AI: Too Big to Fail

AI: Too Big to Fail

A new government document says the AI industry in the 2020s has become like the big banks in the 2000s — “too big to fail.”

Not that the document frames it in those terms, of course.

The report is being prepared for Treasury Secretary Scott Bessent and Federal Reserve Chair Kevin Warsh, among others. From the nonprofit NOTUS news site…

A draft report inside the Treasury Department is set to warn of the risks posed by the artificial intelligence market, likening key aspects of it to the dot-com bubble that upended the U.S. economy when it burst in the early 2000s.

The document, the existence and contents of which have not been previously reported but was obtained by NOTUS, is a significant departure from the Trump administration’s public tone, which has focused on encouraging unrelenting investment to unlock exponential growth.

Career Treasury analysts found that AI firms are more deeply entrenched in the U.S. economy than their dot-com predecessors and pose significant risk to the entire system if financial conditions change, productivity goals are missed or various choke points stymie growth.

I bolded those couple of lines for a reason. 

While the report compares the AI boom with the dot-com boom, the implicit analogy is with the 2008 financial crisis — with all of its domino effects starting in one isolated pocket of the system and then spilling into everything everywhere.

According to the NOTUS write-up, the report says “AI investors are taking risks so significant that much of the financial system now rests upon AI meeting expectations for productivity gains and profitability…

“If AI companies fall short, the effects would ripple throughout the financial system as a whole, from big banks and hedge funds to private creditors, the analysts note. The largest AI firms are also all interconnected with each other and across different markets, which also points to widespread impacts if investment dries up or demand slows.”

The report acknowledges a reality first spotlighted in this space 18 months ago: AI faces two huge constraints that digital technology has never grappled with until recently.

One is the limitations of the electric grid — whose capacity remained static between 2011–2023. The buildout since 2023 hasn’t been nearly enough to keep up with demand: Data center projects are being cancelled left and right, not because of local opposition as much as the fact there’s just no juice to power them.

The other constraint is the rising cost of borrowed money. Interest rates move in decades-long cycles of roughly 40 years down and 40 years up. We’re about six years into the current up phase — with the benchmark 10-year Treasury note yielding 0.5% in the summer of 2020 and over 4.5% today.

On that first limitation, NOTUS says the Treasury report worries that “supply chain issues, geopolitical tensions, electricity bottlenecks, utilities shortfalls and other concerns could all block AI’s momentum.”

On that second constraint, NOTUS says the report frets that “the AI sector is vulnerable to funding for data centers and other infrastructure projects drying up and sustained growth expectations not being met.”

It’s hard not to think this report is greasing the way for an eventual taxpayer bailout of the AI industry.

We broached that possibility late last month. And our suspicions were reinforced last week when OpenAI CEO Sam Altman proposed “giving” Uncle Sam a 5% stake in his (money-losing) firm ahead of its IPO. 

Such a deal, right? 

What would Uncle Sam have to do in return? Our Jim Rickards unpacked the details yesterday for Strategic Intelligence readers: “In exchange, the U.S. government will clear any obstacles to the release of OpenAI's new ChatGPT models and bury any antitrust or fair trade objections to the IPO. 

“Not only that, but once OpenAI is public, the U.S. government stake will pretty much ensure government contracts and government support if needed.

“Let's give Altman credit for learning to feed at the government trough - just like many others before him.”

“Big, Fat, Ugly Bubble,” 10 Years On

No one remembers now, but during one of his debates with Hillary Clinton in 2016, Donald Trump warned of a “big, fat, ugly bubble.”

“We're in a bubble right now. And the only thing that looks good is the stock market, but if you raise interest rates even a little bit, that's going to come crashing down. We are in a big, fat, ugly bubble. And we better be awfully careful.”

He could speak candidly then because no one, least of all himself, thought he’d win the election. But once he did, he found himself desperately trying to keep the bubble inflated as long as possible.

Which brings us to yesterday. From the White House, he remotely rang the opening bell for yesterday’s trading on the New York Stock Exchange and the Nasdaq.

The occasion was to promote “Trump Accounts” — a new tax-advantaged vehicle for kids made possible by the “Big Beautiful Bill” passed last year (More about that tomorrow.)

Not surprisingly, everything he said about the stock market was effusive. Recent performance was “the hottest stock market in history.” As for future performance, “I think the market’s going to go through the roof.”

He even hit out at short sellers: "I guess you have a couple of guys that went short, those poor bastards. I mean, they're in big trouble. They're being wiped out. I never like short guys because they're betting against the country.”

Setting up scapegoats in case an AI bubble starts to deflate? 

It’s gotta be in the back of his mind.

To be sure, the AI bailout chatter is still in its early stages. There’s nothing you need to do about it yet — but we’re going to stay all over it.

As for the market action today, stocks are mostly in the red — along with nearly every other asset class.

The tech-heavy Nasdaq is taking the biggest slide — down two-thirds of a percent and back below 26,000. The S&P 500 and the Dow are down about a third of a percent.

Bonds are selling off, pushing yields higher: Checking our screens the 10-year Treasury note is now over 4.52% — a four-week high.

Gold is losing ground but is still comfortably over $4,100. Silver’s lost over a buck and is back under $61. 

The exception to the rule today is crypto — Bitcoin back over $64,000 and Ethereum over $1,800.

“Captain, We Have Bombed Your Vessel”

U.S. oil futures have shot up nearly two bucks — back over $70 — now that shooting has resumed in the Persian Gulf.

