The Next Melt Up Is Almost Here
The Weekend Edition is pulled from the daily Stansberry Digest.
AI investment is getting more "circular" by the day...
Last month, chip and AI data-server giant Nvidia (NVDA) pledged to invest $100 billion in ChatGPT developer OpenAI... which already buys chips from Nvidia. Nvidia said it's planning to invest in OpenAI to build 10 gigawatts of data centers to help fuel AI growth.
The move raised eyebrows, but it was just the start...
On Monday, OpenAI announced a multiyear, multibillion-dollar deal that could give it a 10% stake in one of Nvidia's competitors, chipmaker Advanced Micro Devices (AMD). OpenAI says it will deploy 6 gigawatts of AMD's chips and hardware, starting with 1 gigawatt in the second half of 2026.
OpenAI has the right to acquire up to 160 million AMD shares, about 10% of its current outstanding stock, at 1 cent per share if certain vesting milestones and conditions are met by both companies. The final level of the agreement is tied to AMD stock reaching $600 per share.
AMD shares spiked around 25% Monday on the news, rising above $200... And they continued trading above that level for the rest of the week.
In short, AI spending and the supply chain are growing increasingly incestuous. It's just another sign that the AI boom is possibly turning into a bubble...
Nvidia also owns nearly 7% of CoreWeave (CRWV), which uses Nvidia's chips to build its data centers. And a few weeks ago, OpenAI made a $300 billion deal to buy processing power from Oracle (ORCL) – which sent ORCL shares up 36% after the announcement.
There's also news that Meta Platforms (META) CEO Mark Zuckerberg is in talks with Alphabet (GOOGL) to use Google's AI model to improve Meta's ad business (a big source of revenue).
And Microsoft (MSFT), a major investor in OpenAI over the years, just made a deal with Anthropic to use its AI technology in Office 365 apps. As our Director of Research Matt Weinschenk wrote in the October 3 issue of This Week on Wall Street, "In the AI industry, money and computing power are flying around every which way."
This will be a problem if AI doesn't grow as planned...
As Matt explained, companies like Nvidia, Meta, and Alphabet reinvesting cash into further AI spending is working – so far. But if revenue doesn't keep up, Matt cautioned...
These are roundabout deals in which suppliers invest back into their customers, who use the cash to buy more from the supplier.
And this circular nature of AI spending creates risks... It suggests that any crash will be swift and severe.
For industries with a more traditional value chain, changes in the business scale linearly to asset values...
But this feedback loop makes the system nonlinear... chaotic, even.
For now, it's driving AI higher. And thanks to the almost religious belief in AI from Silicon Valley's tech CEOs, the spending can run for a long, long time.
The Big Tech "hyperscalers" funding the AI circular pattern – like Microsoft and Alphabet – haven't pulled back on AI-related spending yet. And from the pace of the deals being made, any crash to reality is going to take some time.
Plus, these are not the only kinds of investments being made in AI today. Money is flowing in from investors and venture-capital firms outside the industry, too.
Still, the increasing number of deals being made by companies already heavily investing in AI with each other is a development you shouldn't ignore.
This AI Boom Looks Familiar
A market "blow off" is coming...
That's what famed investor Paul Tudor Jones said on CNBC on Monday morning. Jones compared today's market with the setup of the dot-com bubble and other past euphoric peaks.
However, Jones – who, among other things, called the 1987 market crash – said the difference between now and the late 1990s is that today's Federal Reserve has just begun a new easing cycle by lowering interest rates. (Before the dot-com bubble popped, the Fed was raising rates in 1999 and early 2000 to try to slow down the economy and inflation.)
As we wrote in the September 22 Digest, the fuse for the next stock market Melt Up has been lit...
Thanks to the Federal Reserve's recent rate cut, interest rates are coming down... with the promise of more to come. The cost of dollars (in the short term, at least) is getting cheaper.
So it sure seems like a good time to consider whether the next market "Melt Up" is around the corner... when stocks will push higher to previously unforeseen heights and a blow-off top.
As our colleague Brett Eversole explained here in DailyWealth on Thursday, a Melt Up typically happens after some crisis inevitably leads to a government easy-money policy response that triggers an upswing in stocks.
If money gets too cheap, we could see the largely frozen housing market thaw... And the AI boom could turn into a speculative frenzy where "all rationality will go out the window," like it did three decades ago during the dot-com bubble.
It will be fun – while it lasts. And these periods can go on longer than you might think possible. But it will be important to manage emotions and not get caught up in the heightened greed, because a "Melt Down" inevitably follows the good times.
We're not there yet, though...
Jones told CNBC that the circular deals, or vendor financing, happening in AI are making him "nervous."
And we're seeing signs of froth in market behavior. "Meme-stock mania" returned to the scene this summer. So far, it has been a "lite" version of what we saw in early 2021 – when the popular tech stocks of the time peaked.
But the mania isn't here yet... not with a record $7 trillion in cash sitting on the sidelines in money-market accounts.
Lower rates may bring some of this money into riskier assets, as investors seek bigger returns and to keep up with inflated asset prices.
So I don't think we're near a peak of wild euphoric expectations like what we saw in 1999 and 2000. (Maybe today is more like 1997.)
Stansberry Research senior analyst Alan Gula also says we're not at a dot-com-like peak in stocks. He recently wrote an excellent article for our free Stock Market Trends website detailing five reasons the AI boom isn't in "dot-com bubble" territory – yet.
As Alan concluded...
The stock market has gotten extremely expensive. Just because it's not at a record valuation doesn't mean we shouldn't be worried. At the very least, we should expect relatively low, long-term returns from here.
There are also signs of excessive speculation everywhere, including soaring options volumes, ballooning leveraged exchange-traded fund assets, meme stock (and coin) pumping, pre-revenue companies attaining multibillion-dollar valuations, and quantum-computing stocks going nuts...
Whatever you do, don't claim that this market is crazier than the peak of the dot-com bubble.
In short, the next Melt Up may just be getting started. However, that doesn't mean we can't – or won't – see pullbacks along the way. Just keep your portfolio diversified. We continue to like high-quality stocks, hard assets like gold, and bitcoin.
Good investing,
Corey McLaughlin and Nick Koziol
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