Just because we can’t imagine it doesn’t mean it won’t happen
I was asked by a reader, who sent me a link to an article in which the author claimed that the AI bubble was ready to burst. To this claim I responded.
Short-term economic constraints need to be alleviated
Of course, there are going to be short to intermediate-term issues as economic factors of supply will be constrained and distorted as AI implementation accelerates. There are sizable energy obstacles to overcome and I see this one factor as the single biggest short-term impediment hindering a fuller AI build out.
Consumer’s electric bills are already escalating quickly as any surplus electricity supply is being devoured by the data centers. I see it firsthand here in Northern Virginia. This is why there is such a concerted effort to ramp up other forms of energy production, like relatively portable nuclear power.
However, I also suspect that the consumer’s appetite for EVs is also placing an ever greater burden on the electric grid as well. The economy’s transformation to everything electric is coming at the worst time for data center build out. In the short to intermediate term, the power grid is just not robust enough to handle it all. This is why we are seeing greater calls for alternative forms of energy.
Of course, there will be labor shortages as well over the short intermediate term as the economy adjusts to the new labor demands that AI and data centers will bring. This will be alleviated over time as well.
Higher paying jobs to be lost over others
AI itself is going to be deflationary in nature. The labor pool will move to where the demand is needed and this will take time.
Unfortunately, for those who continue to underestimate the impact of AI on the lives of the many, there will be an ongoing crash for years as white collar workers are decimated in their professional endeavors.
Blue collar workers will be relatively immune for now as the robotics that the author notes as being cost prohibitive in a lot of manual job sectors will delay any meaningful rollout that would contract this aspect of the job market.
Indeed, this wave of AI roll out seems to be centered on the information aspect of the economy and this is where the white collar worker is going to be hit the hardest. Microsoft itself says that blue collar workers are relatively immune, since the mass replacement of blue collar workers with robotics is at least 10 years out.
The AI transformation is deflationary over the intermediate to long-term
Despite all of the consternation over the economic constraints that the rollout of AI brings, I have to conclude that this ongoing transformation will prove to be deflationary in nature.
What do I mean by this? Despite all of the concerns regarding the supply of trained labor needed to run AI data centers as well as its impact on the construction and power markets, over the longer term, these issues will work themselves out.
While AI is causing supply constraints, it’s inevitable implementation will free up other factors of supply as well.
To an objective eye, the deflationary aspects of an information-based AI roll out is simple to see. There will just be less higher paying job growth over the intermediate term and a lot of manual paper pushing will be automated.
AI will also free up a lot of economic supply issues as well. Time is a limited resource for employees and people and AI is going to make great inroads in helping people to free up the limited amount of time they have every day.
I also envision circumstances in which AI based information will help to alleviate the costs of healthcare and education. I can easily see scenarios in which professionals like doctors, teachers, psychologists, etc. will find it more difficult to differentiate themselves and obtain fat paychecks. AI chatbots will replace physical doctors. Depressed children will consult with AI chatbots on a telescreen.
Unfortunately for those in the bottom 80% of balance sheet wealth, the economic divide will persist and grow. For those dependent on a job, worker competition will keep wage growth subdued. For the asset owners, AI will go a long way in lowering their cost of capital, which will help asset prices and enhance profits.
AI helps QE
The Federal Reserve is waking up to this reality
The transformations to the economy since covid have been breathtaking. Unfortunately, the vast majority of the population have been unable to adjust to this new reality, let alone recognize it. Yes, it seems that only the asset owners have been benefiting at the expense of everyone else.
Even the writers in the alternative media don’t see what I see. There’s no bubble forming and there’s no crash coming. There’s only a harsh transformation that 90% of the population are still in denial about. This includes my psychologist wife.
In a sense, the economy has been crashing for several years. In reality, the economy has been transforming into one in which the income-generating asset owners continue to move forward at the expense of the average worker.
I believe as this harsh reality is finally digested by the average person, inflationary expectations will continue to abate and will provide enough justification for the Federal Reserve to expand its balance sheet and lower interest rates over time.
