An AI-fueled mania
Thoughtful minds are saying the stock market is in a bubble, comparing it to the dotcom debacle. The prevailing rebuttal is that this is different because these are profitable companies, not Pets-dot-coms with only hopes of making money.
The trouble with that is that they’re nevertheless being priced on hopes of making money.
Take Palantir, for example. It’s a real company, yes, with real profits, yes … but it’s trading at a 666 times those profits. At that multiple, it would take literally centuries for an investor to break even. The implicit rationale is the hope to profit by selling to someone else willing to pay even more; the greater fool theory. But, the rationalizers say, it’s growing those earnings fast. The multiple on future earnings is much lower.
Now you see what’s going on here? It’s logical sleight of hand. On one hand, the argument is these are real companies with real earnings, but on the other they’re not being priced on those real earnings. They’re being priced on hypothetical future earnings.
Just the same as the dotcoms.
““At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at USD64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?”
– Scott McNeely, Founder and CEO of Sun Microsystems”
McNeely was calling “ridiculous” the 10 times revenues valuation put on his stock in the dotcom bubble.
Palantir trades at 90 times revenues.
Let’s take a quick look at Nvidia. Its earnings are given as $3.5135 a share. At a price of $206.64 a share, that’s a PE of 58.81.
But of this $3.51, it pays a dividend of $0.04 per share, for a dividend yield of 0.02%. Where did the other $3.47 of earnings go? Most of it is retained in the corporation. But if it takes $3.47 of $3.51 earnings to maintain its competitive edge, can the whole $3.51 be truly said to be shareholder profits?
From the investor’s point of view – based on the actual price of the shares and the actual earnings received – the price to earnings ratio is $206.64/0.04 = … 5166.
That’s right. If you buy Nvidia stock today and receive the earnings it shares with you you will have recouped your investment in the year 7191.
Of course this is hardly unique to Nvidia. Corporate accounting standards are at fault. But how is the average investor, automatically shoveling part of his hard earned paycheck into an S&P 500 fund in his 401(k), expected to know? He’s being urged to part with his money on the basis of past returns.
Earnings are when the company sends you a note saying your shares earned money.
Dividends are when they send you the money.
“How can a company with $13 billion in revenues make $1.4 trillion of spend commitments?” Gerstner asked the OpenAI CEO. “You’ve heard the criticism, Sam.”
The market averages are infamously being inflated by a handful of teracap stocks. The NASDAQ and the S&P are poster children, but these stocks have grown so big even the entire world market is growing dominated by them.
The fund VT represents the world stock market. As of the end of the third quarter, Vanguard lists the top ten stocks as follows:
Nvidia Corp (NVDA) 4.26%
Microsoft Corp (MSFT) 3.75%
Apple Inc (AAPL) 3.62%
Amazon.com Inc (AMZN) 2.05%
Meta Platforms Inc (META) 1.56%
Broadcom Inc (AVGO) 1.49%
Alphabet Inc (GOOGL) 1.38%
Tesla Inc (TSLA) 1.22%
Alphabet Inc (GOOG) 1.12%
Taiwan Semiconductor Manufacturing 1.03%
By market capitalization, Nvidia alone accounts for 4.26% of the entire world’s public industry. At over $5T, its market cap is more than the GDP of Japan, Great Britain, India … every nation in the world except for the US, China, and Germany. And it’s pretty close to eclipsing Germany.
The top nine are all US companies, the tenth is the maker of most of Nvidia’s chips … Nvidia itself doesn’t make them. In fact, Taiwan Semi makes most of the world’s chips. And it only comes in in tenth place.
The top ten stocks make up over a fifth – 21.48% – of the market cap of the nearly ten thousand stocks VT tracks. The average ten stocks accounts for 0.1%. This is a narrow and top heavy market.
