The AI Echo Chamber: When Circular Deals Start Sounding Like 2000

We are presenting a couple of bearish cases this morning. To be clear, my broader view remains bullish for a couple of reasons. 1) the Fed is cutting rates while the economy is fine. 2) I see no slowdown in Capex in AI. 3) global liquidity supports risk assets. That all being said, the tends to throw a monkey wrench into bullish scenarios from time to time, so you always need to have your head on a swivel.

She’s not quite in Cramer’s league, but she’s pretty close. So take this for what you will…..

The AI ecosystem is awash in record-breaking contracts, and the money is going in circles. Nvidia invests billions into OpenAI, which uses that capital to buy Nvidia chips. Oracle sells $300 billion worth of compute to OpenAI, which can only afford it if Nvidia’s $100 billion investment closes. AMD grants OpenAI penny-priced warrants to become its customer, while Microsoft, OpenAI’s largest backer, also rents compute from Nvidia and CoreWeave—where both Nvidia and OpenAI hold stakes. The result looks less like a supply chain and more like a feedback loop.

Circularity isn’t illegal or new. In the dot-com era, telecom equipment makers lent customers money to buy their gear—vendor financing that worked until the music stopped. Today’s version is cleaner but conceptually similar: infrastructure vendors and cloud players are subsidizing their own demand through equity stakes, credits, or guarantees. The problem is opacity—these deals look like revenue growth on the surface but may simply recycle capital through the system.

When AI demand is exploding, circularity feels virtuous. It amplifies scale, compresses time, and feeds market euphoria. But when capital tightens or monetization lags, it can reverse—companies find themselves owning pieces of each other’s liabilities. The risk is that “AI infrastructure” has become an accounting ecosystem in which the same dollar of capital supports multiple layers of projected revenue.

Winners
• Companies with genuine free cash flow and diversified end markets—Nvidia (NVDA), Microsoft (MSFT), Oracle (ORCL)—so long as real demand outpaces financial engineering.
• Utilities, grid enablers, and power suppliers (ETN, PWR, CEG, VST) that sell a physical service in short supply—electricity—regardless of who funds the data centers.
• Suppliers with limited direct exposure to any single AI giant—memory (MU), cooling (CARR, JCI), and packaging (TSM).

Losers
• Companies whose growth depends entirely on vendor-subsidized demand. If the circular capital flow breaks, so do their margins.
• Chip and cloud firms with large equity or debt exposure to the same counterparties they’re selling to—overlap magnifies downside when liquidity fades.
• Investors buying “AI exposure” without analyzing who’s really paying whom.

Key risks
Circularity can disguise concentration. AI’s current expansion relies on a few dominant players financing each other’s capacity. A pause in one deal cascades through the chain. The moment investors start demanding cash-flow returns instead of capacity announcements, some of these flywheels could seize.

Investment takeaway
Treat circular AI deals as a sentiment gauge, not a balance-sheet guarantee. Stay long the real bottlenecks—power, transmission, and high-yield semiconductors—but hedge exposure to over-levered “AI infrastructure” stories that rely on infinite funding. Every cycle ends the same way: when the system runs out of new money to lend itself.

The Real Bubble Isn’t in AI—It’s in Credit

Everyone’s watching for signs of an AI stock bubble, but the real risk may be hiding in credit. Corporate bond spreads—the gap between what risky companies pay to borrow and what Treasuries pay—are near cycle lows. That means markets are treating risky borrowers almost as safely as the U.S. government. In other words, credit is priced for perfection.

The problem: nothing about the current environment is “low risk.” Rates remain high, leverage is climbing, and a massive refinancing wall hits in the next two to three years. Companies that locked in cheap debt during the 2010s will have to roll it at 7–10%, and the weakest balance sheets will break first. Bankruptcy rates are already ticking up, and private credit is masking some of the damage as borrowers quietly “amend and extend” loans instead of defaulting outright.

For investors, tight spreads mean you’re not being paid enough for the risk you’re taking. That’s dangerous because when spreads finally widen, they tend to do so violently—especially if economic growth slows or liquidity dries up.

What to watch:

Implication:
AI may or may not be a bubble, but credit markets are acting like risk is extinct. When spreads are this tight, history says the next correction isn’t about hype—it’s about debt.

Today’s stock is Progressive (PGR)….

I’m a big fan of P&C stocks as a bond alternative and these guys got crushed on earnings. Watch for an undercut and rally at the $230ish area, and/or at the 10 day.

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