According to Financial Times News, Andrew Ross Sorkin has published a new book about the 1929 stock market crash with uncanny timing amid this week’s wild tech stock gyrations. The debate is intensifying about whether we’re witnessing an AI bubble about to burst, with Palantir trading at 230 times forward earnings and 10 lossmaking AI startups valued at nearly $1 trillion. More than $2 billion of First Brands’ $12 billion debt vanished before its collapse without creditors noticing, while the Federal Reserve just stopped shrinking its balance sheet due to liquidity concerns. The Goldman Sachs financial conditions index has loosened markedly this year and will probably loosen further given the Fed’s stance, creating what many consider “froth” across multiple financial markets.
The liquidity flood
Here’s the thing about all this market madness – it’s not really about AI. The AI mania is more symptom than cause. We’re swimming in liquidity from a decade of quantitative easing, low real interest rates, and fiscal stimulus. The Fed’s recent decision to end quantitative tightening? That’s basically adding fuel to the fire.
Matt King from Satori Insights argues this creates “froth” that lulls investors into complacency. And you know what happens when everyone gets comfortable? That’s usually when the liquidity suddenly evaporates. The repurchase rate surge signals stress in obscure financial corners, even as broader conditions remain loose.
The leverage creep
Now let’s talk about leverage. On the surface, things don’t look too scary – US household borrowing is lower than 2007, and corporate debt is flat. But look closer and you’ll see the cracks. Government debt is exploding, financial sector leverage is rising around private equity, and stock market margin trading has surged.
Financial sector leveraging is feeding repo markets and hedge funds, creating this weird situation where passive funds amplify market momentum. It’s like we’re building a house of cards, but everyone’s too distracted by AI chatbots to notice the foundation shaking.
Lunacy everywhere
And then there’s the pure lunacy. Palantir at 230 times earnings? Lossmaking startups worth a trillion? Debt disappearing without anyone noticing? We’ve even got “ratings shopping” making a comeback – financiers shopping for flattering credit ratings, which UBS chair Colm Kelleher calls “a looming systemic risk.”
Basically, we’re seeing the same patterns that preceded every major crash. The difference this time? Everyone’s using AI as the justification for valuations that would make 1999 dot-com investors blush.
Bubble dynamics
So are we headed for 1929 redux? Sorkin doesn’t think so – he expects a correction but not depression, since central banks will inject liquidity like they did after 2008 and 2020. But that creates its own problems. Rightwing blogger Curtis Yarvin argues this just accelerates “monetary dilution,” turning dollar-based finance into an even bigger bubble.
This is why Yarvin and others created crypto and love gold. The tech mania could still run further given the Fed “put” and strong non-AI earnings. But eventually, bubbles always deflate. Sometimes it’s a sudden pop in public markets, sometimes it’s a long, slow hiss in private finance. Either way, watching those three Ls might tell you more about when than any AI earnings report ever will.
