Summaries > Finance > Steve Hanke > ðŸ”´ BRACE YOURSELF! This Is Now The BIGGEST Bubble Of ALL TIME | Prof Steve Hank...

Ðÿ”´ Brace Yourself! This Is Now The Biggest Bubble Of All Time | Prof Steve Hanke

https://www.youtube.com/watch?v=aqTCNRCebq8

TLDR Steve Hanke argues that accelerating money-supply growth will keep inflation and bond yields high, while an AI investment boom fueled by borrowing could become a dangerous bubble and trigger a major market crash. He expects tighter Fed policy to raise that risk, but remains bullish on gold and silver over the long term.

Key Insights

1. Watch broad money growth for clues about future inflation

Professor Steve Hanke argues that changes in the money supply can signal inflation trends before they appear in consumer prices or bond yields. He favors Divisia M4 over M2 because it measures spending power using a broader, weighted set of financial assets. In the interview, he says Divisia M4 was growing about 7.5%, above his estimated 6% “golden growth rate” consistent with 2% inflation. Treat this as one perspective rather than a guaranteed forecast, and compare money-supply data with inflation, employment, and other economic indicators.

2. Prepare for borrowing costs to stay high if bond yields remain elevated

The discussion describes the bond market as having entered a long-term bear market after its decades-long rise ended in 2022. With the U.S. 10-year Treasury yield back above 5%, Hanke expects borrowing costs to remain elevated even if the Federal Reserve does not raise its policy rate. Treasury yields can affect mortgage rates, credit cards, and other forms of credit, so households and businesses should stress-test budgets against higher financing costs. Avoid assuming that a single Fed meeting will quickly bring consumer borrowing rates down.

3. Assess AI investments by their potential returns, not excitement alone

The speakers warn that the scale of AI investment may be outpacing the revenue needed to justify it. Their estimate says that earning a 12% return on projected investment would require about $8.5 trillion in revenue, compared with forecasts of roughly $3.6 trillion. They also raise concerns about companies relying increasingly on borrowing, opaque debt, and investment flows between firms in the same sector. For practical analysis, compare valuations and capital spending with credible revenue and cash-flow expectations, and consider how a slowdown could affect related companies.

4. Account for the risk that an investment boom can amplify financial stress

The interview cites research suggesting that credit-fueled asset booms are associated with a higher chance of financial crises in the following years. That does not mean a crisis is certain, but it is a reason to examine leverage and exposure to rapidly rising asset prices. The speakers warn that tighter monetary conditions could put pressure on highly valued technology stocks and the broader market. Investors can reduce concentration risk by reviewing portfolio allocations, debt exposure, and the impact of a substantial market decline.

5. Distinguish energy-price shocks from persistent, broad inflation

The speakers argue that high oil prices can intensify inflation concerns but do not, by themselves, explain broad and persistent inflation. Hanke emphasizes money-supply growth as a key factor in general price pressures, while energy costs can still affect household budgets and business expenses directly. When assessing inflation, track both energy prices and broader measures such as money growth and consumer prices. This helps avoid treating a temporary change in one commodity as a complete explanation for the economic outlook.

6. Diversify thoughtfully and avoid treating forecasts as guarantees

The discussion presents gold and silver as possible long-term holdings and includes bullish price forecasts from Hanke, while also acknowledging that prices can consolidate or fall in the near term. It also warns that cash and bonds may lose purchasing power when inflation is high, although bonds can still serve important roles in a portfolio. Rather than relying on a single forecast or promotional recommendation, consider your time horizon, risk tolerance, liquidity needs, and the costs of each investment. Diversification can help manage risk, but it cannot eliminate losses.

Questions & Answers

Is the Federal Reserve likely to raise interest rates at its October 28, 2026, meeting?

Professor Steve Hanke said a rate increase is very unlikely.

Why does Hanke expect inflation and bond yields to remain elevated?

He said Divisia M4 money supply is growing about 7.5% and accelerating, above his 6% “golden growth rate,” which he views as consistent with 2% inflation. In his view, money-supply changes lead inflation and then bond yields, signaling continued inflation pressure.

Why does Hanke prefer Divisia M4 to the Fed’s M2 measure?

He said Divisia M4 better captures the public’s spending power by including weighted monetary components such as Treasury bills.

What is Hanke’s outlook for bond yields and borrowing costs?

He said the bond market entered a long-term bear market after its 39-year bull run ended in 2022. With U.S. 10-year yields above 5%, he expects elevated yields to keep costs high for mortgages, credit cards, and other borrowing.

Why is the U.S. dollar strong, and how does it compare with the euro?

The speaker attributed dollar strength to accelerating U.S. money supply, economic growth, deep capital markets, and investors’ demand for dollar-denominated assets. At about $1.11 per euro, the dollar was stronger than the speaker’s estimated fair-value range of $1.20–$1.40 per euro.

Why does the speaker describe the AI investment boom as a potential mania?

They estimated AI investment could average 3.6% of U.S. GDP through 2030, but argued that earning a 12% return would require about $8.5 trillion in revenue versus forecasts of $3.6 trillion—a 58% shortfall. They also cited rising borrowing, opaque debt, and circular investment among AI companies.

