Today I aded this explanation of the second bubble to the end of my Special Report on 3 market bubbles. This Part 2 is about the possibility of an economic recession and a related blow up in the debt market. Especially for AI debt. I’m reposting it here as a stand alone so no reader, who wants to read it, will miss it.
McDonald’s problem with its lower income customers continues. In third quarter earnings announced today, November 5, the company reported non-GAAP earnings per share of $3.22. That was 11 cents a share below Wall Street analyst estimates. Revenue of $7.08 billion, up 3.1% year-over-year, missed by $10 million. Global comparable sales increased 3.6%; U.S. comparable store sales increased 2.4%. The problem, as it was been in recent quarters is that the company continues to see sales drop to its lower-income customers.
This is a very difficult stock market. Even as stocks climb to new record highs. On the one hand, even investors who are all in, maybe even overweight to the long side, worry that this rally isn’t sustainable for much longer. By most historical standards valuations are off the charts. I get a steady stream of stories and posts asking whether XYZ stock has climbed to faro fast. Volatility on somedays can be downright scary with relatively minor events leading to big market moves. It’s simply very hard to stay on board this rally. On the other hand, it’s very hard to get off the train. I see lots of Wall Street analysts cutting recommendations from “buy” to “hold” on valuation fears, but I see almost no one saying “sell.” FOMO–fear of missing out–is just too strong. Which is totally understandable. The Standard & Poor’s 500 index was up 25.02% in 2024 and was up another 18.11% in 2025 to date through October 27. Market leaders have racked up even bigger gains. AI chip icon Nvidia (NVDA) was up 171% in 2024 and has gained another 39% in 2025 through October 27. It’s insanely difficult to walk away from those kinds of gains. So what’d you do?
We’ve reached a tipping point–an important and dangerous one for investors–in the AI infrastructure boom.The looming problem isn’t the incredible increase in AI capital spending, but a major shift in how companies are going to pay for the capital spending.
In their recently released third quarter AI companies such as Microsoft (MSFT) and Amazon (AMZN) have bumped up already stunning forecasts for their spending on AI infrastructure. Analysts at Morgan Stanley, now estimate that global spending on data centers will reach nearly $3 trillion between now and 2028.
Cash flow at the big highly profitable technology companies will cover $1.4 trillion of that.
The rest–$1.6 trillion–will have to be raised in the debt markets. The new generation AI companies such as OpenAI are all still burning cash and don’t have any cash flow to put to paying for this capital spending.
No slowdown on plans for AI capital spending in earnings results this past week from Big Tech. Alphabet/Google (GOOG) said it was increasing what it planned to spend on A.I. data center projects this year by $6 billion, after spending nearly $64 billion over the past nine months. Microsoft (MSFT) said it had spent $35 billion in its latest quarter, $5 billion more than it had told investors to expect just a few months ago.
Amazon (AMZN) said it would be “very aggressive” in adding more data centers and would spend $125 billion this year-— and even more next year. Meta Platforms (META) raised its spending forecast to at least $70 billion by the end of the year, which would be nearly double what it spent last year. The stock market reaction wasn’t unalloyed joy. Investors seemed generally positive on spending plans from Alphabet, Microsoft, and Amazon. And skeptical of Meta’s strategy and spending.
This is Part 2 of my Special Report 3 Energy Crises. I’ve also attached into the end of Part 1 that I posted earlier
Crisis #2–When Things Get Really Nasty
To understand the second of my three energy crises, think about where the NOW! stage has left us: electricity demand is surging with growth rates nobody expected; electricity prices are climbing with stunning rapidity; because no one saw this coming, the United States faces a potential gap between supply and demand created by the length of time it takes to built a power plant of any sort. Of course, I can fantasize that industry and consumers and government regulators and political leaders are going to have civilized productive discussions that will result in long-term plans that will solve these problems in the most expeditious manner possible while distributing the pain fairly among competing consumers of electricity.
Do I think this situation will actually play out that way? Nope. No way. Not a chance. Instead what I see happening is a period of bitter confli
U.S. crude stockpiles rose by 3.45 million barrels, the biggest gain since March, the Energy Information Administration said Wednesday. And this comes before the latest round of production increases from OPEC Plus have kicked in. In April. OPEC and its allies added just 25,000 barrels a day of production, a fraction of the scheduled 138,000 barrels a day production increases. A further boost to production quotas is expected at OPEC’s June 1 meeting.
To generalize, reading the current tariff situation after the China tariff “deal,” Wall Street sees less chance of a recession but still forecasts weaker growth, and strategists have pared back their expectations for Federal Reserve interest rate cuts to two or maybe just one in 2025 with the first cut not coming until December.
All estimates of the effect of the Trump tariffs and foreign retaliation are obviously shots at a moving target. But here’s how the Budget Lab at Yale sees the picture now. (This forecast includes all tariffs implemented in 2025 through May 12. It includes the effects of the lower rates with China, the deal with the UK, and the recently announced auto tariff rebate. The analyses assumes that the May 12 rates stay in effect indefinitely.)
Ford Motor (F), Cummins (CMI), and Mattel (MAT) are the latest companies to pull their revenue and earnings guidance for the rest of 2025 because of uncertainty introduced by the Trump tariffs.
Unilever (UL) and Nestle (NSRGY) both posted better-than-expected sales in the first quarter. Because they were able to push prices higher to counter surging commodity costs.
That’s not good news for consumers or food-price inflation. Both companies said customers will have to take some of the pain as a global trade war and surging commodity prices lift their costs again.
Inflation-linked bonds, TIPS or Treasury Inflation-Protected Securities–are the biggest losers in this month’s Treasury market selloff. The cause of the drop in this market extends beyond damage done by rising inflation expectations. The problem also is a result of a drop in liquidity on the TIPS market. And as such it’s a sign of increasing stress in the financial markets in general. (My YouTube video today is about stress in another are of the system–the growing inability of banks to sell on debt on their books from private-equity buyout deals.)
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