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The French Revolution offers a profound lesson in what happens when monetary disorder becomes a political crisis. Meanwhile, artificial intelligence is “transforming” the economy, but many households are still struggling with the cost of everyday necessities. This week, David McAlvany examines inflation, the enormous capital flowing into AI, and Amazon’s decision to borrow billions to keep funding the buildout.
- The French Revolution Is a Profound Lesson in Monetary Theory
- If AI Is Helping Us So Much, Why Can’t I Afford Gas?
- All-In on AI: Amazon Borrows Billions to Keep Feeding the Beast
“The average American has spent the past five years absorbing a steady accumulation of inflationary pressures. Personal savings rates have fallen to four, five year lows. Credit card delinquencies are on the rise. From McDonald’s to Walmart, corporate leadership is increasingly concerned about the middle and lower income consumer. The lower half of the K-shaped economy, in our opinion, is already in recession. The upper half remains heavily dependent on appreciating financial assets.” —David McAlvany
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Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany.
David, today reminds me of a book that I have in my library from 1794. It’s a celestial navigation book for the French Navy, and it was out of a Paris court—but 1794, that’s a critical date, isn’t it? I mean, that was the reign of terror that was coming to the conclusion of what occurred back in 1789 on Bastille Day.
David: Right. All hell started breaking loose on Bastille Day. This week, my French friends celebrate that day, Bastille Day, 14th of July 1789. And it marks the beginning of the French Revolution, the beginning of a monetary explosion. And for those monetarists in our listening audience, take note. Not only were there fireworks as it related to the money supply—
Over the weekend, actually, I got to see an article from Stephen Miran and Nouriel Roubini. They just published a new paper revisiting the importance of money supply—not that I’m recommending it, but in the category of for what it’s worth. So 1791, there were 1.5 billion assignats. That’s the currency of the time. That’s how much was in circulation. Two years later, August 1793, the supply had grown to 4.1 billion. 1795, the year after your book on celestial navigation was published, money supply reached 19.7 billion. And in just five years, the assignat was destroyed.
No, this is not simply an indictment of fiat currency. Technically, the assignat was backed by land during this period of time. Land confiscated from the Catholic Church served as what was backing the currency. So apparently, supply matters, money supply that is.
Kevin: Heads roll ultimately when you print money, bottom line. I was talking to someone just recently and they were just talking about the prices currently, how high they’ve gotten to where people are just running out of money before they run out of month. And heads aren’t rolling yet, Dave, because we’re not really talking about the total destruction of the currency, but we are talking about a direction that ends not well.
David: Well, the events of 1789 marked kind of the beginning of the end, but they were preceded by decades of fiscal deterioration. The royal court was overspent. Foreign wars, including support for the 13 American colonies in their struggle for independence from Britain, had drained the French treasury. And as the Foundation for Economic Education describes it, “Governments have an insatiable appetite for the wealth of their subjects.” When governments find it impossible to continue raising taxes and borrowing funds, they have invariably turned to printing paper money to finance their growing expenditures. The resulting inflations have often undermined the social fabric, ruined the economy, and sometimes brought revolution and tyranny in their wake. The political economy of the French Revolution is a tragic example of this.
Kevin: We read a book years ago. Do you remember Fiat Inflation in France? Remember that book that you had everyone in the office read?
David: Sure.
Kevin: I joke with you about how interest rates— You’ll read a five or six hundred-page book on interest rates or on inflation. It’s really not interest rates or inflation that we’re interested in. It’s humanity, and slavery versus freedom. That’s really what we’re talking about.
David: Yeah. I think a better read if the folks listening today are wanting to see the sociocultural impacts of inflation, Adam Fergusson wrote The Death of Money, and I highly recommend that book. Again, we see a similar fraying of the social fabric today, albeit in its infancy. We have socialism that’s gaining popularity. We have populism, which is no longer merely an American phenomenon, but a global one. And I think there’s two forces that are driving this: widening wealth inequality on the one hand, and inflation on the other—which always falls disproportionately, falls hardest, on those with the least financial cushion. So when your margin of safety is razor-thin, inflation radicalizes thinking as fear and survival take center stage.