What financial-crisis risk did the speaker associate with credit-fueled investment booms?

Citing a Journal of Finance study covering 42 countries, the speaker said such booms raise the probability of a financial crisis in the following three years from 7% to 40%.

How severe could a potential AI-driven market crash be?

The discussion suggested tech stocks could fall as much as 70% and the broader market around 40% if tightening monetary conditions trigger a crash.

What role did the speaker say oil prices play in inflation?

They said oil prices above $100, particularly amid concerns related to Iran, can heighten inflation worries and affect perceptions of the Fed. However, they argued that energy prices alone do not cause broad inflation, which stems from money-supply growth.

How does Hanke describe the relationship between money supply, markets, and inflation?

He said money-supply changes tend to affect asset prices first, real economic activity later, and inflation after a longer lag. He cited the M2 contraction from March 2022 to March 2023 alongside an approximately 27% fall in the S&P 500, and the pandemic-era money expansion as support for asset-price gains.

What are Hanke’s outlook and price estimates for gold and silver?

He expects both metals to remain bullish despite possible near-term consolidation. He sees gold reaching roughly $6,000–$7,000, with a specific estimate of $6,600, and views silver as a long-term investment.

What resources did Hanke recommend for learning more about money measurement and monetary policy?

He recommended *Making Money Work*, co-authored with Matt Sekerke and published by Wiley, and suggested following him on X at @Steve_Hanke or emailing [email protected] to join his distribution list.

Summary of Timestamps

Professor Steve Hanke says the Federal Reserve is unlikely to raise interest rates at its October 28, 2026, meeting. Meanwhile, 10-year Treasury yields have moved above 5%, reflecting a bond market Hanke believes entered a long-term bear market after its 39-year bull run ended in 2022. He says persistently high yields could keep borrowing costs elevated for mortgages, credit cards, and other forms of credit.

Hanke points to accelerating money-supply growth as a reason inflation and bond yields may remain under pressure. He says Divisia M4, which he considers a more complete measure of the public’s spending power than the Fed’s M2, is growing at about 7.5%—above his 6% “golden growth rate,” which he associates with 2% inflation. In his view, changes in the money supply tend to lead inflation and then bond yields.

The discussion links money growth and U.S. economic strength to a stronger dollar. The dollar is trading at roughly $1.11 per euro, stronger than the speaker’s estimated fair-value range of $1.20–$1.40 per euro. They suggest investors are drawn to U.S. assets because the economy is growing and the country has the world’s deepest capital markets.

The speakers describe the AI investment boom as a major source of capital flows, estimating that AI investment could average 3.6% of U.S. GDP through 2030—larger than earlier infrastructure booms in railroads, highways, and telecommunications. But they question whether the spending can earn adequate returns: a 12% return would require about $8.5 trillion in revenue, compared with forecasts of roughly $3.6 trillion.

Hanke and the host warn that the AI boom may be turning into a financial mania. They say some companies have shifted from funding expansion with cash flow to borrowing, while valuations and credit are rising together. Citing a study of 42 countries, they note that the chance of a financial crisis in the three years after a boom rose from 7% to 40%, which they view as a warning signal.

The conversation turns to U.S. government debt, which the speakers say has exceeded $40 trillion and more than doubled since 2017. They also point to weakness in long-term Treasury bonds: the 20-year Treasury ETF TLT has lost more than half its value since 2020. They caution that bonds and cash can lose purchasing power when inflation remains high.

The speakers discuss the possibility that tighter monetary conditions could puncture the AI bubble. They suggest a severe correction might send technology stocks down as much as 70% and the broader market down around 40%. They also cite very high reported valuations, a large projected funding gap, opaque off-balance-sheet debt, and circular investment within the AI sector as reasons for concern.

Oil prices above $100, particularly amid tensions involving Iran, could intensify inflation worries and shape perceptions of Federal Reserve policy. Hanke argues that higher energy prices alone do not create broad inflation; in his framework, sustained money-supply growth is the underlying driver. The speakers expect incoming Fed Chair Warsh to pursue the 2% inflation target and tighten monetary conditions, which could put additional pressure on speculative markets.

Hanke explains the monetarist view that money-supply changes can affect asset prices first, real economic activity later, and inflation after a longer lag. As examples, the speakers note that M2 contracted from March 2022 to March 2023 as the S&P 500 fell about 27%, while pandemic-era money expansion helped lift equities, commodities, real estate, and other hard assets.

Despite expecting possible near-term consolidation, Hanke remains bullish on gold and silver over the longer term. He sees gold reaching roughly $6,000–$7,000, with a specific estimate of $6,600, and considers silver a long-term investment despite its recent dip below its base. He also agrees to present his charts virtually at the host’s Friday seminar.

Hanke recommends following him on X at @Steve_Hanke, emailing [email protected] to join his distribution list, and reading *Making Money Work*, co-authored with Matt Sekerke and published by Wiley. The host says the book will be linked in the description and closes by asking viewers to like, comment, subscribe, and support the channel through its Substack and listed affiliates.