My Thoughts on AI and Inflation.

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Welcome back, I have some Cyber Monday related offers in the middle of the newsletter, but I wanted to get right into the content.

My thoughts on AI as of today.

I’ve written pretty extensively on AI, but tbh, a lot of it has come from my 2x/week newsletter, The Wall Street Rollup, just given the frequency of the newsletter.

I’ve been working on this for a while but it seems like the market is finally starting to wake up a bit and align closer to my views: that the AI trade is what drives the broader markets (not really the consumer) and that AI is currently just a “first wave” thing that’s not helpful enough relative to current valuations.

I won’t mince words in this one, and apologize for my bluntness in advance. What I say, while direct, comes from a place of trying to be helpful.

I've been talking about the “everything’s computer” trade in the market. Basically, I don’t care about the Consumer, the AI trade is what is actually driving things and any material change in AI spend is what drives my market views. So yeah, I have the view of materially downplaying the outlook of the “bulk” of consumers. Ultimately, I feel really bad about the affordability situation a lot of this country has to go through. The Fed and Federal Government exacerbates this by policy actions that drive inflation further. I hate this reality. But, I’m not investing my money based on that - I’m investing money and forming my overall view of the stock market based on what’s actually driving things - and that’s AI and the top 10% of consumers. The top 10% in the U.S. drives 50% of the consumption.

So there are obvious, single-name investment decisions to make when you see consumers trade-down and traffic declines out of more expensive food options, but even if it makes you feel bad you have to look at what is actually driving consumption & how important AI is now.

People like to joke about permabears. The whole “he predicted 27 of the last two recessions!” joke. I wouldn’t get spooked just because there’s layoffs or consumers are complaining. Consumers ultimately are always complaining. It’s good to avoid Layoff headline bait, as well as Credit default bait. Remember, Private Credit has 5% default rates, which makes sense for highly levered smaller companies! And layoffs happen all the time! Goldman does layoffs every year! That’s not necessarily a sign there’s a systemic worry.

There are times where it makes sense to be Chicken Little, but if you’re Chicken Little forever then you’ll never make any money.

So I really, I form the bulk of my market views based on AI sentiment, which is finally starting to crack a bit.

We’re in the First Wave of AI

I also view AI a bit in two waves. Right now, we’re in the first wave, where we are flush with funding and firms entering the market. What will pause the first wave are worries about AI capabilities plateauing, questions over ROI, farther away than anticipated data center and electricity constraints, and financing/cost of capital questions. The Metaverse was a really dumb (or extremely early) thematic trend, so I don’t want to compare AI to that, but I think we’ll get a degree of bears comparing an AI plateau to the Metaverse.

One of the bigger constraints with AI IMO relates to energy and data center build. The incredibly long lead times coupled with rapid depreciation are the biggest problems in powering the next gen models. This financing and model improvement mismatch is bound to cause problems, which I think surface in 2026, or 2027 at the absolute latest.

Arguably, this has started to play out to a lesser degree over the past month. People are very right to wonder whether this massive amount of spend is going to be worth it. Especially relative to what we have today and given how many AI companies are negative gross margins and appear to have unsustainable business models.

Over the past month, we’ve seen signs that Gen AI may have reached a near-term ceiling, and OpenAI has been the face of this. Chat GPT-5 was incredibly unimpressive, they’re trying to diversify into slop, they’re trying to create a circular economy where “they’re too big to fail”, and they floated the idea of the government being the financier of last resort if needed (this blew up spectacularly in their face as there was a lot of public uproar). We’ve also finally seen the market start to punish some names - in particular, Oracle, Microsoft, and Meta (like I alluded to with the Metaverse, this is almost very reminiscent to where Zuck lost his mind chasing the dragon). On the bright side, at least we have a lot of time to make money before AI makes a lot of roles redundant.

In this, we’re going to talk about the “permanent underclass” idea a bit, in two different ways. The idea of a future permanent underclass is basically a social caste of people who got oneshotted by AI and didn’t stay ahead of the curve. They didn’t make enough money before we reached AGI and their skillset got made redundant. A lot of Tech Twitter has talked about the permanent underclass this year. Generally, technological shifts deeply harm specific economic classes. If we reach AGI, then the displacement is likely going to be far more severe than what happened with the prior industrial and technological revolutions.

Like I said, the top 10% of the consumers drive 50% of consumption - at face value that tells you two things 1) we live in an inequal/unjust society where wealth accrues to the top percentage of Americans and 2) If wealth accrues to the top percentage of Americans, then what can I do to make sure I’m in the top percentage of Americans?

