#429 Henrik Zeberg: Now We Rally — Not Because Things Are Great, But Because Things Are Bad

Henrik Zeberg · Swissblock

AI boom is overstated: it added little real GDP, and AI firms' profits rest on aggressive revenue recognition.

AI businesses will be the first dominoes to fall in the bust. The AI boom has contributed only about 1.6 percentage points of GDP growth over three years, and half of that was imports of hardware from Taiwan and other countries. The boom in profits at some AI businesses reflects strong demand and creative ways of recognizing revenue. Their perceived strength is not supported by the broader economy, and the bubble is set to burst.

“And the AI boom, if I actually dived a lot deeper into that since we spoke the last time, you will actually see that it's actually only been contributing with 1.6 percentage point GDP growth over three years, and half of that was imports from Taiwan and other countries on hardware.”at 4:46

Henrik Zeberg · Swissblock

AI debt is building into a bubble that will burst and cause problems across credit.

Zeberg says AI debt is on everyone's radar because of recent developments, and it will be a problem. He calls it an AI debt bubble that will burst and says it sits alongside the private credit exposure. He also questions valuations, citing IPOs in the trillions from companies that do not make money, and warns that the good times are unsustainable if consumers cannot keep paying.

“the AI debt is something that is on everybody's radar right now because of what we have seen, and that is going to be a problem.”at 42:34

Henrik Zeberg · Swissblock

Stocks have bottomed; Nasdaq to rally about 30% into a January top, then a bust toward S&P 3,500.

A correction has run since June-August, and the bottom is in. The market will rally hardest as the economy rolls over, because bad news keeps the rally going. He compares this to 2000 and 2007, when the Nasdaq rose about 25-45% in a few months before topping. He sees a dip around Thanksgiving and a top around January. The later bust follows the 2007 template and is deflationary. He notes the blow-off began in 2022, and a retracement toward roughly 3,500 on the S&P is probable.

“I have the Nasdaq target that is 30% higher than where we are today.”at 6:37

Henrik Zeberg · Swissblock

US stocks have a strong run into January, then a top, with a dip around Thanksgiving first.

Zeberg maps the cycle to the 2007 template and to 1990. In the past, the ten-year yield started falling before stocks topped, with the stock top coming two to four months after yields turned, and 2007 took about three and a half months from the June top to October. He expects a strong rally into around January, a dip after Halloween (corrected to Thanksgiving), then a final push where everyone turns bullish, with the top in January. He notes a possible crash after Democrats take office as an alternative timing, though he frames it as not a political call.

“I would dare to say January. I think I think the top will there. It'll be there.”at 38:39

Henrik Zeberg · Swissblock

The economy is rolling over; a recession should arrive roughly three to six months after mid-2026.

His business cycle framework uses the 12-month average of nonfarm payrolls and year-over-year GDP. The economy crossed over in July-August of this year. Normally a recession follows three to four months later. This cycle may take longer, with three to four to five months, perhaps six, because of the bubble. Weak jobs, a stalled housing market, and a consumer under pressure all point to the downturn.

“after that point, it'll be three, four to five months, maybe six months, maybe even, before we see the recession setting in.”at 17:31

Henrik Zeberg · Swissblock

The US economy is rolling over, with the labour market weakening, tracking the 2007 pre-crash template.

Zeberg compares non-farm payrolls and GDP against past cycles and finds the current phase most resembles Q3-Q4 2007, the last large cycle top before the crash. He says the labour market is rolling over, which will bring inflation down later. He describes his framework as housing leading, jobs following, and the consumer deciding everything, with the business cycle in a late-stage slowdown.

“And they are rolling over, which means that the labor market is rolling over, and you will see inflation rolling with that.”at 37:42

Henrik Zeberg · Swissblock

The US consumer is under pressure; the bottom half of earners is not well off.

Consumer spending drives the economy, and GDP is about 70% private consumption. The system is slowly squeezing the consumer, and the top 30-50% is doing fine while the bottom 50% is not well off. This consumer pressure, combined with geopolitical tension and a bursting bubble, is a bad mix. Mrs. Johnson's psychology decides whether the consumer spends or saves.

