Crash Mode
Intel (INTC) is down 31% today as I write this. Brutal.
Not even during the dotcom bust did Intel have a 1-day fall like this.
And to be clear, the stock is still up 60% over the past year. Impressive. But from its June peak, INTC is now down 55%.
Unfortunately, these types of selloffs can indicate there’s more downside ahead. Yes, AI stocks might bounce on Monday. But most of them will still be richly priced, and fragile.
We must recognize this could be the beginning of a real crash.
Valuations, as measured by CAPE ratio, are near the peaks of the 2000 dotcom mania. Debt is soaring. Interest rates are rising. And we’re starting to hit fundamental limits on data center expansion.
Changing Fundamentals
The AI boom has been amazing for U.S. tech. Intel was late to join the party, but has done incredibly well over the past 18 months.
The boom has driven strong demand for its data center CPUs.
But AI is driving up prices for computer parts, especially memory. This is spiking hardware costs. So people and businesses are buying fewer PCs and tightening their belts. This is one of the key reasons Intel fell so hard today. They also issued miserable forward guidance.
These types of booms have all sorts of complex effects on the economy. It’s very hard to model them all, because as we can see, nearly every Wall Street analyst missed what was happening at Intel.
Bad news: it’s not just Intel.
Broader Problems
The whole AI trade looks shaky. First of all, it’s all fueled by unprecedented piles of debt.
And interest rates are rising. That creates an obvious problem for hot AI stocks. They need to raise more debt to complete their projects, but yields are becoming problematic. Coreweave, a leading “neocloud” which rents GPUs, has seen the yield on some of its debt rise from 9% to 15%. We warned about data center stocks back on September 24th.
If interest rates stay elevated, this alone could spoil the party.
Additionally, there are serious questions about whether we have enough electricity to power more data centers. What will happen to GPU sales as we literally run out of juice? Natural gas turbines are backordered 3-5 years. Industrial-scale transformers are in the same boat.
You can see how this sector is more fragile than it appears. Higher interest rates, energy costs, cheap Chinese models, grid fragility, hacking, etc. It’s a potential black swan parade.
Despite the selloff, most AI stocks remain priced for flawless execution going forward. Anything less will be punished by markets.
All Fall Down
We’re in crash mode today. Most sectors are down.
Whether it’s related to AI or not, it’s getting hammered. This is typical in any major selloff.
Gold and silver miners are certainly taking a hit.
We’ve seen this movie before. After the dotcom bust began in 2000, the vast majority of the market sold off. Including miners.
From March 10, 2000 to November 14, 2000:
- The Nasdaq fell 38%
- The HUI Gold Miner index fell 45%
Yes, gold miners actually fell MORE than tech stocks in the initial fallout. But from Nov 2000 to Dec 2003, the sector went on an epic run.
Gold stocks rose 614% over those 3 years. An incredible return. And the precious metal bull market lasted up until 2011.
Meanwhile, the post-2000 Nasdaq wouldn’t regain its highs for another 16 years.
The “good” news is that today, the largest gold miner ETF (GDX) is already down 35% from the highs.
Gold, silver, and miners might have a bit further to fall, but I’m holding onto my portfolio allocation (about 15% now). If silver gets down to the $45 level, I’m a buyer at those levels. $35 and I’m beep-beep-beep backing up the truck.
After the smoke clears, and the big print begins, it’ll be off to the races for precious metals once again.
