【US Economy: Complete Anatomy】The Madness of 'Stock Gains via Employment Collapse' and the Chain Reaction of the AI Bubble Triggered by 5.27% Interest Rates
Hello, Kato-chan here.
I was quietly watching from in front of my monitor as the series of US economic indicators released this week, and the ‘abnormal reaction’ shown by the stock market over the weekend, unfolded.
Looking at the weekend closing, the NY Dow was up 0.49%, the NASDAQ up 1.19%, and the SOX index (Philadelphia Semiconductor Index), which is the center of the AI market, recorded a massive gain of 2.40%, painting the screen entirely in green (gains).
However, to the eyes of fundamental analysts like us who have thoroughly dissected corporate ‘debt and liquidity depletion’ from primary EDGAR information, this weekend’s stock rally looks like nothing more than ‘the final fireworks (bull trap) before the scorched earth.’
The market is currently dancing in a terminal state where the logic of ‘Bad news is good news’ has collapsed. Let’s integrate all the distortions in macro indicators we have investigated so far with the time bomb of ‘shadow banking’ lurking in the depths of corporations, and thoroughly evaluate the ‘true current position’ of the current US economy. We will dissect it without missing a single important piece.
1. The ‘Illusion’ of Wednesday and the ‘Death Sentence’ of Friday
From the beginning to the middle of this week, the illusion that ‘the US economy is invincible’ was spreading in the market. Real GDP for the second quarter (annualized rate) was revised upward to 2.2%, significantly exceeding the expected 1.5%, and personal consumption also showed strong growth of 3.8%. Furthermore, the Chicago Purchasing Managers’ Index (PMI) made a V-shaped recovery from recession levels to 58.8, and the ADP employment report also hit a result of 90,000, exceeding expectations.
However, the data released on Friday shattered this rearview mirror illusion into pieces. The Non-Farm Payrolls (NFP), which most accurately reflects the current state of the real economy, recorded a desperate collapse of only ‘29,000’ against the expected 95,000. Along with this, the unemployment rate also clearly worsened from the expected 4.1% to ‘4.2%’.
The reality that job creation has come to a sudden halt is already eroding consumer sentiment. The Conference Board Consumer Confidence Index released on Tuesday plummeted to 81.9, significantly below the expected 89.0.
Proof of a ‘structural collapse’ that cannot be blamed on external factors
Media and Wall Street economists are trying to dismiss this extreme downside of the NFP (29,000) as ‘temporary noise,’ citing external pressures such as ‘temporary inability to work due to a massive hurricane’ or ‘special factors due to large-scale strikes.’ However, when dissecting the depths of the primary data, it clearly emerges that this is not just an excuse, but a ‘structural collapse’ of corporate strength.
① Rapid stall in ‘average hourly earnings’: If weather or strikes were the cause, even if working hours decreased, the ‘average hourly earnings’ themselves would not drop that much. However, this time, average hourly earnings (month-on-month) decelerated sharply to ‘0.1%’ against the expected 0.3%. Year-on-year, it also sank to 3.0%, below the expected 3.2%. This is proof that companies have completely lost the pure labor demand to ‘hire people even if it means paying high wages.’
② ‘Fatal Divergence’ from the ADP Employment Report: The ADP employment report, which focuses on large companies and was released on Wednesday, was solid at 90,000. Despite the ADP being solid, the fact that the NFP, which includes a broader establishment survey, collapsed to 29,000 suggests that small and medium-sized enterprises with tight cash flows that cannot benefit from the AI bubble may be starting hiring freezes and layoffs with fierce momentum.
③ Stoppage of Future ‘New Orders’: ‘Manufacturing New Orders (month-on-month)’, which indicates the future outlook for companies, has also completely stalled at ‘0.1%’ against an expected 0.2%. As long as new orders are not coming in, there is no reason for companies to increase their personnel.
2. The Illusory Toast of ‘Postponing the October Rate Hike’ and Terminal Symptoms
So, why did stock prices rise over the weekend despite the employment statistics worsening so much (NFP 29,000) and companies stopping hiring?
(NY Dow +0.49%, NASDAQ +1.19%, SOX +2.40%)
The answer is that Wall Street algorithms and the masses jumped on the insane logic that ‘bad news is good news’.
Until just before, the market was wary of and pricing in ‘an October rate hike by the Fed’. However, because Friday’s employment data was so disastrous, the market interpreted it all at once as follows.
‘If employment collapses this much, the Fed absolutely cannot force through an October rate hike. The rate hike for the year should be pushed back to once in December. The deterioration of the funding environment has been pushed further away! Buy stocks!’
This stock price increase is not because of improved corporate performance or a recovery in actual demand. It is a complete bull trap (a false rebound) that simply clung to ‘short-term life extension’ via a change in the central bank’s schedule, and fished for stock prices while involving short covering.
3. The Ignored Gravity of ‘5.27%’ and the Trap of Stagflation
While the stock market is enthusiastic about ‘postponing the October rate hike’ and pushing up stock prices, the bond market (smart money) is presenting an extremely cold reality.
Even though employment collapsed, US Treasury yields remained stuck at violent high levels over the weekend as follows.
Although the August PCE Price Index (year-on-year) at 3.4% and core PCE at 3.0% showed a trend of slowing inflation, as seen in the S&P Case-Shiller Home Price Index released on Tuesday rising 2.47% year-on-year (forecast 2.10%), the roots of inflation have not been completely severed.
As long as inflation remains sticky, whether the Fed skips the October rate hike or postpones it to December, the absolute fact that ‘the current funding costs faced by companies and consumers have already reached a lethal dose (10-year Treasury at 5.276%) and are not coming down’ will not change by a single millimeter.