“the system is slowly putting pressure on the consumer. And I think The US is a great example for that, the top 30%, or 40%, or 50%, maybe even, but the bottom 50% is not very well off at this point.”at 25:02

Henrik Zeberg · Swissblock

Low household savings leave Mrs. Johnson unable to absorb higher costs, so spending must slow.

Zeberg says the consumer, which he calls Mrs. Johnson, drives everything. Wage indexation in the 1970s let households absorb higher prices, while today the savings rate is about 3%, down from 10-20% then. When gas or food prices rise, she has to choose what to cut rather than dipping into savings, which slows spending. He says that when the economy slows and the consumer spends less, inflation falls regardless of Middle East events. Without consumer spending, the rally cannot last.

“She only has a 3% right now savings rate... She had 10 to 20%, which means that she could just dive a bit deeper in her pocket.”at 37:03

Henrik Zeberg · Swissblock

Private credit firms that levered up to buy businesses will create problems that spread to banks.

Once the AI bubble bursts, the damage will spread to AI debt and to private credit companies that used heavy leverage to buy businesses. This will create problems at banks, where ordinary people also hold their loans. These risks are tied together, and when they come out, the fallout will be bad.

“and into the private credit companies that have also tried to leverage up and buy, you know, businesses. And all this is going to create problems”at 27:49

Henrik Zeberg · Swissblock

Private credit is the next domino and a 'nuclear bomb' far bigger than people realise.

Zeberg says the debt built up in private credit will be the next domino after the AI debt bubble. Private credit operates off market, so it has been less hurt so far. When a downturn forces mark-to-market valuations, buyers will question businesses bought at 8-20x EBITDA that generate no cash flow, and he says private equity funds have been buying such businesses. The structure is opaque and has been sidestepping regulation, so exposures are hard to track across banks, pensions and insurers. Unlike 2008, when the problem was clearly in subprime mortgages and big banks could be backstopped, he says it's unclear which domino will hit which institution. He estimates the market at about $2 trillion, possibly two or three times that, but says it can't be properly measured.

“I think the next domino is going to be the debt that we have seen building up in private credit.”at 42:34

Henrik Zeberg · Swissblock

The bust will be deflationary first, then the Fed's response will bring stagflation it cannot fix.

The first phase is the bust, which is deflationary by definition. Asset values shrink, pressuring the economy and banks. The Fed will then print, as it did in 2000 and 2007-08, but that will not work. Liquidity reaches the financial sector and creates asset inflation, not real economic activity. That leads to stagflation, which central banks cannot fix, as the 1970s showed.

“So the first phase we're gonna see is probably going to be the bust. And that is by definition, a deflationary development.”at 28:27

Henrik Zeberg · Swissblock

US inflation is already rolling over and will fall as the economy slows and consumers spend less.

Zeberg argues inflation is already turning down beneath the surface, but it shows up late in the data. The labour market is rolling over, and he expects inflation to follow after the economy weakens. When households spend less, inflation falls whatever happens in the Middle East, because no one is buying at the higher prices. He says the market is focused on inflation just as it did before the 2007 top, when stagflation talk peaked before the crash.

“So the thing is that we are seeing inflation rolling over here. It is in underneath... It is happening, but people just don't see it because it comes late.”at 37:18

Henrik Zeberg · Swissblock

Gold falls first to about $3,000-3,100, then rallies to $25,000-30,000 in the early 2030s.

Gold will fall first in the deflationary bust, because investors will move into risk-on assets and need dollars. It will lose out to bonds and the dollar. Gold will rally once the Fed steps in with stimulus. In the stagflationary phase gold does very well, as in 1977-79, when it rose about sevenfold. Gold has not followed the Fed balance sheet expansion, which suggests a large catch-up later. He admits he was early in calling the gold decline.

“I have serious targets that are at 25 to $30,000 an ounce when we get into the early 2,000 thirties.”at 32:46

Henrik Zeberg · Swissblock

Gold has lagged the Fed's balance sheet expansion, so a catch-up relationship would not be surprising.

