In our last quarterly newsletter, I offered my view that the broad stock indexes are getting close to the end of their multi-decade upward trend but still have some positive returns left. We saw the snapback in the second quarter of this year.
I believe the S&P500 is THE most important economic indicator in the world today. Despite clear signs of economic stress in our economy, advancing stock prices tell us that the economy remains stable.
Furthermore, I believe it is critical for the Trump Administration to keep stocks elevated through the mid-term elections. The problem is that the President’s many enemies desperately want him to lose his majority in both Houses of Congress in November – and I suspect they would like to see weakness in the stock market ahead of the election.
The power of the US government is staggering but so too is the power of global central banks who are in opposition to the American System I introduced to you in the last newsletter. This suggests that we are going to experience many surprises in the next six months as two prospective systems battle for the upper hand. Ultimately, I expect stocks indexes to rally into the mid-term elections.
Artificial Intelligence
So far, the only winners in the race for AI have been semiconductor companies – those that make graphic processing units – Nvidia – and those that make random access memory – Micron. The suppliers to these companies have also performed well. The companies that build the frontier large language models (LLM’s) OpenAI and Anthropic, are losing tons of money. In 2025, OpenAI lost $1.60 for every $1.00 of revenue.
Meanwhile, the companies that call themselves “hyperscalers” because they intend to invest aggressively in the space to dominate the markets from beginning to end, are spending $700 billion per year in capital expenditures. There are no records of the companies that operate data centers because they tend to be private but investment funds that provide the “private credit” to the data centers are reporting massive losses because the data centers are not producing enough returns to pay their debt obligations. Investors in these funds have been prohibited from removing their money in many instances.
According to Pew Research, 20% of US workers use AI at their jobs. In general, top management is enthusiastic about using AI while the users are largely unenthusiastic. This is a common theme in corporate usage of AI – managers are shoving it down the throats of workers without a clear reason for it. In general, every study I’ve seen indicates that management is afraid to be left behind while lacking a clear fundamental reason for their advocacy. It represents coerced adoption, not organic demand. Logitech’s CEO Hanneke Faber described AI as “a solution looking for a problem that doesn’t exist” in an interview with Bloomberg.
AI was designed as a social control mechanism. It is great at amassing information on people, groups, industries, etc. but little else. When the Trump Administration took control, the industry was forced to find other uses besides being a tool for governance. To date, it has been a failure yet the investment continues unabated.
The Trump Administration supports it because they see a great race for dominance with China; I see winning this race as a Pyrrhic victory at best. China is a totalitarian state which is why they need AI. I think the real reason the Trump Administration supports the investment is the chart below that shows AI investment is driving economic growth. There are similar charts for software, data centers, and R&D.
Investments in Information Processing Equipment: Contribution to GDP Growth
I covered this discussion more fully in a recent piece on the 2nd Derivative section of our website. Here’s a link: https://geovestadvisors.com/tokenomics-equals-panic/
The most interesting development in the realm of AI discussion is that I’m not alone in my skepticism – the room is too small to contain us. Analysts are openly discussing its failure even as companies such as Ford Motor have been forced to re-hire engineers formerly replaced by AI. Even the central bank of central banks – the Bank of International Settlement (BIS) has warned of its failure. There are successes but they are relatively few and definitely do not justify the massive investment in AI.
As I mentioned in our 3rd quarter 2025 newsletter, the hyperscalers such as Google, Microsoft, Amazon, Tesla, and Meta don’t generate enough cash flow to continue this level of spending and right on schedule, Google and Meta started plans to sell stock to the public. These are the same companies that bought back stock aggressively in previous years. Even Nvidia, which is extraordinarily profitable, recently borrowed $20 billion in the bond market to invest in AI.
AI Infrastructure
To understand the problem, it’s important to understand the infrastructure that makes AI possible. It starts with “Cloud” data centers owned by Amazon, Google, and IBM predominantly. These data centers hold the information that supplies AI and are giant buildings full of computers that hold all of the information uploaded by people, governments, and businesses. These facilities are connected to AI data centers through the internet.
AI data centers are like Cloud data centers but they are full of very powerful servers that run predominantly Nvidia graphics chips and which can process voluminous amounts of data quickly. They use enormous amounts of electricity which requires extensive investment in cooling equipment and water supply.
Each time you use AI, the query is processed through a data center which gets the information from Cloud data centers. Besides the obvious copyright infringement of using supposedly private data, the act of processing each query is extremely expensive in terms of energy, cooling, and paying its part of the extraordinary fixed costs that made the query possible in the first place.
AI data centers appear to be extremely unprofitable because it is impossible to get economies of scale from the process – each query uses enormous electricity and cooling, using the equipment more intensively only makes it break down faster. Such is the nature of being at the extreme limits of silicon-based technology. The laws of physics can’t be managed further.
