In this podcast, I sit down with Ed Dowd, the former BlackRock portfolio manager, to discuss the AI bubble and how the stock market is entirely being propped up by just 7 companies, most of whom are engaged in what is being termed "circular financing."

That practice hearkens back to the dot.com bubble when companies engaged in what was termed 'vendor financing.'  In other words, you pay your customers to buy your products.  In this era, 'circular financing' is vastly more complicated in is workings, but the essence is exactly the same when the maneuvers are boiled away.

Ed explained that the math just isn't mathing.  OpenAI, the company behind ChatGPT, needs something like $900 billion of annual subscription revenue at 25% margins just for a 10% ROI.

Nope, not going to happen.

And certainly not before their first waves of chips wear out and have to be replaced at enormous cost.

So, what happens when this bubble bursts?  Ed believes that a serious market crash is in the cards.  Of course, this means stocks will drop in price, but the main action is going to be in the credit markets.

Treasuries will continue to advance in price (fall in yield), making them an attractive option to ride out the storm, while other forms of lesser credit will implode, as is already happening across the subprime lender space (TriColor, PrimaLend, First Brands).

When will this happen?  According to Ed, it already is.  He tracks the Free Cash Flows (FCF) as the more important arbiter of company health and by that metric, all of the Big 7 companies are experiencing declining FCF, while Oracle's debt is getting more and more expensive to insure against a default.

And, oh by the way, stocks are at historically expensive levels, a condition that has historically resulted in very poor returns over the following years: