I. Iran’s Exercising Its Most Powerful Weapon: Higher Prices and Rates.
Oil prices shot up along with interest rates in response to the U.S. bombing of Iran in retaliation for Iran’s bombing of commercial ships in the Strait of Hormuz.
Iran was trying to exert control over the Strait to command extortion fees and establish a strong bargaining position, but the resulting tensions gave Iran the added benefit of two things that hurt Mr. Trump politically: higher oil prices and interest rates.
The “average mortgage interest rate” is now back up to about 6.625%, 5/8% higher than the low we saw before the war. But mortgage rates are still ¼% lower than they were on this date last year.
Also interesting and encouraging: WTI oil prices are up considerably from last week ($67 to $75), but they remain far below the $90+ levels we saw in early June (prior to the supposed peace talks).
So, prices and rates are higher, but not THAT high…
II. Doritos Pushed Their Prices Way Too High (Pure “Greedflation”)
Frito-Lay executives pushed the price of Doritos way too high after COVID, as a perfect example of “greedflation” (when companies use actual inflation as an excuse to raise prices far beyond what inflation would justify).
This is unrelated to pretty much everything, but I wanted to touch on it because it is so interesting and because I saw so many pundits begging for regulations to control “greedflation” when prices were shooting higher after COVID.
Michael Girdley recently posted this great video: Why Nobody Buys Doritos Anymore. It’s partly because someone finally said, “hey, wait a minute, these things are poison…”
But it’s mostly because a bunch of short-sighted executives jacked prices way too high, using inflation as an excuse.
Turns out, though, that politicians did not need to regulate “big corn chip.” The market took care of the problem for them, as demand collapsed in response to high prices.
This is something the regulation crowd never seems to understand. If companies actually “price-gouge,” they will lose market share very quickly – making government action entirely unnecessary.
When the government does get involved, shortages and higher prices result like we saw with energy prices in the 1970s.
If the government regulated Doritos, we’d first see shortages, then we’d see government subsidies to support “big corn chip,” then we’d see required consumption in schools, government offices, and military bases at $53 per bag (right after Doritos were declared the most important item on the food pyramid).
There is a happy ending here too: All of the greedy executives who jacked up prices were fired.
III. OK, OK, AI Is a Bubble! (Woohoo Because a Crash Means Lower Rates)
I wrote this blog last week: Did We Avoid The AI Bubble? – making the case that higher-than-expected revenues (in contrast to the internet boom) could cover the massive amount of capital spending.
And – I got a ton of feedback from readers, mostly saying (and I’m paraphrasing a bit) “… no way we avoided a bubble, you dumbass; that sucker’s gonna pop for sure.”
Here are some of the reasons: (1) AI investment (cap ex) levels are insanely high and will never pay off; (2) there is far too much leverage/debt – that can’t be serviced with the revenues available; (3) AI is more hype than benefit; (4) companies are not trusting the AI engines to not steal their data and trade secrets; (5) the AI stock valuations are not even close to rational; (6) there is no way to meet AI’s energy demands; and (7) there is too much political pushback.
But – a savvy agent shared this video with me yesterday with the most interesting and compelling reason the AI bubble will pop: China Is About To Pop The AI Bubble.
TLDW: China’s cultivating much cheaper open-source models – using U.S. tech – that will allow them to sell AI for a fraction of what U.S. firms charge.
This would be the same play China has used successfully with electric vehicles, batteries, solar panels, telecom products, and more.
So yeah, it seems likely that they can pull it off. If/when an AI bubble does pop, we’ll see lower rates like we saw with previous bubble pops (dotcom in 2000, housing in 2008).