Warren Buffet recognizes it. Berkshire just took a stake in google. If what you say here happens, imagine what will happen to social security. How will it be funded if most white collar works goes away?
Most people’s income will slide dramatically but the money has to go somewhere. I imagine it will be accumulated by the shareholders of the biggest tech firms: Microsoft, Nvidia, and Google.
Maybe this is why there’s such a great push to deport illegals. The only work that will be left will be blue collar work.
The Fed Is Fixated on AI — But Not Ready to Make a Greenspan-Size Bet
(Bloomberg) — Like everyone else, policymakers at the Federal Reserve are increasingly obsessed with artificial intelligence and its promise of a turbocharged economy. They’re just not ready to make a big call that the revolution is under way.
Analysts across the financial world are scouring data for signs AI is making the economy more productive – the holy grail of new technology. The last sustained boost of that kind was the 1990s internet boom. Back then it shaped Fed policy: Chair Alan Greenspan reckoned innovation would allow faster growth without triggering inflation, and used that argument to keep interest rates down.
Right now, US central bankers are in agreement that AI will be transformative — but essentially in “too early to tell” mode when it comes to how the effects will land. A more immediate concern is above-target inflation, leaving many policymakers opposed to rate cuts. Others put more weight on weak job markets and support further easing: AI’s ability to replace workers is part of that case, but not front-and-center.
Caution is par for the course, because technological leaps often take years to work their way through the economy and show up in data. But the Fed is under pressure at a pivotal time.
‘Open Mind’
Chair Jerome Powell’s term ends in six months. President Donald Trump says he’ll pick a successor committed to lower borrowing costs. Treasury Secretary Scott Bessent, who’s in charge of the selection process, says whoever gets the job should be open to making a Greenspan-style early call.
In the first half of 2026, “AI implementation is just really going to start biting in terms of productivity,” Bessent told CNBC last month. “It would’ve been easy for Alan Greenspan to kill the internet boom, not be open to the idea that there was a productivity boom and slam on the brakes,” he said – adding that the next Fed chief should have “an open mind” on the topic.
There are five names on Bessent’s shortlist. In recent weeks four of them signaled they’re receptive to his case.
Kevin Hassett, head of Trump’s National Economic Council, said AI is lifting worker productivity at a “remarkable rate.” BlackRock Inc. executive Rick Rieder said “we are in a productivity revolution.” Former Fed Governor Kevin Warsh wrote in the Wall Street Journal that “AI will be a significant disinflationary force, increasing productivity and bolstering American competitiveness.”
Current Governor Christopher Waller sounded a little more cautious, saying he has “no doubt” AI will boost the economy and is “hoping” for sustained productivity growth. The fifth candidate, Vice Chair for Supervision Michelle Bowman, has tended to discuss AI more in the context of regulatory work she oversees.
All of this suggests AI is set to take up an ever-growing share of Fed attention – and of course its implications for the economy go far beyond the central bank’s interest rates.
The rush to develop AI is already driving a large portion of US growth, not to mention a stock market that many believe is in bubble territory. Businesses and consumers are rapidly adopting the technology. For the economy, as well as for equity valuations, the big question is: what’s the output from all these inputs?
That boils down to productivity, or how much workers can produce using the available tools. Numbers are volatile and notoriously hard to parse, but they’ve picked up lately and some economists think it’s an early AI effect.
What Bloomberg Economics Says…
“A productivity boom is a dream come true for any central banker, and a unicorn for any macroeconomist. It comes once in a couple of decades.
The question is: are we in one right now? At the macro level, the evidence is unclear. At the micro level, we think evidence is starting to trickle in. History has also taught us that a productivity boom only shows up belatedly in the macro data well after it began.”
— Anna Wong, chief US economist
The St. Louis Fed has been asking workers in regular surveys how many hours they saved by using generative AI. Researchers found it may have boosted labor productivity by as much as 1.3% since the release of ChatGPT three years ago.