Kevin: There’s a member of our family, Saturday morning we were talking on the phone, and it broke my heart because she lives up in the northern part of Colorado. It’s hot right now, very hot, very dry. She lives in a trailer home, and she said every time her air conditioner comes on, every single time she feels like she’s being chased by the devil. And what she’s really saying is she can’t afford to have her air conditioner run right now in the heat. And why? Why is that? Is it because she didn’t save enough money, or is it because the money that she saved didn’t save buying power?
David: When you go back to Greenspan’s paper many decades ago, when he was under the influence of Ayn Rand, “Gold and Economic Freedom,” I think he does a marvelous job explaining more of the philosophy of gold and what it represents as a preserver of not only purchasing power but agency and economic freedom.
I think one of the things that we forget is that inflation is not merely a monetary event. And so just to play with the monetarists a little bit, it’s not merely money that we’re counting here. It’s the cost to humanity, as you said earlier. And it’s the impact that it has squeezing individuals, essentially seizing their time. If you look at savings as a reflection of someone’s output, someone’s work life, and you take and live beneath your means and set aside savings, and that’s an expression of human energy that you can use when you need to, later on.
That is you. That is your time. That is your effort bottled up and waiting, a repository of wealth to be utilized when you want it to be utilized. Inflation robs you of that time. Inflation robs you of that economic freedom and flexibility to apply in the future what you’ve saved in the present. And it’s why there’s a moral component, to me, Kevin.
I think it’s one of the reasons why I feel so strongly about what we do in this business, helping people preserve their purchasing power, because it’s more than money that’s on the table and more than money that’s at stake. The IMF is looking at this as a global issue. They revised their forecasts for global inflation from last year’s 4.1%—that’s in 2025—to 4.7% in 2026. Again, that’s the global average. Those projections assumed Middle East tensions would ease and that energy prices would recede.
So even during the ceasefire, however, the IMF warned that renewed conflict would drive up global inflation, would damage supply chains, would weigh on financial markets. And of course, maybe they could have foreseen, maybe they did foresee, the end of the ceasefire, and the resumption of the uptrend in energy prices. But this story is not done, not by a long shot.
Kevin: You bring up an important point, though, Dave. When we talk about inflation in France in the late 1700s, we’re talking about a country. But what you’re talking about now with the IMF, we’re talking about a worldwide phenomenon. It may not be to the degree of the French inflation, but it’s worldwide.
David: Yeah, I think these are hardly French Revolution inflation rates of 14% on the first round, 60% on the second, ultimately the destruction of the assignat. By comparison, today’s inflation appears modest, yet public sensitivity to inflation is higher than it has been in a generation.
Kevin: Well, Dave, you brought up so often liquidity being important. And right now we really are seeing the wealth effect, but it’s centered in the AI and the semiconductor bubbles. How long can that last?
David: I think the connection between inflation and the AI bubble is that policymakers today are holding onto this notion that productivity gains from AI will make inflation irrelevant. And so, we should not restrict or limit the investment in AI, even if we tempt fate with a bubble, because of the likely benefits.
So when the AI bubble finally comes unglued, I don’t think anyone’s going to be able to claim that it was unforeseen. The AI bubble dynamics have sort of a self-reinforcing impact on liquidity. And so from both a financial stability standpoint, I think this is why you’ve got the Bank of England, you’ve got the U.S. Treasury, you get the IMF, even the Bank of Korea, many others have expressed growing concern about current trends becoming unsustainable. Last week it was the Treasury Department who drew comparisons to the AI infrastructure spend and the dot-com bubble.
Kevin: Well, that probably means something to you, Dave, because you were really cutting your teeth about 25, 27 years ago as a stockbroker just as the dot-com bubble was blowing up. And now we’ve got the AI bubble.