Zeberg compares the Fed's balance sheet, which has grown dramatically since 2008, with gold's price. He argues gold has not come close to following that balance sheet rally, and that the two should have some relationship, so gold's gap relative to the balance sheet would make a big move higher not surprising. This is a long-run argument about gold catching up to monetary expansion; he gives no near-term price call in this segment.

“Gold has not, by any means, really followed that kind of rally in the balance sheet.”at 34:30

Henrik Zeberg · Swissblock

Bond yields have topped, and US Treasuries should hold up strongly during the coming bust.

He had said yields needed to top before the equity market turns, and he sees that happening now. Falling yields show that fund managers are moving relatively more money into bonds as trust in equities fades. In the bust that follows the blow-off top, the dollar and especially US bonds should be strong, and gold lags.

“That will probably be the dollar or bonds, which I think will be really [stand] strong there, and especially US bonds.”at 33:51

Henrik Zeberg · Swissblock

The ten-year Treasury yield has already peaked near 5.03% and will fall as the economy rolls over.

Zeberg says yields have already topped, citing the ten-year peak at about 5.03%. His business-cycle map compares the current phase to Q3-Q4 2007. When the economy slows, consumers spend less, inflation falls, and yields come down. He also notes that in past cycles yields began falling before stocks topped, with the stock top coming two to four months later. He names falling yields as one signal that would confirm the call, and says that if yields do not fall, the timeline would need to stretch out.

“Yes. I think we have. And that is one of the reasons why also I said that now we're starting to see things flash.”at 35:33

Henrik Zeberg · Swissblock

The labor market is very weak, with nonfarm payrolls averaging only about 50,000 a month.

On the 12-month moving average, job creation has fallen to about 50,000 a month, which is extremely low. Within his framework, jobs and GDP move together because consumption depends on employment. A weak labor market is a key sign that the economy is rolling over and that the cycle has reached its downturn.

“and you see that the labor market is as weak as it is, you're down to 50,000 jobs on an average per month going on the twelve month moving average, which is extremely low.”at 4:36

Henrik Zeberg · Swissblock

Housing leads the business cycle; the housing market is at a standstill, which foreshadows jobs weakness.

Housing takes about 25% of household spending, so it leads the cycle. Housing problems show up in the labor market with a lag of a few years, as Michael Burry saw in 2005. The housing market is now stuck at a standstill. The labor market took a hit in Q4 2024, and that started the clock on the current downturn.

“And the one thing that leads it is housing market.”at 16:24

Henrik Zeberg · Swissblock

Fed easing cannot stop the recession and will create worse stagflation later.

Central banks were already printing in 2000, 2001, 2007 and 2008, and a major crisis still followed. Once the business cycle rolls over and jobs are lost, liquidity cannot stop consumers from pulling back. Consumers take months to respond, so monetary stimulus works with a lag. The Fed's response will create stagflation that it cannot fix.

“So when the Fed steps in, they're going to create something that is worse.”at 29:34

Henrik Zeberg · Swissblock

AI will reduce the need for workers, so the recovery after the bust will take longer.

Monetary stimulus will not create jobs if consumers do not spend the money. AI will push down the need for people. Together, these forces mean the recovery after the bust will take longer than usual.

“And when you have AI on top of that, which is going to put a downward pressure on the need for people, you will see that the recovery will take longer.”at 30:04

Henrik Zeberg · Swissblock

The dollar will weaken over the next few months as yields fall and conditions ease.

Zeberg describes the usual pattern in the business cycle: falling bond yields, a weaker dollar and relative easing. He says he expects the dollar to weaken substantially in the next few months, and that a dollar that stays firm would keep him from fully believing his call. The dollar move is one of the drivers he expects this phase to show.

“I would also need to see that the dollar does not weaken as much as I think it's going to do in the next few months here.”at 41:40

Henrik Zeberg · Swissblock

Spreads are spiking in the weakest credits, and that stress will spread to other credit levels.

Zeberg says credit is starting to have problems. The weakest credit ratings are seeing a spike in spreads as investors start to price in risk. He expects that stress to spread into other credit levels in the not-too-distant future, and says a full bust would bring more credit problems that feed into private credit.

“as we start to see credit having problems in general... the weakest credit rankings are now starting to see... a spike in the spreads there.”at 42:47