“What surprised me was how clearly the signal is already appearing at the industry level,” says co-author Alexander Bick. “The correlation is already there.”
For anyone trying to answer this key question — whether it’s Fed officials, corporate chiefs or investors — there’s a fundamental problem, according to Kristina McElheran of the University of Toronto, who studies AI and the future of work. There’s a lack of “nuanced, high-fidelity data on AI use by firms,” she says, while many of the headline-grabbing studies are based on “really questionable information.”
“We are flying blind into this AI revolution,” McElheran says. “We don’t have the statistics that we need for policy. We don’t have the statistics we need for managers.” As a result, all modelers can do is “take past trends and try to fit them onto stuff that’s happening super-fast right in front of us.”
‘Augmenting That Human’
Business owners who are adopting AI get the real-time view, and many see dramatic gains in productivity.
Peter Capuciati’s company Bluon Inc. has been building an AI model with a database that covers generations of HVAC equipment, using insights amassed by its own technicians answering several years’ worth of calls, as well as tens of thousands of manuals. Around 160,000 technicians now use the free version and some 13,000 pay for the full service. Capuciati reckons it can save them up to eight hours a week.
“Techs don’t like to admit that they have a problem or they don’t know something,” Capuciati says. “So if they can go to an AI source and either confirm their assessment or be guided elsewhere, that’s a very time-saving process.”
Christopher Stanton at Harvard Business School has been tracking Bluon’s deployment of AI. He sees it as a winning formula for higher productivity in an industry running low on skilled workers.
“The machine is simply augmenting that human with information about how to do those things,” he said. “It’s a very powerful driver, especially in places where we think there are labor shortages.”
‘My Usual Pessimism’
There’s a darker flipside to that idea, which taps into some of the fears around AI. A technology that allows fewer workers to generate the same output could be an effective way to fill labor-market gaps — or a job-killer that leaves workers with nowhere else to go.
Typically when the economy takes a technological leap forward it finds ways to redeploy labor. While the 1990s internet boom ended in a stock-market bust, its productivity legacy ran for around a decade and has yet to be matched.
Back then, according to Julia Coronado, founder of Macropolicy Perspectives LLC, companies were taking advantage of innovations to expand employment. Now she says they’re more likely to be using AI to reduce their workforce.
The Fed’s recent Beige Book surveys cite evidence that AI is a drag on hiring demand, especially for entry-level jobs. A Capital Economics study points out that the information tech industry, not surprisingly an early adopter of AI, has been chipping in a bigger chunk of US growth even as its payrolls shrink — evidence of productivity gains, but also of risks as the technology spreads.
That’s something on the mind of Robert Gordon, a professor at Northwestern University and author of “The Rise and Fall of American Growth.” Gordon, who’s among the most-cited scholars of long-run economic trends, has often been skeptical about the ability of new inventions to deliver a growth payoff on the scale that older ones did.
In the case of AI, the 85-year-old Gordon says, “I’m willing to bend from my usual productivity pessimism.” He sees a chance of faster increases than the US has enjoyed over the last couple of decades — “somewhere into the mid 2% range, probably not 3% for very long, maybe for a year or two” — and thinks they might also be more sustained than the ones that followed the internet boom.
But Gordon worries there’ll be a darker side to the coming era. Instead of the low-inflation, low-unemployment growth spurt of the late 1990s, AI may end up creating “a whole raft of new social problems coming with white-collar displacement,” he says, “in a society where white-collar work is the ambition of every young person.”
ADP number comes in slightly weak. Headline PPI comes in as expected, while the core comes in slightly lighter. The highly volatile Retail sales is definitely less than expected. Keep in mind that the data release this morning is for September.