‘The economy (employment) is dying, yet base interest rates are not falling due to inflation concerns.’
This is the arrival of the ‘stagflation’ that Wall Street fears most. Despite crude oil inventories piling up abnormally (up 922,000 barrels) and the real economy suffocating, only the weight of interest rates is bearing down.
4. [Comprehensive Analysis] The chain reaction collapse of the AI bubble triggered by 5.27% interest rates
Macro data suggests ’employment collapse × entrenched high interest rates’. In this cruel environment, what will be the fate of the micro ‘ticking time bombs’ that we have uncovered from primary EDGAR information? When all the pieces are connected, a scenario of an inescapable ‘chain reaction total collapse’ is completed.
① Funding shortfall for end-tier tenants (SaaS)
In an environment where consumer confidence is falling and companies are stopping hiring (NFP 29,000), there is no way software from end-tier SaaS companies like ServiceNow will sell. The 81-day commercial paper (ultra-short-term borrowing) they hold and the $2.9 billion in ‘infrastructure future rent’ set for 2030 will completely crush their cash flow.
② Default of SPVs (CoreWeave, etc.) and BDCs Under high interest rates of 5.276% for the 10-year Treasury and 5.055% for the 5-year Treasury, ‘refinancing (rollover)’ for private credit like ARCC or the usurious loans exceeding 10% that CoreWeave has structured will be 100% impossible. Even if the ‘October rate hike is postponed,’ the pressure of existing Term SOFR plus spreads and the wall of $11.7 billion in principal repayments looming over the next 21 months will not disappear.
③ Tech giants’ ‘shadow banking’ turning into non-performing loans
If payments from customers (tenants and SPVs) who bought AI servers stall, the ‘approximately 6 trillion yen in modern CDOs (securitized loans)’ structured by giant hardware vendors like IBM, HPE, and Dell through their own loans will all turn into a mountain of non-performing loans at once. The game of passing the buck by offloading risk to Wall Street via bankruptcy-remote entities (VIEs) will collapse, and the narrative of AI sales growth will come to a complete end.
④ The Final Boss (SoftBank and Arm) Forced Liquidation
When the non-performing assets of infrastructure and SaaS surface and the illusion of the AI bubble peels away, Arm’s stock price will break through the deadline we calculated ($87–$104). SoftBank Group (SBG), which is running out of cash, will be unable to pay the 3.1 trillion yen margin call, and the pledged Arm shares (75% of the total) will be subject to forced liquidation (market sell orders) in a market where the free float is only 13%.
This will trigger a chain reaction of mechanical selling by leveraged ETFs, dragging the valuations of all AI-related stocks around the world into the abyss.
Conclusion and Investment Strategy: To Become a ‘Survivor’ in the Scorched Earth
The stock market rise this weekend is a bull trap caused by an ‘illusion of liquidity’ that is not accompanied by a recovery in the real economy. A market inflated solely by the expectation that ‘rate hikes might be postponed,’ rather than corporate earnings (cash flow), will inevitably collapse under the weight of its own contradictions when it is confronted with real ‘declining sales’ and ‘increasing interest expenses’ in the next earnings season.
Wall Street’s smart money must be viewing this weekend’s ‘stock gains due to worsening employment’ as the perfect exit, quietly unwinding their positions while offloading stocks onto the masses.
The action we investors should take is not to jump on this bandwagon of madness.
It is to completely block out the hype from influencers claiming ‘stock prices will resume rising because rate hikes are on hold!’, unwind all leverage, and maximize your cash cushion.
When the market has been turned into a complete wasteland by Wall Street algorithms and crowd panic.
We will screen for [true quality companies] that do not rely on AI circular trading, hold no bad inventory, and continue to generate abundant ‘free cash flow’ on their own even under high interest rates, using primary information from EDGAR to pick them up at the bottom.
Ignorance and leverage will be fatal, but primary information and cash will be your strongest shield and spear in a crashing market. Let’s hack the market’s deception and survive the game of capitalism.
[Editor’s Note]
The moment I saw the employment statistics (NFP 29,000) this week, I couldn’t help but double-check the screen.
And seeing the market’s subsequent reaction—‘Rate hikes are on hold!’—as they went wild and bought up semiconductor stocks, I am once again reminded of the terror and absurdity of the market.
The masses always want to believe in a convenient story. They cling to the short-term life extension of ’employment has collapsed’ rather than the fatal fact that ‘the October rate hike is off the table.’ It is a textbook bull trap (false rise) that always appears just before a bubble bursts.
However, bond yields remain stuck at 5.27% and have not budged an inch. The cold gravity of interest rates will now mercilessly strangle AI infrastructure SPVs and funds carrying excessive leverage.
When everyone around us is hysterical, we must coldly face the primary information and wait with cash in hand.
We will be the ones laughing last in the scorched earth after the storm has passed.
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In this note, rather than relying on secondary news information or chart vibes that flood the market, I directly dissect primary information from the US SEC (Form 10-K, 10-Q, 8-K, Form 4, etc.) to expose the true state of companies to the light of day.
As the macroeconomy is torn into a K-shape and high interest rates take hold behind the scenes of an employment collapse, investors who cannot verify a company’s ‘true cash flow’ and ‘off-balance-sheet risks’ with their own eyes will be hit by unexpected forced liquidations.
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[Disclaimer]
This text is for informational purposes only and does not constitute a solicitation for specific stocks, investment advice, or a guarantee of the completeness of financial analysis. Investing involves risk. Please always make final investment decisions at your own responsibility.
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