THE A.I. GOLD RUSH
In January, 1848, the California Gold Rush began. Thousands of people thronged to the "Golden State" seeking their fortunes. Only a tiny fraction of them got rich. The vast majority suffered severe hardship, lost their money and were forced to abandon their efforts. It is commonly noted that the few who made money during this period did so by selling provisions to the miners: pick axes, shovels and denim wear.
For the last several years the new gold rush has been Artificial Intelligence. Companies have spent vast sums of money building out AI infrastructure. Microsoft, Meta, Alphabet, and Amazon have collectively spent hundreds of billions of dollars building new data centers hoping to cash in on the presumed AI fortunes to come. This gold rush took off in 2022 when Chat GPT 4 was released. It was swiftly downloaded by millions of people hoping to use it to further their personal quests.
Nvidia is the Levi Strauss of AI. It makes the computer chips most in demand for AI data centers. It is making astonishing sums of money and recently became the first company ever to reach a market cap of $5 trillion. It is now worth more than all the companies making up London's FTSE 100 stock market or the GDP of each of the world's nations except the US and China.
The companies spending fortunes to buy these chips and build huge data centers to run AI programs are discovering a very disturbing fact. Nvidia keeps improving its chips. Companies using its most advanced chips have an advantage over those using its older chips. The rub is that the cost to upgrade older chips is immense and even when upgraded, the new chips themselves will soon become obsolete. This means having to continuously spend monumental sums of money just to keep from falling behind competitors. The kicker is that the cost of borrowing money to do so will assuredly rise.
Apple, Amazon, Alphabet, Microsoft, Nvidia, and Tesla have pledged to spend another $300 billion on AI infrastructure. This relentless cycle of spending and upgrading cannot go on forever. Something that few people are considering is how many data centers are actually needed to meet existing and reasonably expected demand? We will save for another day a discussion of where the electrical and cooling power to run all these centers will come from - and at what cost to society at large.
To financially survive, AI focused companies must generate enormous AI revenue streams that will exceed their former and ongoing AI capital costs. How are they doing in that regard? Not so well. Chat GPT has large revenues paid by subscribers ($2.7 billion in 2024 and $4.3 billion in the first half of 2025). But it is nevertheless operating at a large loss due to its very high operating costs. By some estimates it suffered a $5 billion loss in 2024.
It is true that Microsoft, Amazon, Google, Meta and others have huge unrelated revenue streams, but their AI revenues are not coming close to meeting, much less exceeding, their AI expenses. They are simply subsidizing their AI activities with their other income. The unknown is when, or if, their AI revenues will offset their past and ongoing AI expenses. Investors do not seem to care about this issue and simply assume that AI revenues will soon arrive in tsunami proportions. It is reminiscent of the dot-com bubble where hope sprang eternal - until it was dashed. It is true that the internet eventually revolutionized many industries and enriched many people, but not before it impoverished many others. AI is highly likely to have far reaching effects. But the timing and extent of those effects are uncertain. Some AI businesses will eventually thrive - many more will fail.
AI is having and will continue to have big impacts around the world - for better and for worse. The "better" is that, like robots, AI will help make businesses more efficient (at the cost of reducing employee headcount). The "worse" is that it can make all governments much more efficient in surveilling and controlling their citizens. Think: the "tele-screens" in the dystopian novel, 1984.
The Alarming Growth of Government, Corporate and Personal Debt
Ray Dalio, the founder of Bridgewater & Associates, the world's largest hedge fund, has written recently that, "The US and UK are heading into very, very dark times". He bases this belief on his analysis of governmental declines over the last 500 years. He writes extensively on the subject. His latest book, How Countries Go Broke, is well worth every investor's time. He is not the first to warn about the dangers of out-of-control government spending and soaring debt. Some 250 years ago, US Founding Father, Alexander Hamilton, presciently wrote,
Large government debt is perhaps the natural disease of all governments, and it is not easy to conceive of anything more likely than this to lead to great and convulsive revolution.
The near universal growth of massive government debt in all developed countries can be expected to lead to Dalio's "very, very dark times". We regularly write about the unrestrained growth of US and European government debt. Notably, it took the US government 197 years (to October 23, 1981) to accrue its first trillion dollars of national debt. It took that government just 71 days to add the latest trillion dollars of debt - now over $38 trillion.
It is hard to grasp the idea of a trillion dollars. It may be helpful to remember that it is one thousand billion dollars. So, the US national debt now stands at thirty-eight thousand billion dollars. Per the Congressional Budget Office (an arm of Congress tasked with estimating future government income and expenses), this debt will reach $185 trillion in nineteen years. We are confident it will not take any where near that long because the CBO's estimate assumes no recessions during that nineteen year period or any other untoward developments (wars, pandemics, social upheaval).
Government apologists argue that vast government spending is necessary to "prime the pump" to grow the economy. That might be true if government spending actually resulted in a "multiplier effect" for the economy (that is: each tax dollar spent creates more than a dollar of growth). Unfortunately, that is demonstrably not the case. The following chart shows the growth of US government debt (red line) and growth of US GDP (blue line). Rather than positively stimulating GDP growth, it is instead retarding it because the massive sums of money going to pay interest on the debt are no longer available to support the economy. Debt has become an anchor on the economy. The resulting lack of growth of GDP makes servicing the soaring debt (paying interest to bond holders) a growing existential problem. Even Fed chairman Jerome Powell has expressed alarm saying that this path is "not sustainable" and that Congress must get control of its expenses - which, of course, it refuses to do.
