PodcastWealthionJesse Felder

Higher Rates Could Burst the AI Bubble — Here’s What to Own Instead

Jesse Felder argues that rising inflation could prompt a new Fed hiking cycle, putting pressure on consumers, housing, gold, and leveraged Treasury trades. He sees AI infrastructure as vulnerable to overbuilding, amid constrained data-center construction, growing open-source competition, and risks tied to concentrated financing and investment. He favors real assets such as commodities and precious metals as potential diversifiers, while expecting further upside in oil and commodities if supply constraints persist.

Interest RatesInflationArtificial IntelligenceMarket ValuationsCommoditiesPrecious Metals

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Key Takeaways

Felder sees a gap between AI labs’ claimed $30 trillion market opportunity and the risks and constraints behind it: he says AI companies could face liability for harmful outcomes, open-source models are gaining ground as cheaper options that can run locally, and data-center construction cannot meet semiconductor earnings forecasts. He also warns that efficiency gains and a history of overinvestment could leave AI infrastructure overbuilt, even as cheaper compute may eventually support more sustainable business models after a painful adjustment.

Felder says unusually strong second-quarter nominal GDP—a pace matched by only six quarters since 1990, including 1999 and 2005—supports his view that inflationary pressures could prompt a new Fed hiking cycle lasting longer than investors expect. He says higher rates could stress consumers and housing, lift the 10-year yield from its 5% starting point toward 6% on average and potentially 6.5%–7%, and—if hikes occur—help value stocks overtake growth stocks.

Felder attributes rising long-term yields to Treasury and corporate debt supply outpacing demand, with both helping finance the AI boom; he also cites SoftBank’s pursuit of junk-rated financing for OpenAI as a sign of pressure in tightening credit markets. That financing concentration extends across markets: he says AI infrastructure stocks make up 40% of the S&P 500, half of this year’s investment-grade bond issuance is AI-related, and 90% of VC funding is going to AI, complicating diversification for pension funds.

GEO-POLITICS

AI Liability — Jesse Felder says Treasury Secretary Scott Bessent argued that AI companies should be held liable for hacking, not indemnified. Felder also describes bipartisan support for enforcing existing laws against AI companies, including possible prosecution for illegal hacking.

“Scott Bessant has been asked about, you know, the recent talk about security issues and whatever, and he said straight up, the best way to regulate these companies is make…”—

TECHNOLOGY

Open-Source Gains — Felder says AI labs have not delivered on their bet to create artificial general intelligence, while open-source competitors are gaining ground. Some customers, he says, see open-source models as cheaper and less exposed to IP theft, and can download them to run on local servers instead of relying on data centers.

“M you know and he basically said you have these AI labs, right?…”—

Data Center Constraints — Felder argues that semiconductor earnings forecasts depend on data-center construction over the next several years. He says the industry cannot build enough data centers to meet those estimates.

“Because when you think about it, literally right now all of the forecasts for semiconductor earnings, you know, are 100% dependent on building out data centers over the next several…”—

ECONOMY

Strong Nominal GDP — Jesse Felder says nominal GDP in the second quarter was running at a pace matched by only six quarters since 1990. He cites 2005, before the housing bubble burst, and 1999, before the dot-com bubble burst, as examples of similarly high readings.

“Nominal GDP is running at its literally there's only six quarters since 1990 that where nominal GDP has been running as high as it did in the second quarter…”—

Fed Hiking Cycle — Felder expects the Federal Reserve to be beginning a new rate-hiking cycle that could last longer than investors expect, citing building inflationary pressures. He says markets have shifted from expecting rate cuts to anticipating hikes; the cycle’s potential duration is his forecast, not a certainty.

“But I think, you know, with the Fed meeting last week and the inflationary pressures that are building, I think what what investors maybe don't appreciate well enough right now…”—

MARKETS

AI Financing Pressure — Felder attributes rising long-term yields to Treasury and corporate debt supply outpacing demand, with both types of issuance helping fund the AI boom. He also points to SoftBank seeking junk-rated financing for OpenAI amid tightening credit markets. A funding pullback, he says, could affect the broader stock market and economy.

“And so I think what we're just seeing is an oversupply of treasury debt coming to the market amid an oversupply of corporate debt at the same time to fund…”—

Private Credit Defaults — Felder cites Fitch’s estimate that private-credit defaults have reached 6.5%. PIMCO puts defaults near 20% of loan portfolios when payment-in-kind loans are included, he says. He argues that rising interest rates add pressure to the sector.

“Fitch is saying that literally defaults are already you know hitting 6 and a half% in private credit PIMCO talks about if you include payment in kind loans defaults in…”—

AI Market Concentration — Felder says AI infrastructure stocks account for 40% of the S&P 500; three chip stocks make up 28% of emerging-market indexes; half of this year’s investment-grade bond issuance is tied to AI; and 90% of this year’s VC funding is AI. This concentration makes diversification difficult for pension funds, he says. Energy represents 3% of the S&P 500, while Nvidia is worth more than the entire energy sector.