David: It’s particularly memorable for me because that’s when I first learned the markets. And in the beginning, every newcomer assumes that headlines drive prices, and I certainly did. I was fortunate enough to learn during a bear market where experience quickly teaches otherwise. And I think with time you discover that headlines rarely drive the markets. Liquidity drives markets. Financial conditions drive markets, monetary policy and fiscal policy. I mean, these are factors that matter because they shape liquidity. So the cost of capital matters, leverage matters. No one told me in 2001 that these were the deeper forces beneath the daily headlines.
Kevin: So what you would say is liquidity drives headlines, headlines don’t drive liquidity.
David: Yeah. Sentiment and trading volumes. I mean, there’s many things that you can look at, and there are indications of these underlying factors. Sentiment trading volumes, they reflect the activity made possible by liquidity.
Charts are nothing more than a record of capital flows, and sometimes you see optimism and risk-taking. Other times in the charts that you can see fear and risk aversion. Liquidity itself becomes self-reinforcing in both directions.
Kevin: I know a lot of people are watching this commentary on YouTube, but it makes me think of the vulnerability that people have when they think that they’re getting their information on, let’s say, a YouTube channel, which is driven by click bait—headline type of bait. It’s not necessarily a measure of what you’re talking about, which is financial conditions and liquidity.
David: Yeah. Next week I’ll be attending an economics conference where one of the panels will examine the forces driving the U.S. economy and whether those forces are sustainable. I’ll have a few minutes to make my case, so I can briefly summarize the factors I think I believe matter most. You start with financial conditions. Today they remain incredibly loose, remarkably loose. And as long as they remain loose, you’ve got upside potential. U.S. equities remain difficult to restrain in the context of very loose financial conditions.
So officially, monetary policy is described by Warsh and others at the Fed as neutral, even restrictive. Yet, by almost every market-based measure, policy remains accommodative. Market capitalization relative to GDP, margin debt both nominally and relative to GDP, credit spreads, numerous other indicators all point in the same direction. The threat of tighter policy remains conditional upon a renewed acceleration in inflation. Of course, we got numbers today, which give them plenty of latitude to say, “See? We are winning this fight.” So the Fed may be talking tougher on inflation, but actions, I think, at this point are going to matter more than rhetoric.
Kevin: I had an economics professor up at CU Denver. His name is John Cochrane. And he said, when you read the headlines, speaking of headlines, he said, just go ahead and write out the opposite because they have to talk one way to do the other. And that was at a time when Volcker was the Federal Reserve chairman. But I always remembered that: opposites. Think in opposites. Whatever they’re saying, if they’re saying, “Well, we believe in a stronger dollar,” maybe look at the other indicators.
David: Well, the prevailing argument is that, and this is from Warsh and others, that AI-driven productivity will ultimately contain inflation. We’ve seen this story before just with other productivity booms. We had the post-war infrastructure boom in the 1950s, personal computer revolution of the 1980s leading to another productivity boom, the internet boom of the 1990s, and now we have AI. Those productivity booms were real. They also occurred during periods of lower declining interest rates. Abundant inexpensive credit was one of the essential ingredients supporting each of those expansions. And this time we may not have that luxury.
Kevin: It strikes me though that, yes, those booms were real, but the dollar has lost almost 100% of its buying power throughout those booms. So for them to say that AI is going to be a deflationary effect, or that it’s going to, like you said, contain inflation. The booms that we had before, those were fine. And yes, they increased productivity, but they were not deflationary.
David: Well, they also haven’t quite explained how displacing 30% of the knowledge economy is going to be helpful in terms of driving GDP growth. If the consumer is critical to economic activity, I appreciate somebody being able to work a three and a half day week, but it becomes consequential when 30% of our white collar workforce is out of work. But we’ll leave that discussion for another day.