Iran’s Islamic Revolutionary Guard Corps fired missiles at two commercial ships near the Strait of Hormuz. 

In one case, the IRGC got onto marine channel 16 — the emergency radio frequency known to all boaters and sailors — and announced, "Captain, we have bombed your vessel. 

“You shall only use routes as approved by Persian Gulf Strait Authority. Any other routes are considered unsafe.

“All vessels in your vicinity must turn around immediately or face imminent danger."

No one was hurt and the damage was minimal. Basically what happened is what happened about 10 days ago: A couple of vessels tried to transit the southern side of the strait, bordering Oman, and Tehran took a few potshots just to say Look at me, I’m the captain now.

Also to say: We will impose a toll once the 60-day Memorandum of Understanding with the Americans expires in mid-August.

Last time this happened was on a Thursday. U.S. forces then bombed Iran over the weekend — while the markets were closed, and then of course it was announced the ceasefire was back in effect before the markets reopened Sunday night. 

It being Tuesday, there’s no opportunity for a precise replay of those events this time. But don’t rule out a few ceremonial U.S. airstrikes late this afternoon or tonight.

In the meantime, shipping traffic through the Strait of Hormuz remains only about a third of its prewar level.

Follow-up: Where In the World Is Gal Luft?

For nearly two years, the whereabouts of an accused arms trafficker have been known only to himself… and the feds.

It was in 2018–19 when Gal Luft first came on our radar for his early warnings about de-dollarization — a concerted move by governments in the Global South to get out from under U.S. sanctions and other economic warfare measures. This was years before global central banks began accumulating gold in response to Washington’s freeze of Russia’s U.S. Treasuries.

In February 2023, Luft was picked up on an Interpol warrant in Cyprus. He then escaped house arrest and went on the lam.

“The chances of me getting a fair trial in Washington are virtually zero,” he told the New York Post from an undisclosed location.

That’s because Luft said he had the dirt on Joe Biden’s son Hunter — having talked to the FBI in 2019 about the Biden family taking illegal payments from Chinese officials.

In May 2023, the Justice Department detailed its allegations against Luft — summed up by USA Today as acting as “an illegal arms broker and unregistered agent for the Beijing government while also seeking to help China obtain Iranian oil in violation of U.S. sanctions.

“Gal Luft, a dual U.S. and Israeli citizen, is accused of recruiting and paying a former high-ranking U.S. government official — and adviser to then president-elect Donald Trump — on behalf of principals based in China in 2016 without registering in the U.S. as a foreign agent as federal law requires.”

➢ The official Luft allegedly recruited and paid was not named in the feds’ paperwork — but investigative reporters identified him as former CIA Director James Woolsey. The claim made zero sense. Woolsey is a card-carrying neoconservative — about the last guy in the Beltway you’d figure would cozy up to Beijing.

Three years later, the story has retreated into the mists of mystery.

There’s only one update of substance we can locate, although it’s a big deal: In September 2024, Reuters reported that Luft had been re-arrested and plans were supposedly underway to extradite him to the United States for trial.

The weird thing is that prosecutors did not specify when or where the new arrest took place. There has been no update since.

Meanwhile, on his reputation rehab tour this past spring, Hunter Biden told conservative influencer Candace Owens that Luft is living as a fugitive in Israel and that the “Israelis will not help us locate” him.

And that’s all that can be readily found in the public record. 

Where, if anywhere, is Luft in custody now? 

Whenever we hear, we’ll have an update…

Apple and the Ens***tification of Everything

After your editor made passing mention last week about “how Apple has gone down the tubes, a process underway even while Steve Jobs was still alive,” the following landed in our inbox…

“I’m interested to hear the reasons you dislike Apple and think they’ve gone downhill. They’ve pissed me off quite a few times over the years too but as far as I can tell, most of the problems (except maybe iTunes) started awhile after Jobs. 

“I think it’s obvious he cared more about user experience, and not just because of the bottom line either.

“Anyway, go ahead and list all your reasons. We may share a few criticisms. And keep up the good work, etc.”

Dave responds: What I’m about to say comes with the authority of having bought my first Mac on the recommendation of a friend in the summer of 1996 — before Jobs returned to the company.

Leave aside the technological advances of the last 30 years: Apple products today under Tim Cook are less reliable and less user-friendly than Apple products under Michael Spindler 30 years ago. 

That’s because in 1996 the Jobsian ethos still suffused the company even though he’d been away for a decade. 

Within only a few years of Jobs’ return, it seems that ethos dissipated as Apple evolved from scrappy upstart to world dominator. An early warning was an iBook laptop purchased in 2005 that croaked in catastrophic fashion not long after the AppleCare coverage lapsed.

In 2018 I bought a Mac mini that constantly gave me fits for reasons I could never figure out. One day in 2020 — while it was still covered by AppleCare — I called once more for support and was kicked up to a “senior adviser” who had the temerity to tell me the machine was underpowered for what I wanted it to do.

Preposterous. I write documents and browse the web. I wasn’t using the computer for video editing or high-end gaming, for crying out loud. And I custom-ordered it with 16 GB of memory, double what came standard, specifically so it would be somewhat “future-proof.”

Then there are the constant “improvements” to macOS and iOS which inevitably make simple tasks harder. What used to require one or two taps on the iOS Podcasts app now takes five or six — and I still haven’t mastered the proper sequence in the current iteration.

I could go on, but I think you get the point.

People talk these days about “the ens***tification of everything.” From where I sit, Apple is a prime example.