“When bubbles happen, smart people get overexcited about a kernel of truth,” said Sam Altman, CEO of OpenAI, last week. That’s a striking admission from the man most responsible for fueling the current AI gold rush.
Altman’s point was simple: AI is, indeed, the most important technological advance of our era.
But investors? They’re piling in like it’s the late 1990s all over again. His comparison: the dot-com boom, when stocks without revenues — or even business plans — traded like lottery tickets until the Nasdaq lost 80% of its value.
Ray Dalio, Alibaba’s Joe Tsai, and Apollo’s Torsten Slok have all chimed in with similar warnings. The irony, of course, is that Altman is both the architect of the boom and the skeptic of its valuations.
When the guy selling shovels in the gold rush tells you the rush looks like a bubble, it’s worth listening.
Scion of the Big Short
You remember Michael Burry — the awkward, one-eyed, contrarian doctor-turned-fund manager immortalized by Christian Bale in The Big Short.
While everyone else was cheering the housing boom, Burry was buried in the footnotes of mortgage-backed securities, reading loan-level data line by line.
What he saw was simple, if terrifying: defaults were inevitable. Adjustable-rate mortgages would reset, borrowers would fail, and the securities Wall Street worshipped would crack.
But spotting the problem wasn’t enough. Burry used a financial innovation known as credit default swaps (CDS) against subprime bonds, paying pennies for what amounted to financial fire insurance on houses already smoldering. “It was an elegant bet,” wrote The Wall Street Journal, “with limited downside but near-infinite upside.”
The hard part was waiting. His investors panicked, sent angry letters, even threatened lawsuits. One called him “unhinged.” Another said his obsession with mortgage minutiae had “derailed the fund.”
Yet Burry refused to relent. In a 2005 letter, he told investors: “Sometimes the hardest thing to do is to do nothing. I am confident in the data.”
That confidence paid off in 2007–08, when the housing market imploded. Scion Capital netted nearly $1 billion. Even his doubters were forced to admit the power of his contrarian stance.
Hedge fund peer Joel Greenblatt later said: “Burry had the guts to stay in the trade. That was the brilliance. That was the art.”
What Would Burry Short Today?
Fast forward to today: Burry’s Scion Capital is shorting Nvidia with $97 million worth of long-dated puts, while also profiting handsomely — $106 million so far — on contrarian calls in UnitedHealth.
Nvidia represents today’s AI hype machine, while UnitedHealth was left for dead after lawsuits and scandal. Classic Burry: short the mania, long the despair.
We’ve been playing in similar waters.
Our Grey Swan Trading Fraternity went short on Palantir—a stock once up 10X on AI buzz—paid off as shares dropped 7% today. Our options flipped from loss to a quick 25% profit almost overnight.
We expect more opportunities to profit from moves in Palantir in the months ahead. The real selloff hasn’t happened yet. “Shares gapped higher following earnings, and we just took profits on that gap fill,” notes our Portfolio Director Andrew Packer.
Breadth Is Cracking Beneath the Surface
The S&P 500 is near record highs, but the story beneath the surface is weaker.
Fewer industries are trading above their 200-day moving averages, leaving just a handful of tech giants like Nvidia and Palantir carrying the index.
History’s warning is clear: in 2007 and again in 2018, similar “narrow leadership” preceded sharp selloffs.
A market supported by a shrinking leadership group is fragile — when one of those pillars stumbles, there’s nothing left to hold the tower up.
₿ Crypto on the Balance Sheet
More than 152 publicly traded companies now hold over 950,000 bitcoin worth $110 billion. They call it diversification and inflation hedging. More often, it’s about juicing stock prices.
Michael Saylor’s MicroStrategy leads the charge, but the cautionary tale belongs to Isaac Newton.
Our friend Marc Faber included this insight regarding Newton in his last Gloom Boom, Doom report: Newton famously made, then lost, a fortune in the South Sea Bubble. His lament: “I can calculate the motions of the heavenly bodies, but not the madness of people.”
Three centuries later, investors haven’t changed.
Debt and Drunken Sailors
To the chagrin of many of Trump’s MAGA supporters, the federal government is blowing bubbles of its own: latest calcs show $630 billion in federal spending July alone, averaging nearly $600 billion per month this year.
The result? Annual interest costs have now surged past $1.2 trillion.
Bank of America calculates that rates would need to fall below 3.1% just to keep the interest bill from climbing higher.
Credit markets may have the final say: high-yield spreads are at 30-year lows, sending the false signal that “there’s no risk.” In truth, low spreads tend to precede a crisis. And spreads widen quickly once fear sets in, cutting off liquidity and hammering stocks.
What the credit and bond markets say about federal spending will undoubtedly be a closed-door topic at this week’s confab of central bankers in Jackson Hole, Wyoming.
We expect Jerome Powell to speak in terms that suggest the Fed will maintain its independence despite pressure from President Trump and Treasury Secretary Bessent to lower rates… sooner rather than later.
The fireworks shot off to end the meeting will likely be more than ceremonial.
The Liquidity Safety Valve Is Running Dry
Musing around at other items in the Fed’s tool shed, we find this curious implement:
The Fed’s Overnight Reverse Repo Facility — a kind of emergency reserve for excess cash — has shriveled to just $38 billion, from a peak of $2.55 trillion.
Treasury issuance is rising. Quantitative tightening grinds on. With the cushion gone, volatility won’t creep in gently — it will arrive all at once.
Investors should again heed our warning to take some profits off the table – particularly in AI names. And if you’re inclined to trade, look for shorting opportunities like we have with Palantir. There will be more of those opportunities in the months ahead.
Lumber as the Canary
We close with a few nuggets pertaining to a slowdown in the economy.
Goldman Sachs estimates that businesses are still eating 64% of tariffs today. By October, that flips: consumers will shoulder 67%.
Combine that with collapsing container ship departures from China, and the result is fewer goods and higher prices.
The economic and price squeeze is real. And it’s ultimately its going to tighten the belts of consumers. As we’ve noted yesterday, the trend away from credit cards toward debit has picked up speed already.
Lumber prices have slipped back under $600. That may sound like a niche data point, but lumber is one of the most sensitive demand barometers.
In 2006, lumber collapsed ahead of the housing bust.
In 2021, it whipsawed with pandemic stimulus.
Today’s decline suggests something bigger: demand fading, builders pulling back, and liquidity draining.
When builders stop buying wood, it’s more than a tight housing market, it signals the economy itself is losing momentum.
~Addison
P.S.: Join us for Grey Swan Live! this week, Thursday at 11 AM ET. The Fed’s Jackson Hole retreat provides a serene venue for central bankers to meet, but the turmoil between Jerome Powell and President Trump may just come to a boil. We’ll be discussing the potential fallout there.
Your thoughts? Please send them here: addison@greyswanfraternity.com
