Hi Again,
Since 11/1/25, we have been going through a minor correction. This is very healthy. Wall Street always climb a wall of worries. What is the latest worry? It was believed that the top tech companies were using their cash flow to make these huge investments in AI data centers etc., but now it is clear that this is being done with debt (via the bond market). The top 5 companies have recently “borrowed” over $100 Billion for this purpose. Open AI is not a public company (not yet- next year they could go public with a market cap of over a trillion dollars!) but it is a big threat to all the hyperscalers including Meta and Google. This week the CFO of Open AI got in to trouble by suggesting the US government. OpenAI's CFO, Sarah Friar, sparked controversy by suggesting the US government should provide "backstops" or loan guarantees for massive AI infrastructure investments, a move she later clarified was not a request for a government bailout. Friar stated that the government's role is to work alongside the private sector to support American technological leadership, not to bail out a company. She initially explained that a government guarantee could lower financing costs and make it easier for companies like OpenAI to secure large loans for expensive projects. Is the AI bubble ready to burst? Remember the China’s “Deep Seek” episode? The emergence of DeepSeek AI did trigger significant short-term volatility and a sharp sell-off in specific AI-related stocks, particularly Nvidia, in January 2025 (which followed the strong 2024 performance). Recently the CEO of NVIDIA stated that China will beat the US in the AI race. Out of the blue, China could announce another “Deep Seek” scare and that could burst the AI stock market bubble in the US. This time around it could take a different form and not specifically like the “Deep Seek” announcement. It could come from another country/source too. Who is Michael Burry? In 2005, Burry started to focus on the subprime market. Through his analysis of mortgage lending practices in 2003 and 2004, he correctly predicted that the real estate bubble would collapse as early as 2007. His research on the values of residential real estate convinced him that subprime mortgages, especially those with "teaser" rates, and the bonds based on these mortgages, would begin losing value when the original rates were replaced by much higher rates, often in as little as two years after initiation. This conclusion led him to short the market by persuading Goldman Sachs and other investment firms to sell him credit default swaps against subprime deals he saw as vulnerable. n an April 3, 2010 op-ed for The New York Times, Burry argued that anyone who studied the financial markets carefully in 2003, 2004, and 2005 could have recognized the growing risk in the subprime markets.[15] He faulted federal regulators for failing to listen to warnings from outside a closed circle of advisors. Now Burry is short selling NIVIDIA and other AI stocks via put options. I do not believe that we should short sell these stocks but it is prudent to have some “out of the money” put options (very cheap) on these stocks so we could use that as a hedge against an “AI crash”. Even puts on the market (S&P 500) would be okay as an AI crash is sure to lead to a market crash. The "Magnificent 7" stocks now make up over one-third of the S&P 500's market capitalization, with recent estimates putting the percentage around 37% to 39%. This concentration is a historic high for the group, significantly impacting the index's performance and increasing diversification concerns for investors, notes “Forbes”. Are AI stocks in a bubble? Nvidia went from a market cap of $300 Billion to $5 Trillion in 2 years!
On 10/16/24 regional banks got crushed due to bad loan losses. JPMorgan CEO Jamie Dimon expects to see more bankruptcies like First Brands’ if the private credit market goes into an economic downturn. “I probably shouldn’t say this, but when you see one cockroach, there are probably more. And so we should—everyone should be forewarned on this one,” he told analysts on his Q3 earnings call. More broadly, JPMorgan, Goldman Sachs, and Citi all said their private credit books were diversified and high-grade. Executives at JPMorgan, Goldman Sachs, and Citi all used their earnings calls yesterday to assure investors that the bankruptcy of auto parts supplier First Brands—which had borrowed more than $10 billion—did not mean that the private credit market is systemically weak.
On 10/29/25 the Federal Reserve decided to cut interest rate by another ¼%. They also stated that they will stop quantitative tightening (QT) by December 2025. Inflation remains elevated. Two governors dissented Every ¼% cut saves the US government $88 billion per year.
On 10/29/25 Fed Chair Jerome Powell stated:
· Unemployment remained low through August 2025.
· Inflation has gone down significantly since 2022 but remains high.
· There were 2 dissenters. Miran wanted a ½% cut.
· Economy is expanding at a moderate pace.
· Job gains slowed.
· Inflation risk is up and unemployment risk is up.
· Housing inflation has been coming down for a while.
· Feds want inflation down to 2%.
· Inflation minus tariffs is at 2%.
· Economy is expected to grow at 1.6% in 2025.
· Job creation is very low.
· Subprime credit losses are rising. Auto finance companies are in bankruptcies are rising.
· Not sure if they will cut rates again in December 2025.
Jeffrey Edward Gundlach is the founder and CEO of DoubleLine Capital, an investment firm. He graduated summa cum laude from Dartmouth College with degrees in philosophy and mathematics, and also studied mathematics as a PhD candidate at Yale. In 2011, Barron's named him "The New Bond King" and in 2013, Institutional Investor called him "Money Manager of the Year". On 10/29/25, as he does always after a Fed decision, Gundlach made the following remarks:
· There will be no rate cut in December
· The 2 year and 10 year treasury rates did nor move after the rate cut. Unusual.
· Possibly we will have a steep yield curve.
· Feds might get in to quantitative easing to lower mortgage rates by buying mortgage securities.
· Inflation will stay above 3% till 12/31/26
· Defaults showing in private credit.
· Do not buy lower end treasuries; buy corporate credit.
· 10 year corporate bonds are great
· Gundlach who has been correct on his call to buy gold for the past 2+ years. Sold off his gold holdings. Expect gold to go down by 50%.
· People should have 15% in cash
· Over investments in private credit might lead us to the next financial crisis