None of these companies builds homes or grows groceries, the things that are most precious to and becoming increasingly unaffordable for the masses. The Austrian school calls this malinvestment; a phenomenon associated with easy money and asset bubbles.
https://www.telegraph.co.uk/business/2025/11/04/big-short-trader-makes-1bn-bet-against-ai-boom/
Mega’s dispatch from England:- Time to pay the piper
Greeting fellow travellers, tis a sad story i have for you tonight……why gambling is bad. As you might recall over the last 4 years there been a bit of a conflict going on in Ukraine. I leave the well trodden Geo- political path alone as its very well known.
For years Blighty decided to back the wrong horse. I cant for the life of me understand WHY they thought this was a winner as Nazi’s in Europe have a rather poor bating avg. Anyway two important points, 1st Blighty along with others gave Ukraine a series of LARGE loans or rather they guaranteed the loans. They have of course failed to honor them…….this was intended, a way of ripping off Ukraine natural resources & assets.
The 2nd however has gone a bit “Pear shaped” i that we are now in the somewhat unfortunate situation that those assets/resources are under Russian boots.
This comes under the major heading of “Oh Fu@k”. Like a drunk trying to outrun the local police in his 15 year old pick up truck he believes that that he possesses the skills of Ayton Senna……when he in fact to clueless drunk fat f&&k whom is going to ending the night in jail….if he lucky!
Well, it “Morning” & Dumb F**k is just waking up in the jail cell…….
The British government has SUDDENLY discovered a £40 billion black hole in the accounts!
Gee i wonder where that cam from?!
Ukraine is now being drip feed money to service the loans, but its out of control.
The Budget is almost here & our government (most hated in history) is dropping hints that its going to be a bitch! Please bear in mind that we already paying the HIGHEST taxes in the last 45 years & now we are to be taxed yet MORE.
Anyone with serious money IS shipping out, we here that a “Leaving tax” of 20% is being ready. Its all forming a prefect storm. The piper wants paying……
It’s been mere hours since my post and already markets are selling off hard, led by of all things the two stocks I used as examples. Today Palantir is down 8.83% and Nvidia 3.51%.
It’s not my fault! These stocks had no business ever trading at such ridiculous prices. I’m not knocking the companies … make no mistake … they’re great businesses … it’s just that they were trading at beyond great prices. Financial media lite may sell stories, but in the end math counts … no matter how great a business is, there is a price beyond which there are no returns.
There is a whiff of deflation in the air. Even gold is getting thrown out with the bath water today. Of all the asset classes I track, only Treasuries are in the green today. According to the forex market, “the dollar” is up today. To that I add that it’s not just versus other currencies, but it’s up versus almost everything.
This is good news for inflation sufferers. Should it continue, some of that inflation recently registered in the markets this year might still be headed off before it hits consumer prices.
We have no idea though whether it will continue. The bond market cut rates today. If that continues, the Fed will follow. But the fact that inflation has been running rampant does not mean that deflation is far afield … as I’ve pointed out in these pages numerous times, deflation does not usually emerge from inflation falling too low … it tends to be borne from spiking inflation. As it did in 2008, when Fannie, Freddie and Lehman Bros all collapsed in a tidal wave of deflation mere weeks after oil hit an all time high.
Cash and Treasuries are good hedges.
One of the positives to emerge from the AI bubble is the reallocation of computing resources from crypto mining to productive pursuits. Reasonable minds can debate how much, or more pointedly how much the stocks are worth, but few would maintain that AI has no utility at all. CNBC reports bitcoin mining farms are now turning to selling their considerable computing capacity to support AI, effectively becoming improvised data centers.
Bitcoin itself is making news today, having fallen back below the psychologically significant $100,000 threshold. This synthetic tech stock may be the most overvalued of all, having no earnings upon which even to base a PE. As an electronic casino chip, it arguably provides entertainment value, but against its voracious consumption of energy and talent, it’s hard to imagine a lower return on investment. Imagine if just a fraction of the natural and human resources poured into bitcoin had been instead devoted to providing more affordable housing, medical care, or feeding the hungry.
Crypto Ain’t Digital Gold
Treasurys have been given the black eye the past couple of years because they failed to diversify stocks in the bear market of 2022 and because of the federal debt.