For today, CPI decline of four-tenths of a percent brings year-over-year inflation to three and a half percent. This argues for the Fed to continue doing exactly what it has been doing, which is nothing. And if rates remain stable, the rally in risk assets is likely to continue. It’s this threat of inflation and the likelihood of higher rates where all of a sudden the liquidity dynamics begin to shift and risk assets suffer. But we’ve had liquidity tailwinds for some time.
Kevin: Let’s talk about that because the liquidity tailwinds have been in the tech sector, whether it’s AI or whether it’s semiconductors. It’s a little bit like that plastic where you press the bubble down in one place and the bubble appears somewhere else. So the liquidity is still there, but it’s moving, isn’t it?
David: It is. So we had tailwinds that propelled the Magnificent Seven for the better part of four years. Then came the AI hyperscalers. The narrative for the record books is about AI and now most notably semiconductors. So investor capital has steadily migrated within that technology space from less cyclical businesses to the very most cyclical names in the sector. And I think that alone tells you something about where we are in the cycle.
Kevin: Yeah, so let’s go there. Cyclicality in certain industries. I mean, obviously straw hats sell better in the summertime. Semiconductors, let’s go ahead and talk about the cyclicality of the semiconductor industry.
David: Well, we’ve mentioned this before, and gratitude to Fred Hickey for pointing this out, but 14 different boom and bust cycles within semiconductors since the 1960s. This is not new news. This is old market behavior where you go from insufficient supply, massive price increases, increase in production, oversupply, collapse in prices, and the cycle goes on and on. So semiconductors sit at the furthest end of cyclicality within the tech space. Their fortunes typically depend on corporate and consumer spending. This cycle is different only because hyperscalers have committed extraordinary sums to building out AI infrastructure.
Kevin: Basically what we’re saying is we’re seeing hyperscalers, they had a lot of cash. Now that’s been given over to the semiconductor industry. And so, does it go back and forth?
David: Doesn’t always go both ways. I looked at a chart over the weekend and it illustrated this dynamic perfectly. Hyperscaler free cashflow is beginning to roll over. I shouldn’t say beginning to roll over. It’s in a massive decline while semiconductor free cashflow has gone parabolic. And it’s basically an exchange. One group’s cashflow is financing the other group’s boom.
Kevin: So how long can that last, Dave? I mentioned a couple of weeks ago driving in Arizona, these gigantic buildings. I mean larger than I’ve ever seen are being built for the AI industry. I mean, how long can we do that?
David: As long as data center capacity continues to expand, you’ve got semiconductor companies that remain the primary beneficiaries. Micron, for example, recently increased its long-term capacity investment plans from 200 billion by the end of 2035 to 250 billion through 2035. And so they’re racing against each other to be the most important players. Again, we saw that with the hyperscalers. Now we see it with the semiconductor companies. We had SK Hynix list here in the US to raise additional capital to build out even more capacity in South Korea. But the familiar story of semiconductor cyclicality is, once again, being written well before the eventual price correction.
Kevin: So what would be the greatest vulnerability? If a person were looking at the news, what would give them a signal that this might not continue?
David: Well, for the semiconductors, it is the hyperscaler capital expenditures. If they start to look at this and say, “I think we have enough,” those spending plans have become the primary driver of semiconductor revenue. Again, this is not your normal cycle where you’ve got corporate spending, consumer spending driving electronic purchases that would ultimately benefit the semiconductors. This is very different. The hyperscalers are investing in data centers, and for as long as that build-out lasts, semiconductors will benefit. Is that two years? Is that 10 years or is it two days? We may have already seen that expire in terms of an opportunity. All it takes is a shift in corporate priorities, too much extrapolation of today’s commitments leaves semiconductor shares well over the tips of their skis.
Kevin: Well, think about yourself as a business owner. Okay. Right now we’re talking about the dream of AI and the things that it’s going to do and the productivity that it’s going to add. Yet on the bottom line, when you talk about being too forward on your skis, we probably are thinking too far ahead. That might show up in five years, 10 years, 15 or 20, but right now you have to make a profit. So these corporate priorities, if they stop ordering more and more and more AI, then that could be the shift right there.
