrived in this Halloweenish October nightmare because, no it not a surprise at all, though it was a surprise for many.

It might be good even for those who have heard the warnings to read the recap in order to get a clear picture of what this past week means in the context of what has already been unfolding. The warning signs were abundant as was the greed that blew this bubble up to “thermosphere” heights beyond anything reached by any other stock bubble in history; so, there is no room for pity for those who stayed in these stocks:

September 27: Unstable Mountains: A Landslide is Ready to Happen!

Now that all longterm Treasury yields have risen to elevations above the 5% level, we’ve entered a rarified financial atmosphere that drastically raises the risk for stocks, which have attained ludicrous heights of their own, given the crumbling state of global affairs all around them. The fractured strata of these mountainous valuations have been welded together by mere water in the form of ice that is now thawing under the heat of these rising bond yields, and the strata now sound like they are grinding against each other and getting ready to slide as thawing yields turn to flowing lubricant, rather than a bonding agent…. Pity the investors who are standing beneath this top-heavy, poorly supported stock market if it suddenly gives way, as appears increasingly likely.

September 28: When Rockets Fall from Lofty Heights

The emergence of credit troubles could precipitate a crash in high-tech stocks as the fall of Oracle’s rocket from the night sky would paralyze investors. It’s not happening yet, but Oracle’s situation keeps looking more and more precarious; and, again, it is the steepness of the rise in its interest rates due to rising risk and its growing need of more debt to keep fueling its climb, that is most troubling. It’s a rocket ride at the end of a relentless strained rise in its cost of perpetual financing….

October 4: THE DEEPER DIVE: Economic Bubble Troubles Are Ready to Burst Everywhere

Bonds and government debt appear to be headed for trouble. And with bond yields climbing, stocks will be headed for trouble, too, as their profits and dividends don’t look so hot against bond yields above 5%. This is where we get into peril with the stock market, too. Most of the stock market is already crashing. Yes, “crashing.” It is almost solely the big AI stocks that are holding the averages up…. Stocks and bonds are married in this turmoil…. The situation is so bad that it is being reported as one of America’s worst bond crises….

October 11: THE DEEPER DIVE: An Enormous Triple Bubble Bust Has Begun

The three most overinflated bubbles in history are all about to break at the same time. Stocks, primarily due to AI stocks, have never been priced so high above the stratosphere to where one analyst says they are clear up in the “thermosphere.” They are at a level above total GDP that has never been seen before…. So, when the Ponzi scheme fails for lack of another round of fools because the cost of raising cash through bonds is getting so high, the whole thing, “earnings” and all, unravels. Wrap your head around that, and you get the extreme peril.

October 18: THE DEEPER DIVE: Has the AI Stock Meltdown Begun?

On Friday, the NASDAQ dropped 2% with almost all of the action being in AI-related stocks. The week as a whole was mostly a loser for stocks, meaning … a more general slide…. A fairly strong flow from AI stocks into bonds showed a strategic shift…. The current force from bonds pulling down stocks is like the gravity of a passing planet that rips at the market’s surface to strip material away. However, this time the problem is far more serious than just competition for stocks…. This time the problem is that a lot of the money being invested into AI stocks and into AI data centers was coming from increasingly lower-grade commercial bonds that are costing the issuers interest rates well above the already rapidly rising interest on Treasuries. It’s simply getting harder and harder to fund the AI mania…. Underneath that rising volatility of stocks just reported there should be a gnawing core of fear among the foolhardy who have gone way too long in buying into the dot-com bust of the roaring twenties.

October 19: The Big AI Bust Hits the News on Multiple Fronts

AI blows its artificial brains out…. The AI bubble in stocks is starting to show strain … the precarious nature of the bubble due to its dependency on increasingly expensive credit in order to keep funding its development…. Major setbacks are causing hesitation among investors who now see they may NEVER see their project finished…. The AI bubble is about to burst — and a big market correction is coming.

October 20: 2027 PREDICTIONS: 2027 Brings the Everything Bubble Bust, and Here is What that Will Look Like

The fact that stocks rebounded today does not change my thoughts at all on the AI stock crash that is starting to unfold…. The AI stock bubble crashes because AI companies can no longer find affordable loans to continue their Ponzi-scheme expansion, and AI is nowhere near seeing real profitability from AI activity in its present half-built state.

October 24: THE DEEPER DIVE: The Everything Bubble Bust Will Keep on Busting

“People are all of a sudden terrified of the amount of bond issuance by AI-related companies….”

“Terrified.” And of what? Of the very thing that I predicted would bring AI stocks crashing down—the degree to which AI is dependent on massive bond issuance at a time when interest rates are soaring…. With that, a final note on the AI slide that seems to be gaining momentum now ahead of bonds and housing, though bonds began substantial moves ahead of AI…. Don’t expect AI stocks to slide all at once.

Please understand this is major sector of the market that has to move, and it is not likely to slide in one big whoosh! There is a lot of complexity to all of its financing and its revenues…. That will create platforms of instability along the way that are imperiled but waiting on the courts for finality before they complete their slide into other platforms that may have stalled or slowed. But there will be times of whoosh! too. Likely some big ones … like the big one that just hit the Meta platform:

October 27: The AI Bubble Bust: Is the AI Monster about to Fall on us?

I’ve called the whole AI stock mania a giant Ponzi scheme because it depends on endless new rounds of bond investors at higher and higher interest rates to keep the cycle going…. At the center of the debate today over whether the AI bubble is about to bust or boom is Anthropic’s just-released prospectus for its highly anticipated initial public offering…. Truly odd for a prospectus that intends to sell people on buying the new stock at a fortune of a price … the prospectus spends 90 pages telling all potential shareholders how the company’s AI may make Anthropic liable for destroying the entire world or destroying humanity. That is a little bigger liability than you’ll see any non-AI IPO prospectus…. This bubble will break like the dot-com bust, and that bubble took 2.5 years to fully plumb its bottom.

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