The second is the more legitimate concern, but also a secular one. Treasurys’ correlation with stocks is a more cyclical issue, and it depends on the source of pressure on stock prices. In 2022, it was bonds themselves, hiking rates to combat inflation, that changed the discount equation and resulted in stocks falling in price. Of course they correlated.
If stocks decline on their own accord, for example because a bubble is deflating, bonds could well be diversifying again. One day doesn’t make a trend, but it’s interesting that Treasurys rose today as stocks sold off. Gold sold off too, illustrating the ongoing value of three way diversification.
Supreme tariffs … quick comment.
1 Only Congress has the constitutional authority to levy taxes.
2 In the case of foreign commerce, Congress has delegated this authority to the Executive.
3 The cure for this is being sought in the wrong place. The challenge to the tariffs should be heard in Congress, not the Courts.
4 The cure should fit the disease. To remove the President’s authority to levy tariffs, the logical solution is to undo the act which gave them to him. Congress should repeal the 1977 act and any others that it doesn’t intend to be used.
Because that’s the logical solution, it’s unlikely that will be the path chosen. Instead, the Supreme Court will “interpret” the act in the way that it chooses, in effect legislating from the bench.
Big picture: Congress is dysfunctional and has been effectively offloading its constitutional legislative duty onto the Executive and Judicial branches. The whole system of party recognition, committees and rules needs to be overhauled.
Ron Paul agrees:
“For Dr. Paul, this legal fight is a symptom of a deeper rot: Congress’s willful surrender of its own power…”
Ron Paul: U.S. “totally bankrupt,” warns fed strategy “is to cause chaos”
What a Bloody nasty air crash…….my thoughts are with all those concerned. MD11 AKA DC 10……i seem to recall one of these planes dropping an engine on a runway @ takeoff. MD11’s didn’t sell well & they were maintenance nightmares so they got dumped after a short service life.
That little Honda is making progress, i think we be in a Mega fuel troubles with in 18 months….might have to look at this.
https://www.youtube.com/watch?v=ZOVYZLDnnA0&t=363s
Mega’s Dispatch from England:- Power to the people (Electric power that is).
Oh Ye, the blessed overseers whom watch & guide our every move are once again “Here to help”. Ev’s are too expensive?……….cant afford to “Up grade”……..Oh ye of little faith.
https://insideevs.com/news/778201/renault-twingo-e-tech-ev/
Ah……yes, just what the Plebs….er i mean People need.
80 bhp
12=13 secs to 60
80 mph flat out (Someone tell Jimmy his 85 mph speedo is not required.
“160” mile range………..(90 ish at best).
DRink deeply from the well of nothingless……….
Can they force him to attend?
https://news.sky.com/story/andrew-mountbatten-windsor-summoned-to-us-to-explain-epstein-links-13464390
With each passing day it’s looking more like we may indeed be witnessing the implosion of a bubble. In a reversal of the prior trend, supercaps continue to underperform the rank and file. The Financology model portfolios with the flatter weighting and emphasis on dividends, quality and value, are strongly outperforming the cap weighted indices. The sustainability of the new trend is supported by the fact that it’s associated with concern about valuations, and there’s plenty more room for that. Could it go on for a few more months? Sure. But if not November 1999, this has a feel of March 2000 to it. It may well turn out that the top was seen on October 28, 2025.
But the Fed is cutting rates!
Readers will recall the Fed cut rates all through the last two major bear markets in 2000-2002 & 2007-2009.
This article expands on some of the points I raised in my earlier comments:
These Analysts Predict an AI Sell-Off. Here’s the Long-Short Trade They Suggest
I’ve compared the contemporary American infotech industry to the seventies auto industry on several occasions, citing the dangers of complacency and arrogance, and suggesting that China could become to American infotech what Japan was to US auto. This article outlines how it could go down:
China’s Open-Source AI Strategy vs Big Tech’s Trillion-Dollar Bet