David: I’m trying to remember if it was Facebook. It was one of the Silicon Valley giants talking the other day about what benefits there were from their AI investments and what the costs were. So kind of a very back-of-the-napkin cost-benefit analysis. Cost for token purchases were increasing, basically doubling every 45 days. And so far, annualized profitability benefits somewhere at or below 5%. So you’ve got this exponential rise in cost, and very little—what the CEO basically said was zero—benefit thus far.
So I think if businesses begin demanding measurable profitability from their AI investments instead of simply funding the next wave, or require, how are we going to apply this? What is it going to look like ultimately to benefit the growth of our company? Then hyperscalers will eventually slow capital spending. Less CapEx quickly translates into weaker semiconductor revenues and potentially a brutal repricing for the sector.
And it’s important because this is where everyone is hanging their hat today. This is where the leveraged bets are being placed. This is where there is so much energy and activity, positivity in the stock market. You flip that, you either have to have a replacement for that enthusiasm—who’s going to be the next carrier of the baton?—or the story’s over; the narrative has run its course and we enter a bear market.
Kevin: So this is different than the everything bubble. The everything bubble a few years ago, everything was going up. At this point, this is pretty concentrated, isn’t it?
David: Yeah. And I think that’s an important distinction. The everything bubble in 2021 lifted virtually every asset class. You had equities, bonds, crypto, meme stocks, you name it. Today’s bubble is far more selective. Capital is concentrating into only a handful of sectors. That concentration is itself a symptom of liquidity excess, end-of-cycle expression where as we’ve talked about breadth, it begins to narrow down to just a few themes, even a few names.
I remember a few years ago working with Lila Murphy, and she introduced me to this phrase, “When the ducks are quacking, feed them.” And I had never heard that phrase before, but today investors are quacking for memory chips, and so you’re getting all kinds of offerings. You’ve got every ability to speculate and potentially gain money investing in semiconductors. If the ducks are quacking, feed them.
So there seems to be no limit to the imagination surrounding companies like SK Hynix, which listed an ADR in the United States last week, raised 26 and a half billion dollars. It was a good haul. Micron, another example. But according to the Financial Times, you’ve got quarterly profits increasing 15 fold, sector earnings up as much as 19 fold year-over-year, and yet even those spectacular numbers have not prevented semiconductors from correcting sharply in recent weeks.
Kevin: So you talk about ducks quacking. If the duck is quacking and it’s on a one-to-one bet, okay then that’s okay. When the duck stops quacking, you go away. But if the duck’s quacking and then stops and you’re leveraged, you talk about this being a liquidity situation. Leverage is built into this system dramatically, and the duck may stop quacking, but what happens to margin?
David: Yeah, this is fundamentally a liquidity story: what is driving excess in semiconductor investor investments in other small segments of the market? Fundamentally a liquidity story. Investor capital has flowed aggressively towards semiconductors. Margin debt has reached a record. We mentioned this in recent weeks, 1.41 trillion. That’s for the month of May. June figures are due shortly. It’ll be worth watching whether loose financial conditions continue encouraging additional risk taking, larger allocations to this year’s biggest winners. But a contraction in margin debt would be one of the first signs that investors are beginning to question paying peak multiples for these companies. If liquidity starts to drain, then comes forced liquidation quickly becoming sort of the dominant risk.
Kevin: So explain the mechanics of margin for those who aren’t familiar with that, Dave.
David: Yeah. So margin mechanics, a 20% decline in a stock purchased on 50% initial margin reduces your equity to roughly 30%. 30% is the general next threshold for maintenance margin. And so a 20% correction doesn’t seem like a big deal, but you may be getting a margin call at that point. 25% correction, you are getting a margin call. And at that point, investors have to either contribute additional capital or sell their positions. So a decline, and then if you don’t have the money and you have to sell your position, it forces additional liquidations. You hesitate long enough, and the broker or broker dealer makes the decision for you and liquidates immediately. So forced selling is how corrections become cascades.
