I. I Have Concrete Proof That The AI Bubble Will Soon Pop
Allbirds was a SHOE company that went public in 2021 with much fanfare. It then fell 99% from its peak (turns out their “sustainable” shoes, made from wool, sugarcane, and unicorn feathers, weren’t actually sustainable).
Yesterday, they rebranded themselves as an “AI” company – and their stock surged almost 600%.
What makes this so frightening and amusing is that we’ve seen it before.
Long Island Iced Tea tried to rebrand as a blockchain company – and it rose and crashed.
More significantly, we saw similar rebrands repeatedly during the “dotcom” boom of the late 1990s – and ALL of those rebranded firms crashed into oblivion.
In the years after the dotcom crash, mortgage rates fell by 2.2%! (That would be like rates falling to 4.1% today!)
II. Energy analyst Doomberg says we will see $30/per barrel oil (down from $94 today) after the Iran war ends.
In a recent Thoughtful Money podcast, Doomberg again explained how producers vastly over-expand production to take advantage of today’s prices. This will turn into a massive oversupply when the war ends, causing oil prices to crash.
Given how much rising oil prices push up rates, we can expect prices that low to bring down rates that much more (at least 1% or more).
III. Private and Commercial Real Estate Credit Crises Are Coming
I have blogged several times about the coming commercial real estate lending crisis, as banks are massively exposed to “upside down” office buildings across the country that have lost as much as 90% of their previous values.
Banks and borrowers have been doing a great job of keeping their loans afloat, but it appears that the gig is now up; commercial loans are short-term in nature – and they now need to be paid off or refinanced, but there is not enough equity to do so.
There is also a private credit crisis coming, and I recently blogged about it: Woohoo! Another Financial Crisis Is Coming – And It’s Gonna Be Bad! TLDR: Weak companies borrowed from private funds instead of from banks, and those funds don’t know how to safely lend or properly disclose risks.
Credit crises usually result in much lower rates, too. 2008 was an extreme example. Rates could easily fall as much as 1% in response to these pending credit crises as well.
IV. How Long Will This Take?
This is where I often get things wrong, forgetting how long it takes for these things to play out.
It took almost 3 years for rates to bottom out after the dotcom crash. Rates did not bottom out after the 2008 crisis until 2012. And – Doomberg says it could take a few years for oil to bottom out at $30 per barrel.
Darn.
But – my point remains: there are a lot of factors out there that can put tremendous downward pressure on rates.
V. What Could Offset Downward Rate Pressure?
INFLATION!
The money supply (the major influence on inflation) is growing quickly again, and the Fed is loosening up bank lending regulations to encourage much more lending.
Remember that our money supply is mostly “loaned” into existence by banks.
But remember too that credit crises and stock market crashes can SHRINK the money supply – and offset money supply growth/inflation.
So – it all comes down to “inflation vs. crashes.”