Back to my first wave point - Karpathy is right

Andrej Karpathy, a co-founder of OpenAI and a leading voice in AI (he termed the phrase vibe coding), had a 2-hour long podcast a month ago that reinforced what a lot of the investment community has been starting to think about AI.

• He called AGI a decade away and said that the average SF person is overshooting where LLMs are today. LLMs can only take us so far (our Brains are more advanced)

• Compared LLM outputs to "summoning ghosts” and they don’t have reinforcement learning like humans do

• Most notably, he called AI Agents slop: "Overall, the models are not there. And I feel like the industry [...] it's making too big of a jump and it's trying to pretend that this is amazing. And it's not—it's slop! And I think they are not coming to terms with it. And maybe they are trying to fundraise or something like that, I'm not sure what's going on."

I loved this one quote I saw on X, “LLMs are pretty good. They're not transformative, and also not useless. There are some tasks where LLMs will save you a lot of time. And that's it”

Like most things on the internet, people quickly forgot about this and moved on to the next thing, but the message has stuck with me. Mainly because it resonated with a lot of my thinking, and because no one really provided a strong rebuke. AI really is quite an impressive technology, but is it okay to admit we might be at a near-term ceiling and we’re a little ahead of our skis? I think so.

Burry warns on Chip Depreciation

While Michael Burry doesn’t have a 100% hit rate, and was notably “too early” with the housing crash, Burry’s return to criticize aggressive capex spend feels quite timely.

I generally have fewer concerns with the spending of companies that have abundant excess cash flow, but I think some of the players in the AI space that don’t have ad or subscription revenue to fall back on will be in for a rough landing soon. We’ll have to see what his big November 25th reveal is.

The research backs it up - AI is in the testing phase - we’re still in the first wave

AI is a must for organizations, but McKinsey’s State of AI Report found that generally, most companies are still testing or piloting AI, with nearly two-thirds not yet scaling it across the organization. While interest in AI is strong and many report use-case-level gains in cost savings and innovation, only 39% see a meaningful boost to overall EBIT. Views on AI’s impact on jobs are mixed as 32% expect workforce reductions, 43% foresee no change, and 13% expect hiring growth. Overall, it shows that AI is broadly still in the experimentation and piloting phase for most large organizations.

I’m incredibly bullish the 2nd Wave of AI

I’m in the Karpathy camp of AGI being a decade away. A lot of the business decisions being made today do not reflect that reality and it means a lot of companies are going to be in for a bad time. So a flush out has to happen, it’s inevitable. After the flush out I expect to happen after the first wave, I expect a 2nd wave where it becomes clear who the winners are and as we inch closer to advanced reasoning and ultimately AGI.

I fully expect some of the leading names of the AI hype to trade down like 70%. The higher quality companies obviously won’t go that low, so you need to look at names on an individual basis and determine what the “pound the table” price is on your highest conviction predictions.

I still think there’s a lot of companies doing very cool things in the first wave, but ultimately I think the flush out is intuitive and I frankly do not believe there’s only one, continual wave.

It is ridiculously impressive how much has happened in the AI world in the past 3 years, and there are a lot of cutting edge AI companies that finance professionals should be trying out, but I think we should also worry a bit about bold claims that don’t reflect where AI is actually at today.

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Part II: Own things that increases more than Inflation:

No more beating around the bush on this. A lot of people reading this are in their 20s or have kids that they’re trying to prepare a better future for.

Beyond the obvious tariff and labor related pressures, there’s politically motivated drivers that will likely keep inflation running hot.

I continue to see a fiscal and monetary policy that seems indifferent to addressing the root causes of inflation or reigning in unsustainable spending. I also see a world where many corporates are lacking on innovation, so they resort to price increases, which in many cases come with service degradation.

In a perfect world, I think government spending should be significantly cut. There is too much inefficient spend across almost every vertical. It makes sense why this happened though, the incentive system isn’t capitalistic in nature, so of course the cost structure is going to be quite poor. I have a slight libertarian streak tbh and think government should be much smaller. But we don’t live in “perfect worlds” and “what ifs” - we live in the world as it is shaped today and where the puck is going.

The government has no interest in fiscal responsibility, so the onus is really on you to make sure you and your loved ones don’t get stampeded by inflation and don’t become part of the “permanent underclass”.