Kevin: So going through some of the margin types of events that we’ve seen in the past, Dave, going back, let’s say to 1987. 1987 and then the year 2000 when we talk about the dot-com bubble, 2008. Anytime you have that margin debt going the reverse direction, that turns into a major crash, doesn’t it?
David: Yeah. We’ve discussed for months, leverage is the critical ingredient in every major market reversal. It fuels exponential gains on the way up, and it accelerates losses on the way down. Now, like valuation or valuation metrics, leverage rarely tells you when to exit. Generally the confidence of bets kind of compounds on itself. But when it begins to reverse, you ignore it at your peril. And so, I would watch the June margin debt numbers with some curiosity. And again, it’s just an extension of a growth trend. If we go from 1.4 up to 1.5 or 1.6, we’d be entering into brand new all-time high territory. But if we begin to give up 100 billion, 200 billion in margin debt, you’re at risk of a significant decline.
Warren Buffett made this memorable point back in 2018. He said, “My partner Charlie says there are only three ways a smart person can go broke, liquor, ladies, and leverage.” Now the truth, he said, is that the first two he just added because they started with L. It’s leverage.
Kevin: It’s always leverage.
David: It’s leverage. Exactly.
Kevin: Yeah. But in a bull market—
David: It’s wonderful.
Kevin: Yeah. Liquor, ladies, leverage. Come up with other L words if you want, but—
David: Probably lots of things that work well in a bull market. In an emotional bear market, there’s a lot of things that don’t work. And in a financial bear market, there’s a lot of things that don’t work. So the mathematics become merciless once prices begin falling. So it’s wonderful in a bull market and merciless in a bear market. Consumer margin borrowing is only one form of leverage, and it creates an inherent fragility beneath every extended bull market. Additionally, you have derivatives, which create another layer of leverage. With derivatives, investors routinely obtain 5, 10, 20, even 100 times economic exposure to an underlying asset. These are the instruments that amplify both gains and losses, and are the preferred tools of highly leveraged—what we would sometimes describe as hot money—hedge funds.
So as my friend Doug Noland often reminds me, you cannot assume orderly market functioning during a leveraged decline. In other words, the idea of liquid and continuous markets, it’s an assumption that works in a bull market, and it comes to pieces in a bear market.
Kevin: And you can’t trust appearances, can you? Because markets typically look liquid until they’re not. It can happen almost overnight. I think of last October, even in the metals market, it was like, wait a second, the interest rate to borrow metal went from what, 1%, 1.5% to 200%?
David: Overnight.
Kevin: Almost overnight. Yeah.
David: Amazing. Yeah. I mean, I think it was a Thursday to Friday. Mid Thursday to the close on Friday, you had those rates. It was stunning. So markets always appear liquid until everyone heads for the exits at the same time. And then there’s no one to buy the product you’re trying to sell, which is the point.
South Korea provides an interesting example. Its equity markets fell 7.4% last week, heavily influenced by Samsung Electronics and SK Hynix, which together now represent roughly 50%—that’s five-zero—50% of both stock market capitalization and trading volume in South Korea. The Bank of Korea has expressed increased concern not only about semiconductor concentration—obviously at 50% of market cap somebody’s finally paying attention—but also in the growing popularity of leveraged single stock ETFs.
So if it’s not good enough to get 300% gains in Samsung electronics in a short period of time, let’s ramp that up to 600%, 900%, using leverage to get it. And the view of the Bank of Korea is that we’re building in fragility which we’re not going to be able to manage on the downside. Bloomberg reported one of the lawmakers even proposing de- listing some of those products, arguing that the KOSPI, which is the acronym for the Korean market, has turned into a casino. No doubt it has turned into a casino.
Kevin: The crazy thing about that, though, Dave, like you said, it does look liquid until it’s not. A lot of times you’ll see some of the strongest push to have more leverage happen right at the time that it’s actually failing, like what you’re starting to see signs of in Korea.