While this lack of sustainability should be obvious to anyone over the age of ten, it utterly escapes the attention of those in Congress who continue to increase the debt to pay ever-soaring government expenses that well exceed government revenues. Aiding Congress' malfeasance, Powell has been busy cutting interest rates, making it easier for the government to spend money that it does not have. He has become a co-conspirator of Congress' gross mismanagement of the nation's finances - to the detriment of all citizens.
More remarkable, he recently announced that the Fed would cease selling off the assets it purchased with trillions of dollars conjured from thin air during the last financial crisis (what had been "quantitative tightening" of liquidity, or QT). He will instead allow the mortgaged-backed securities that the Fed bought from stressed banks to "run off" (mature) and use the proceeds to buy yet more US Treasuries. There is only one reason to do this. The Fed has growing concern about the shrinking demand for Treasuries. He cannot allow a "failed auction" of government debt to occur because that would ignite a global financial storm. He does not want to go down in history as the person responsible for triggering it.
This chart shows the US government's expenses by category (right side), receipts (left side) and the resultant budget deficit of nearly $1.8 trillion (mid-bottom yellow line) for fiscal year 2025 (ending in October). "Net interest" paid, ($970 billion, right side) now exceeds what is spent on "National Defense". Before long, it will exceed the nation's current biggest expense, Social Security. 
One might reasonably wonder, "at what point do the wheels come off?" It is commonly believed that when government debt-to-GDP exceeds 90%, trouble is brewing. US debt to GDP reached 90% in Q4 2010 and now exceeds 120%. The Congressional Budget Office estimates it is expected to reach 150% in thirty years. Its estimates have proven to be widely off the mark so take its estimate with a grain of salt. Albert Einstein famously said about interest, "He who understands it, earns it, he who doesn't, pays it". It is evident that national governments do not "understand" it.
The next chart shows the rapid growth of US government debt. The unspoken reality is that there is no possibility that this debt will ever be repaid in honest money. The time-honored way for governments to "manage" their enormous debts is to debase their currency so that creditors are continuously paid in devalued money. Is that dishonest? Of course! Doing so defrauds creditors who lent their money to the government in good faith. Sadly, history proves that governments do not deal in good faith. Therefore, you can count on the continuing debasement of your currency - indeed, all currencies. That means avoiding holding any more currency than is absolutely necessary to meet your ongoing expenses. Instead, you need to store the bulk of your wealth in assets that your government cannot debase by the simple expedient of printing more of your local currency.
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Bear in mind that national government debt is just part of total outstanding debt that includes, but is not limited to: state and local government debt, corporate debt, credit card debt, mortgage debt, and pension debt (underfunded government and corporate plans). The next chart reports on each US state's debt. The darker colors are higher levels of debt and the numbers are the amount of debt - in millions and billions. These sums are both alarming and growing worse. Rather than cutting spending to meet tax revenues, governments always seek higher taxes with predictable results: stagnating economies, the out-flow of people and businesses to lower-taxing jurisdictions, and falling revenues. Ever-higher taxes guarantee a slowing economy. 
US personal credit card debt has reached $1.21 trillion. Mortgage debt is nearly $13 trillion. Should any categories of debt begin to default in growing numbers - as they memorably did during the housing meltdown - another financial crisis is assured. That is because every debt is someone else's asset and that someone else is counting on being repaid to meet his own expenses. Defaults tend to cascade throughout the economy. The next chart shows the rising delinquency rate of commercial mortgage-backed securities (office building mortgages that have been bundled into securities and sold to investors). They ar higher than during the Great Financial Crisis.
The next chart reports on "margin debt". This is money borrowed by investors from their brokerage firms and used to place bets, largely on stocks. Margin borrowers have to post money or assets to secure these loans. Should margin debtors start to get margin calls (demands to post more money to secure the lending firm from losses as a result of falling asset prices), the margin debtors will either have to liquidate their margined investments or sell other assets to keep from having their margined positions from being closed out at a growing loss. Such rushed liquidations ensure falling market prices resulting in yet more margin calls. Market chaos can develop in a very short time. Too short a time for most investors to react. Even those without margin loans will suffer because their holdings will also lose value due to the cascade of sell orders. Yes, there are market "time-outs" that can be imposed to slow sudden losses, but they cannot contain a growing crisis for long.
Voters are constantly told by their elected officials that "the economy is strong". Do the facts support that representation or do they show increasing financial stress? Take home ownership for example. This is the dream of much of the population - a home of their own. Here is a chart reporting on pending home sales. Even though mortgage rates have come down from recent highs and reached historic norms, they are still too high for financially stressed buyers - and home prices remain elevated. Result? Far fewer home sales.
Average Fully Loaded Manufacturing Wages Per Hour in 2024
India: $4.50.
Mexico: $5.00.
China:$6.00.
S. Korea: $20.50.
Canada: $22.00.
Japan:$28.00.
UK: $30.00.
EU-27: $32.50.
USA: $44.25
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