Episode summary
When A.I. Spending Starts Slowing, Start Worrying About Recession | Wolf Richter
Thoughtful Money
· · 1 hr 7 min · Hosts: Wolf Richter
Summary
Wolf Richter argues that the U.S. economy is still running hot because of a powerful mix of AI capital spending, large federal deficits, full employment, and strong nominal GDP growth. He says the key metric is nominal growth, not real growth, because GDP, taxes, and debt service are all measured in current dollars. In his view, that hot economy helps the government manage its debt burden by raising tax revenues and keeping debt-to-GDP in check, even though it also leaves inflation elevated.
He does not see a recession in the next couple of quarters. The main risk he watches is a slowdown in AI spending, especially if it coincides with a sharp sell-off in AI stocks and a broad pullback in corporate capital spending. He says the boom feels real in San Francisco, where AI-linked money is pushing up home prices, spending, and hiring, but he also thinks the revenue model for AI remains highly uncertain and likely cannot justify the scale of investment forever.
Wolf Richter rejects the idea that the economy is truly K-shaped in the usual sense. He says the lower-income half is still rising, just more slowly than the top, and he points to relatively low consumer credit delinquencies, still-tight labor markets, and rising wages as evidence that most households are not in outright distress. For investing, he says he is out of stocks, shifting from T-bills into longer Treasuries and TIPS, and staying away from AI bonds and gold at current levels.
Key takeaways
- Wolf Richter says recession risk rises only if AI spending and AI stocks both roll over hard, because that would hit corporate capex and confidence.
- He argues nominal GDP growth is doing the heavy lifting on debt sustainability by lifting tax receipts and keeping debt ratios manageable.
- Richter says the AI boom is broadening into manufacturing, construction, utilities, and finance, but its revenue model remains unproven.
- He rejects the standard K-shaped-economy label, saying the lower half is still growing even if the top is growing faster.
- For portfolios, Richter is favoring Treasuries and TIPS, staying away from corporate AI bonds, and avoiding stocks at current valuations.
Notable quotes
“When that starts declining, uh that's when I start seeing a recession on the horizon”
“the bond market is still in la-la land”
“the revenue model for AI is completely uncertain”
“the K-shaped economy. So, the K the K is one arm goes up one leg goes up the other leg goes down”
How the episode opens
It's a huge amount of corporate money that's getting spent, that's getting drawn in globally, and that's getting spent in the US economy. When that starts declining, uh that's when I start seeing a recession on the horizon. — Welcome to Thoughtful Money. I'm Thoughtful Money founder and your host Adam Taggart. Welcome you here for a long-overdue return discussion with Wolf Richter, publisher of wolfstreet.com, very famous not just for his macro and market uh research, but for the charts that he creates there. Wolf, it's been way too long. Thanks so much for coming back on the program.
Thanks for having me, Adam. — Well, look, um we we caught up before we turned the um the camera on, but I just want to say once again, I was just back in your home city of uh San Francisco uh 24 hours ago, and despite some of the problems the city's still dealing with, um it is still overall one of the most beautiful cities in the world. So, uh congratulations on living there.
I have nothing to do with that. — And I will remind people that Wolf um is one of those crazy people that uh walks down and uh go swimming in the bay there, um which is so cold. Um but uh I'm sure that uh you know, you were you were hip on cold plunges before they became uh the the hot hot thing to do.
Well, you know, the cold plunges where they they sit in ice water in the bathtub. And I can't do that. When when I get into cold water, I need to move or I get very cold.
So, I I need to uh I need to swim hard to stay warm or not get too cold too quickly, but these people are I I look at them, you know, they say this is nuts to sit in ice water like that.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- ai capex slowdown
- recession risk
- ai stock valuation
- bond market
- t-bills to tips rotation
Watch the episode
Watch “When A.I. Spending Starts Slowing, Start Worrying About Recession | Wolf Richter” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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