The Next Fed Chair is a Puppet:

I generally lean quite hawkish, especially given the significant AI investment and wealth effect we’ve seen, and since I’d like to see 2% inflation instead of tolerating 3%. It seems like our real estate genius President wants to see rates as low as humanly possible (remember when Trump wanted negative rates in his first term lol) and wants a puppet Fed Chair who is going to do whatever he says. Obviously, it takes an entire committee to get things done, but in my view I see a Fed that’s going to focus more on the economic growth mandate than the inflation side of the coin.

Our fiscal deficit is a joke:

In 2013, when I was first starting to get into economics while in High School, I was getting indoctrinated into a lot of the political messaging around how egregious and unsustainable government spending was. This was something I was quite worried about and in reality it was laughably tame compared to the deficit and debt levels we run today.

The inflation that worries the most relates to home purchases and healthcare insurance. I think in particular our country has to get a grip on healthcare costs. The rate to insure is growing dramatically. It’s very hard for me to propose a solution to this complex problem, in fact JP Morgan, Berkshire Hathaway, and Amazon tried to brainstorm a plan and gave up!

I refuse to apologize for being aggressive:

If you’re following me, you’re in the right place. I joke around a lot, but overall I’m very intense and genuinely want the people who read my stuff to make as much money as they reasonably can. But like I said, the onus is really on you to make sure you and your loved ones don’t getting stampeded by inflation.

This means making sure you’re earning enough to invest towards the future and make sure you and your loved ones are taken care of. This may mean, shockingly, having to work more than 40 hours a week.

This meme got some uproar. To anyone mad at this, I’m not apologizing - I’m trying to help you!

I cannot imagine being a 20-30 year-old who doesn’t have your bag yet and is optimizing for work-life balance. The “permanent underclass” could be a real thing, and it’s worth getting out of.

As a college freshman, I spent the summer working 3 jobs for 60 hours a week, with the methodical approach of knowing I was saving up for my future NYC apartment. There’s two points here. 1) I’ve never been shy about having to work a lot of hours to earn. Genuinely, as a first-year analyst working 50 hours a week I realized 50 hours wasn’t that much and was debating getting a 2nd part-time job to make even more money. Two years later I would start a lucrative meme account. 2) A lot of your earning and savings habits need to be forward-looking and planned out 3-4 years ahead of time. The best example of this is by working hard and making more $ in advance of having kids.

IMO, it is very easy to work 45-65 hours a week and still have a social life and time to exercise. I’ve been clocking 80 hours weekly consistently for the past 30 months and I’m playing the best soccer in my life!

So look, I truly believe that if you feel like you’re falling behind and fighting against inflation, there’s plenty of time in the day for you to right the course and get things on track.

The “NGMI” Bros are Jerks - but they’re right:

Crypto bros are overly cocky and say “NGMI” aka “not gonna make it” condescendingly to non-coiners, but it doesn’t mean they’re necessarily wrong. Sure, they look like morons when crypto draws down materially (we’re in a drawdown rn), but through the troughs they still ultimately come out on top (as long as they don’t use leverage).

Crypto and Bitcoin in particular have outperformed significantly. You can call it a bubble, but I’ll call it like I see it - over the past decade, everyone who went long Bitcoin made serious money. That’s no flash in the pan, regardless of what you think of Bitcoin. Part of investing is looking in the mirror and being honest on about your mistakes, but ultimately a lot of people are still saying the same thing they said about Bitcoin at $3,000. It’s very hard to take seriously people who can’t just put their hands up and say “hey I missed Bitcoin” and the ppl who keep tripling down on a wrong thesis. Money was on table, you either grabbed it or not, onto my next point.

Ik Gen Z and retail is getting more involved in the markets, but financial literacy is still quite poor and you can dramatically grow how much money you have sitting in your accounts at 30 and 40 compared to the average joe.

Let’s say you’re a finance bro who has worked in the industry for 6-8 years. You’re making a lot of money, you’re not going too overboard with spending and are making sure you’re saving a lot, and you’re sharp enough to put your money into index funds and into some stocks you like. You’re a millionaire at 30, congrats.

Let’s say you work in marketing, have worked in the industry for 6-8 years. You’re making okay money, still spend within your means, don’t live in a high cost of living area, so even though you’re not in as strong of a position as the Finance Bro, you still have decent enough FCF you’re saving each year. Maybe you’re focusing on saving for a house. But there’s a big problem. Beyond the workplace 401k, you’re not really sure how to invest in your money. You have a checkings account, but you just learned about a high-yield savings account. One of your hinge captions is “I’m like the Stock Market, high risk, high reward” - and that’s your current understanding of the stock market, as opposed to putting your hard-earned money in it. At 30, you’ve got some money, but you’ve been outpaced significantly by folks who started on the compound interest train much earlier.

