Wall Street’s Odor of Decay

A quick weather update. Our computer — somehow in league with the French authorities — has been warning us of an Extreme Heat Advisory throughout the week.

Today’s temperature is expected to hit 100 degrees, with tomorrow following suit. The Mirror reports:

Extreme heat is gripping the UK and Europe this summer, with nearly half of England and all of Wales officially in a drought. England’s Environment Agency and Natural Resources Wales announced their driest months on record, marking the third time they’ve been broken over the past five years. It comes in the wake of four record-breaking heatwaves since May, which Chloe Brimicombe, a climate scientist at the University of Oxford, explained that adaptation to and mitigation of climate change are urgently needed. “We need better long-term planning.”

The Washington Post states:

Few places around the world have experienced more unusual heat and drought recently than Europe. A record late-spring heat dome was a harbinger. Then the heat domes just kept coming.

These extreme conditions have turned once-lush landscapes dusty brown. Rhine and Danube rivers have been particularly affected.

Is this merely a product of shifting weather patterns, or does it signal a deeper transformation toward what feels like a final furnace?

We can’t say for sure… but here in France the atmosphere feels apocalyptic. Parched earth. Trees resembling zombies—standing but dead at their core. Ground so desiccated that walking on the grass sounds like stepping on glass. And people, like survivors from the fall of Rome, hide indoors, hesitant to face the daylight.

A heat apocalypse? Possibly. But there’s rain forecasted for Saturday.

Meanwhile…

Wall Street reeks of decay too. It seems as if the AI frenzy might be nearing a turning point.

The AI ecosystem consists mainly of three segments. First, the chipmakers—led by Nvidia, followed by Broadcom, Micron, AMD, ASML, and TSMC. They supply the essential tools. Combined, they’re valued at roughly $11 trillion but generate only $236 billion in free cash flow. A hypothetical investor purchasing the entire group and pocketing all the FCF would have to wait until 2073 to break even.

That figure assumes no disruptive technology emerges in the next 50 years and that capital spending ceases. It’s as unlikely as the Baltimore Orioles winning the pennant every year for half a century. Yet, this underlines how difficult it is to profit when an asset is overpriced from the outset.

Driving chipmakers’ growth is investment by the so-called ‘hyperscalers’—Microsoft, Alphabet, Apple, Oracle, and Meta. These giants thrived and expanded following the last major tech boom and bust. Together, they boast a market value near $16 trillion. Instead of distributing profits as dividends, they funnel money into capital expenditures (Capex) to maintain leadership in cutting-edge technologies. This cycle highlights how challenging it is to profit in emerging tech; there is always another innovation on the horizon.

Their Capex planned for the upcoming year is nearly equivalent to 3% of GDP. Here lies the catch: capital injected into one firm reappears as income for another. Casual investors interpret this swirl as a boom and scramble to buy tickets before the curtain falls.

The third group comprises the AI developers themselves—OpenAI, Anthropic, xAI among the leaders. These firms contract with the chipmakers and hyperscalers, offering continuous ‘proof of concept’ and fueling enthusiasm among AI supporters.

Underlying it all is a belief that reducing the cost of acquiring knowledge—thus eliminating the need to pay experts—would raise overall prosperity.

Yet creating impressive technology is only half the battle. Selling it is another matter. Henry Ford doubled factory wages to enable workers to afford cars. In contrast, AI advances are leading firms to cut jobs rather than raise pay. Forbes observes:

Companies Are Firing Workers To Fund AI That Isn’t Working Yet

During the Dot.com boom, investors bet on internet traffic doubling every 100 days, assuming sales would follow suit. Success hinged on attracting as many ‘eyeballs’ as possible.

Now AI may actually be eliminating some of the ‘eyeballs’ it needs to sustain itself. As in previous tech revolutions, displaced workers may eventually find new means of earning income. Perhaps, as in past eras, they will become grooms, gardeners, or chambermaids serving AI moguls’ estates. Still, the transition from pink slip to new livelihood could be painful.

While the viewership may diminish, we’re told major AI ‘labs’ hold a tollgate on the road to the future. This is plausible. High barriers to entry mean only a few players control access, much like oil companies. Alternatively, for reasons citing ‘national security,’ the government could take control of the route. The big tech CEOs stood alongside Donald Trump at his second inauguration. Could there be an undisclosed public/private pact funneling AI activity onto regulated thoroughfares? Possibly.

However, every bubble eventually meets its bursting point. The AI hype is encountering the familiar headwinds that typically bring investment frenzies to an end. Most crucially, the small stream of profits this industry might generate will be overwhelmed by the flood of investment that has poured in.

After the peak in 1999, Microsoft, a genuine success story, saw its share price fall by half. Intel investors suffered even longer, with recovery only arriving more than 25 years later. JDS Uniphase, to cite a notable bust name, lost 97% of their investment.

The prick that pops the bubble may take its time. But we doubt AI investors will fare any better.