ADP Employment Change Weekly
Act: -13.50K Cons: Prev: -2.50K
Core PPI (MoM) (Sep)
Act: 0.1% Cons: 0.2% Prev: -0.1%
Core PPI (YoY) (Sep)
Act: 2.6% Cons: 2.7% Prev: 2.9%
Core Retail Sales (MoM) (Sep)
Act: 0.3% Cons: 0.3% Prev: 0.6%
PPI (MoM) (Sep)
Act: 0.3% Cons: 0.3% Prev: -0.1%
PPI (YoY) (Sep)
Act: 2.7% Cons: 2.7% Prev: 2.7%
PPI ex. Food/Energy/Transport (YoY) (Sep)
Act: 2.9% Cons: 2.7% Prev: 2.9%
PPI ex. Food/Energy/Transport (MoM) (Sep)
Act: 0.1% Cons: 0.2% Prev: 0.3%
Retail Control (MoM) (Sep)
Act: -0.1% Cons: 0.3% Prev: 0.6%
Retail Sales (MoM) (Sep)
Act: 0.2% Cons: 0.4% Prev: 0.6%
Retail Sales (YoY) (Sep)
Act: 4.26% Prev: 5.02%
Retail Sales Ex Gas/Autos (MoM) (Sep)
Act: 0.1% Cons: 0.4% Prev: 0.6%
House price data definitely looking weak, however this is the slow time of the year. NSA data looks seasonably weak.
FHFA House Price Index (MoM) (Sep)
Act: 0.0% Prev: 0.4%
FHFA House Price Index (YoY) (Sep)
Act: 1.7% Prev: 2.4%
FHFA House Price Index (Sep)
Act: 435.4 Prev: 435.6
S&P/CS HPI Composite – 20 s.a. (MoM) (Sep)
Act: 0.1% Cons: 0.1% Prev: 0.1%
S&P/CS HPI Composite – 20 n.s.a. (YoY) (Sep)
Act: 1.4% Cons: 1.4% Prev: 1.6%
S&P/CS HPI Composite – 20 n.s.a. (MoM) (Sep)
Act: -0.5% Prev: -0.6%
Now Trump has signed an E.O. on A.I. called genesis. Operation warp speed of A.I. The digital technocratic shift is full speed ahead!
Very astute and solid perspective- I was just reading this article on the same topic https://www.fintechbrainfood.com/p/ai-is-rewiring-the-economy he also leans into the idea that ai is going to be deflationary however I think he glosses over the pain that many people are going to experience in this orchestrated reboot of economic activity I feel like it’s going to force many into severe austere conditions. I suppose all the super elite at the big hyperscalers announcing all these huge capex expenditures in ai know the planned outcome and that they will come out on top regardless.
We have spoken in the past about real estate investing. I hope you’re still working at it.
I want to give you a real life example of what is taking place for me and what is a common occurrence with other SFR investors.
Earlier this year, I was able to raise the rent on one of my SFR’s, while simultaneously refinancing its old DSCR 7.825% mortgage I took out in the late summer of 2023 into one with a much lower interest rate of 6.25%.
The DSCR ratio on the old loan was 1.0, which meant my rent equaled my mortgage. After the refinancing and raising the rent, I created over $800 in monthly rental income on that property. I raised the rent $550, while lowering the property’s mortgage about $270.
I am now contemplating another straight refinancing. This current loan carries a 7.5% interest rate that I took out in 2023. I can now refinance for as low as 6%, while I just raised the rent almost $300. Since I prepaid about $30,000 of this current loan, any refinancing would raise my current monthly rental income from $275 a month to about $700 a month. Up until around June of this year, my DSCR loan ratio of 1.0 meant I had $0 of rental income.
Between the two houses, this means my rental income will go up at least $1,500 a month.
This is the power of lower interest rates and costs of capital. I have two more loans after that that are currently over 7%.
This is a rinse and repeat operation and I took out all of these mortgages, because I used the proceeds to facilitate six tax exchanges out of six black tenants occupied PG condos and into six houses that all have white tenants. I took two steps back with regards to cash flow and I’m in the process of taking three steps forward.
I am greatly encouraged with the deflationary pressures in the economy caused by the economy’s transformation.