A lot of Americans are too risk averse and then miss the compounding train. For a lot of America, their asset or worth is tied into their house, as opposed to assets that appreciate more naturally.

Yes, house values go up, blah blah. But they also come with significantly more expenses than a low-cost ETF. Things in your house break!!! And there’s a mortgage and property taxes. Your house appreciates but other houses are built every day, and you need to renovate your house in order to attract the type of valuation you think you deserve in the a sale. So many boomers have absolute dogshit interiors and then wonder why they can’t sell at Zillow pricing.

Keep your emergency fund, but man, get in your head real quick how powerful compound interest and constantly giving money to the best companies in the U.S. is.

High-level thoughts on ETFs, Equities, and Crypto:

When you look at longer-dated fixed income, it looks increasingly unattractive as inflation increases and the risk premium increases. That’s why longer-dated bonds weren’t really compelling. In my 20s, I’ve had like 5% fixed income exposure and even that might’ve been too high. This obviously changes over time, but 60/40 doesn’t seem like the golden plan it used to be.

I was someone who was buying I-Bonds back in 2022, and that was a nice little trade and everything, but it was only a nice trade from a fixed income allocation standpoint. It was obviously a bad trade from a lock and load on equities standpoint.

Equities: It seems like we’re a little late innings on this first wave of the AI story, but I generally am buying indexes every month regardless of what I think about the market. Even if my concerns about what AI looks like today, 15 years from now (if not much sooner) AI will be doing things we wouldn’t have comprehended.

• Some types of AI beneficiaries: 1) Software companies with a moat, distribution, relationships, and stickiness that have the ability to deploy AI workflows into existing enterprise product suites. 2) Fortune 500 companies (and others) who will benefit from AI related synergies unlocking a ton of operating leverage.

• Of course, there’s a ton of software companies getting bled out by AI, but overall you’re looking at a minimum thesis of “I should probably keep investing in the top 500 companies in the U.S.” Most people primarily focus on owning baskets of the best companies in the U.S.

Crypto and StableCoins: Look this is the obvious anti-fiat positioning - but it amazes me that people try to deny crypto’s role in the economy. I made my case earlier in this piece. If you want to say it’s a scam or tulip fever you can, but you don’t get brownie points for saying something whimsical - bitcoin and crypto made a lot of people serious money and you either participated in that or you didn’t. I’m not here to convince you what to do next in cryptocurrency, but clearly people are gravitating towards it, and it’s clearly previously made people a lot of money (past performance isn’t indicative of future performance, of course).

I’m biased, I’ve been very tilted towards equities ever since I started my career. I think in the next 5 years or so I’ll start zoning in on increasing my allocation towards more predictable income. But while currently wearing a capital accumulation hat, that’s less of a near-term goal.

Ultimately, my goal is to ensure that my passive investments are dramatically outperforming the rate of inflation.

Keep growing your income and keep reinvesting your income

On the income side, have a hard look at what your career path looks like and what compensation could look like. This is a very hard exercise, but be honest about what Plan A, B, and C looks like and how much you’ll actually make.

On the reinvestment side, go take a look at your savings, portfolio, and earnings profile, and figure out what the right risk and return profile for you. You should not go overboard on risk assets if you have a queasy stomach and/or don’t know what you’re doing. Your saving, investing, and spending profile changes materially with kids, so that is part of why I stress focus on earning and working a ton in advance of that.

I truly want what is best for the folks willing to read my stuff, so I hope you can compound interest your way out of the permanent underclass and are able to stress less about money.

With inflation and rising costs not going anywhere, it’s up to all of us to figure out how to get our money working better for us.

Until next time.

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Disclaimer: Obviously none of this is financial advice and you should not take make any financial decisions based on what was included in this piece. This publication is for informational and educational purposes only and should not be construed as investment, legal, tax, or financial advice. We are not registered investment advisers or broker-dealers, and this newsletter is distributed under the “publisher’s exclusion” of the Investment Advisers Act of 1940. The content provided is impersonal and general in nature; it does not take into account your individual objectives, financial situation, or needs. Investing in securities involves risk, including the possible loss of principal, and past performance is not indicative of future results. You should consult with a qualified financial professional before making any investment decisions.