David: Yeah. It also appears on corporate balance sheets. We’ll get to that in a minute, but the proliferation of these single stock leveraged ETFs, it is in South Korea. It’s also in the United States. You get pro shares, you get rec shares, you get leveraged shares. All these companies are preparing to launch additional leveraged products on semiconductors and SK Hynix this week.
Again, leverage rarely retreats quietly. It’s very damaging on the downside, and it usually takes people by surprise because of how quickly it unwinds. But again, balance sheets, you’ve got corporations borrowing tens of billions of dollars to finance AI infrastructure. That fundamentally changes corporate risk profiles. It also introduces, again, this layer of fragility into the AI trade. Amazon, who borrowed 37 billion in March, another 25 billion last week, to fund additional data center investment. And as recently as February, the company was spending roughly 90% of free cash flow on AI CapEx, 90% of their free cash flow.
And by the end of the first quarter, free cash flow had swung to the negative by $18 billion. Now they’re continuing to borrow to build. At what point do you think corporate boards should be saying this might not be a good idea? And right now it is just a blind race for the finish line. If you’re going to win, it’s going to be a winner-takes-all, and you have to be across the line. Doesn’t matter if it’s 100 billion, 200 billion. In the case of Micron, 250 billion. Actually with some of the hyperscalers, you’re talking about 100, 200 billion per year in CapEx spending.
And again, if you don’t know how much money these companies are making, they’re spending more than they’re bringing in. That only works for a short period of time if you’re a government because you can inflate away the debt. There’s nothing you can do as a corporation. If you’re spending more than you’re bringing in, ultimately there is a bill that comes due. When is it? That’s the only question.
Kevin: It’s like the guy in Vegas who just wants to win back what he lost last night. It’s like, “Hey, can I just borrow 10 bucks? Give me 10 bucks and I think I can win it back.”
David: Yeah, this is quite a transformation for many of these companies, from abundant cash generation to what amounts to the corporate equivalent of pushing all your chips into the middle of the table.
Kevin: In this case, that’s a pun intended. Chips, pushing your chips—
David: Absolutely.
Kevin: —into the middle of the table. Yeah.
David: So as we look at the economy, the consumer remains the key to the US economy. We mentioned hyperscalers and AI capital spending because 75% of GDP growth is coming from AI CapEx spending. But ordinarily, it’s 68% of economic activity which is coming from—and this is the total measure, not just of growth—but the total measure is coming from the consumer.
The average American has spent the past five years absorbing a steady accumulation of inflationary pressures. Personal savings rates have fallen to four, five year lows. Credit card delinquencies are on the rise. And when you check in with the likes of McDonald’s, I think Walmart is a pretty good sample for how the lower K in the K-shaped economy is doing. But from McDonald’s to Walmart, corporate leadership is increasingly concerned about the middle and lower income consumer.
Walmart recently—this is a very interesting note. In the most recent period, their CEO said, “The number of gallons that customers—” They have a big fuel business. “The number of gallons that customers fill up when they come to our fuel stations fell below 10 for the first time since 2022.” That is an indication of stress. The lower half of the K-shaped economy, in our opinion, is already in recession. This is me speaking. The upper half remains heavily dependent on appreciating financial assets.
But Kevin, I remember being back in college and being like, “I’ve got 10 bucks in my pocket. I’ll fill up what I can in the tank” because I’m out of cash at that point. I mean, that’s the behavior of, “I’m broke.” If you’re like, “I can put in 10 gallons and that’s the max. I’m not going to fill the tank.” Particularly in the context of higher fuel costs. Most people, if you had the resource, you’d say, “I’m just going to fill up now, fill it to the top because tomorrow it could be a dollar more expensive per gallon.”
Kevin: Well, and that reminds me of what I was talking about from Saturday morning. Just talking to a family member who said every time the air conditioner comes on, she feels like she’s being chased by the devil.
David: Yeah.