The investors that provided the funding for these data centers are experiencing significant losses through their private credit investments. There isn’t enough demand for the processing services of AI data centers. Companies like SpaceX and Meta rent out their spare AI capacity. It seems that everyone has excess capacity which is why I’m doubtful of further data center buildout.
The hyperscalers such as Meta are experiencing similar losses off their books due to the declining value of the special purpose vehicles they employ to invest in data centers without reflecting the investments on their books. In this way, the Mag 7 stocks are very similar to the defunct Enron. I’ve written about this connection in our 2nd Derivative section – here’s the link: https://geovestadvisors.com/field-of-dreams/
Index Funds
Technology stocks make up roughly 50% of stock market capitalization which makes the previous discussion extremely important for understanding the future of stock market indexes. Unless AI companies find a real, positive use for AI, we’re sitting on a time bomb.
Even the semiconductor companies that supply the buildout have a serious problem. If your customers don’t earn money, neither will you – for long. Furthermore, semiconductor companies are benefiting from an artificial wave of demand besides AI. The Trump Administration is pushing for the repatriation of chip production back to the US and while strategically admirable, this move is creating grotesque excess capacity in the world. Excess capacity means lower future prices.
These are the two time bombs that will ultimately detonate technology stocks in the future but probably not until 2027. We can already see the problems starting to surface at Microsoft, Meta, and Tesla.
Don’t be surprised if these stocks rally in the third quarter despite clear problems. Keeping the index elevated is the most important task of the US government’s economic policy today and these stocks are integral components. The wealth-effect is real and absolutely necessary to maintain our domestic economy. And don’t be surprised if we trade in and out of these questionable stocks over the next six months because they will rally at times despite their problems.
Iran
The issues in Iran are not over. If you visit the 2nd Derivative section of our website, you’ll see I’ve written three pieces – the Opera Ain’t Over I, II and III. It was worth the effort because I believe we will get an upward move in our defense and energy names when the fighting begins again.
In my view, there can be no peace in the Persian Gulf until the US takes Kharg Island as I outlined in the last newsletter. The peace talks allowed oil prices to decline and for ships to move out of the Persian Gulf to reduce the collateral damage when the fighting resumes.
There is one thing people consistently get wrong about Iran. Their top leaders are not stupid fanatics; they are intelligent men who benefit from running a terrorist organization. Ending terrorism will result in a sharp decline in power, wealth, and potentially their lives.
Fighting terrorism is a giant global industry and those who benefit don’t want the industry to diminish. Factions within developed nations and the European financial elite would suffer enormous losses even as the decline of frictional costs associated with the fight benefit the world. Never underestimate a man’s willingness to defend the source of his wealth and power.
One major loser in this war against terrorism and drug trafficking appears to be bitcoin. As time goes by, I increasingly become convinced that the genus of cryptocurrency was to facilitate illegal transactions while pressuring the legitimacy of the US dollar in trade. The chart below suggests that I may be on the right track.
The value of bitcoin is down 30% year to date and this decline coincides with US military efforts to destroy drug trafficking in the Caribbean, drug cartels in South America, and illegal oil trafficking from Iran. If this correlation persists, further military efforts around the world should pressure financial entities in Europe and Asia – entities that I believe are the progenitors of many of the world’s difficulties.
I watch it closely as an indicator of potential dislocation in the global financial system.
The GeoVest Approach
Many people discuss the circular financing that is the lifeline of the AI build-out but the problem is so much bigger than just financing. AI is a tool without a purpose, or said better, a tool without enough uses to justify the enormous upfront investment and substantial continuous investment needed to keep it running. It represents a Black Hole for capital that will eventually suck in the semiconductor companies – but not today.
I think of it as the Swan Song of Microsoft, Amazon, Google, and Meta. They will all survive the fallout but I believe they are at the absolute peak of their wealth and power as corporations because AI is draining them like medieval bloodletting drained ill-patients in the Middle Ages.
Fortunately, the nature of the US economy is change. Americans can turn on a dime when new opportunity arises and while those new opportunities are still embryonic, they will ultimately replace the Mag 7 stocks. We are preparing to invest in the new economy, not the old economy.
The next six months have the potential to be wild but profitable. Private credit is collapsing and private equity funds are under extreme pressure. It’s best to avoid these sectors. We’re also experiencing problems with consumer credit, home values, auto demand, and consumer spending. The underlying components of the US economy are in rough shape but another round of 0% interest rates is coming after the election.
We remain bullish on the US. The country is in a transition phase and transitions always include ugly rhetoric and noise. We remain focused on our nation’s innate competitive advantages and the fact that we are the most successful nation in existence at assimilating people from all over the world that want to be better. Thank you and it is our continued pleasure to serve you.
Philip M. Byrne, CFA