“I think they point out that AI infrastructure 40% 40% of the S&P 500 now is just AI infrastructure stocks. 28% of emerging markets is just three chip stocks…”—

FORECASTS

Treasury Yield Risks — Felder says the 10-year rate has historically risen an average of 100 basis points during a rate-hiking cycle, with past increases ranging from 50 to more than 200 basis points. Because this cycle began with the 10-year rate at 5%, he says it could reach 6% on average and potentially 6.5%–7%. He warns the move may be uneven, pressuring the leveraged basis trade and raising the risk of a Treasury-market accident.

“And the tenure historically during a rate height cycle rises at least 100 basis points. That's on average…”—

Value Rotation — Felder argues that if the Fed raises rates as he expects, value stocks could take over from growth stocks, as they did when the dot-com bubble began to burst in 2000. He points to a possible rotation toward undervalued, old-economy companies.

“But if the Fed is going to have to, you know, do what I think they're going to have to do, then value stocks are going to take over…”—

Fed Rate Hikes, AI Bubble & Real Assets

Jesse Felder sees inflation risks and an overheated economy as reasons the Fed may begin sustained rate hikes, challenging expectations that policy easing is near.

Is the Fed Starting a New Rate-Hike Cycle?

Felder argues that unusually strong nominal growth, loose financial conditions, and rising prices across energy, imports, manufacturing, and food make further Fed tightening plausible.

Could the 10-Year Treasury Yield Hit 7%?

Historical rate-hike cycles have typically pushed 10-year yields higher; Felder says a move toward 6% or even 7% is possible from current levels.

Why Treasury Yields Keep Rising

Felder attributes rising global yields chiefly to abundant Treasury and corporate debt issuance, while warning investors may underestimate the inflation outlook and potential Fed response.

What to Own as Interest Rates Rise

He favors defensive sectors and value stocks over growth as rates rise, and cautions that higher yields could stress leveraged Treasury basis trades and private credit.

Could Something Break in the Treasury Market?

Felder sees a commodity supercycle still in its early stages because producers have not invested enough to expand supply, unlike the heavy capacity investment underway in AI and chips.

Private Credit Risks & the Shift From Growth to Value

Felder says higher interest rates have historically helped puncture speculative bubbles and sees weakening AI funding, open-source competition, and investor skepticism as warning signs.

Why the Commodity Supercycle Is Just Getting Started

He describes a potentially damaging repricing if AI financing slows, given consumer and housing fragility and an economy increasingly reliant on data-center construction and chip demand.

Could Higher Rates Burst the AI Bubble?

Felder doubts government support will provide a reliable backstop, pointing to bipartisan opposition to data centers and growing legal and regulatory exposure for AI companies.

AI Spending, Data Centers & a Violent Market Repricing

Felder says AI infrastructure, chip stocks, corporate bonds, and venture funding dominate portfolios, leaving investors unusually concentrated in the AI trade.

Can Washington Save the AI Trade?

With traditional financial assets exposed to inflation and AI concentration, Felder favors commodities, precious metals, and other real assets as portfolio diversifiers.

How Investors Can Hedge Massive AI Exposure

Felder argues that investment booms routinely overshoot, and that technology efficiencies can worsen overcapacity as data centers and computing resources become more productive.

Why Real Assets, Commodities & Gold Matter Now

Open-source models and locally run AI can reduce costs and reliance on large data centers, while efficiency gains may make the current infrastructure buildout excessive.

Is AI Heading for a Dot-Com-Style Overinvestment Bust?

Felder says investors can recognize AI's promise while still anticipating overinvestment, valuation declines, and a painful shakeout in infrastructure companies.

Why an AI Bust Could Ultimately Help the Technology

He remains enthusiastic about technology but argues that an AI bust could lower computing costs and create the conditions for more durable products and business models.

The Supply Shortage Driving the Commodity Supercycle

Felder says long-run commodity performance depends more on constrained supply than short-term demand; years of weak investment have left many resources undersupplied.

Is $100 Oil Still Cheap?

He argues that oil remains relatively cheap compared with equities and gold, and that prices may climb substantially before reaching historically problematic levels.

What Could Send Commodity Prices Even Higher?

Felder expects commodity producers to invest only after prices rise enough to justify new projects, potentially aided by lower borrowing costs during an economic downturn.

Gold Outlook: Rate Hikes, Fed Policy & the Next Rally

He sees gold as a leading indicator for commodities: rate hikes may weigh on gold near term even as oil and other commodities catch up.

Final Thoughts

Felder says a sustained hiking cycle could pressure gold, but a later Fed pivot or intervention to calm Treasury markets could become a powerful catalyst for gold.

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Important Disclaimers

Not Investment Advice: For education only — not financial, tax or legal advice.

AI-Generated: Made by AI from source transcripts and may contain errors.

No Guarantees: Past performance does not predict future results; investing carries risk.

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