Kevin: People are running out of money. And yet you talk about these hundreds of billions and trillions that are being devoted to this dream. Yes, is AI real? To some degree it is. But as far as the type of money that’s showing up there, that’s where the liquidity is right now, not in the pockets of the person who can’t get 10 gallons of gas.
David: Right. So the connection to AI in terms of the viability—the go-forward viability—for the economy is that the upper half remains heavily dependent on their appreciating assets and they continue to spend aggressively. They’re holding the consumption part of the economy together very well because of the wealth effect, because asset prices are still very healthy.
That shifts, you’ve got a significant shift in consumer spending, and all of a sudden I’m not sure that there’s enough AI CapEx spending that can keep GDP growth positive. So as long as financial conditions stay loose, affluent consumers will continue to support GDP. And as long as AI capital expenditures, which are now estimated to account for that 75% of GDP growth, continue at the current pace, the economy will appear remarkably resilient. But—
Kevin: But we have Bastille Day. So let’s go ahead and go back to what occurs if inflation continues.
David: But if inflation continues to squeeze household incomes while the middle class grows increasingly constrained, Bastille Day becomes more than a historical anniversary. It becomes a reminder of what prolonged inflation can do to the social fabric and ultimately to the political order.
It brings me back to the technology cycle. Like the internet boom of the 2000s, a period I experienced firsthand and learned invaluable lessons from, the defining issue is not innovation itself. It’s overcapacity. Chinese AI firms, DeepSeek, Zhipu now deliver roughly 95 to 99% of the functionality offered by leading US hyperscalers at roughly one-tenth of the cost. That changes the economics.
Are we overbuilding in terms of US capacity? We’re trying to be a winner-takes-all when we’ve already been undercut in terms of margin and the ability to capture market share because they can deliver a comparable product, a virtually comparable product at a fraction of the cost. The American AI trade is beginning to look increasingly vulnerable. And again, this is back to capacity things that I learned during the early 2000s. The American AI trade looks very vulnerable to me, and with it one of the last major pillars supporting both the US economy and today’s financial markets.
Kevin: So you teach us to ask the right question. See, this is what’s amazing to me. If somebody says anything negative right now about AI, it’s like, “Oh, well, you must be scared of it. Maybe you haven’t used it. Maybe you don’t know how valuable it is. Don’t you understand? You don’t have vision.” That’s really not the question. The question isn’t whether the technology is here and here to stay. It’s the over capacity question that we’ve seen so often, Dave, and we bring up the dot-com boom.
The internet is here, and the dotcoms are here. I mean, yes, they stayed, but the bust because of overcapacity back in the year 2000, it took 15 years for the NASDAQ to get back to break-even. I mean, that was a big deal.
David: Yeah. It’s easy to forget the lost decade. Gold has been, and I believe will remain, the best insurance policy and the best ballast a portfolio can own. I mean, if you think about it, it’s like garlic to a vampire. Gold neutralizes a remarkable number of financial threats. It doesn’t eliminate volatility, but it provides stability when other assets become increasingly vulnerable to it. I mean, first it starts as a dependency on liquidity and then they become vulnerable because of the lack of liquidity. It doesn’t continue forever, and thus follows investor confidence.
So I’ll close with one final observation. During the past two months, one of our mining positions has been meaningfully added to by insiders. Insider buying has picked up. We don’t know where the ultimate lows are until they’re well behind us. But looking down the road, I know where I want to be positioned. I want the enduring security of precious metals, and I want the operating leverage of the companies that bring those ounces to market.
It was many years ago that my godson gave me a replica of one of the keys to the best deal. And it sits where I see it every day. It reminds me that fiscal mismanagement, monetary expansion, and inflation rarely end as purely financial events. They become cultural events, political events, social events. Currencies lose purchasing power. Societies can lose something far more valuable. So remembering those lessons makes me grateful to own the ounces that I do.
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You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. You can find us at mcalvany.com and you can call us at 800-525-9556.
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This has been the McAlvany Weekly Commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial advisor to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.
