It could break the stock market. But it’ll stimulate the economy. Just don’t expect inflation to cool on its own.

By Wolf Richter for WOLF STREET.

The AI investment bubble is starting to produce a giant sucking sound of cash out of stock-market investors’ accounts as Corporate America raises enormous amounts of cash through sales of newly issued shares at mindboggling stratospheric valuations.

There will be the share sales via mega-IPOs by SpaceX, Anthropic, and OpenAI; combined, they might suck up close to $200 billion of stock-market investors’ cash. SpaceX alone might raise $75 billion in its IPO.

There will be – and already are – the sales of newly created shares by giant tech companies, including at-the-market sales at huge valuations to retail investors and whoever wants to buy them.

Oracle started that in February by announcing a $20 billion at-the-market share sale, meaning that it will sell newly created shares into the market whenever it sees fit.

Alphabet came out on Monday with an $80 billion share sale, most of it at-the-market, but it also included a private placement of $10 billion in shares at a discount to Berkshire Hathaway.

There will be the share sales by a potentially huge wave of big and lesser IPOs as PE firms and VC firms are trying to unload their portfolio companies. PE firms are sitting on over 13,000 US companies, according to PitchBook. Many of them are established companies that PE firms acquired in leveraged buyouts years ago and have held for well past the 5-7 years that usually mark the exit timeline, and these companies may sell lots of newly created shares to the public during the IPO and with follow-on offerings in order to raise funds to pay down their heavy debts.

These sales of newly issued shares to raise money suck up cash from investors that have hoarded the cash, and move this hoarded cash over to Corporate America which is hell-bent on spending this cash in the real economy, on construction of data centers, factories, and chip plants, on HVAC equipment, electrical equipment, on semiconductors and servers, on power plants and transmission lines, on power-generating and transmission equipment, on all kinds of related products and services.

And the vendors of those products and services receive that cash and build that equipment and provide the services, and they pay their people and suppliers, and this whole pile of cash that investors had uselessly hoarded for years, and that they’d just gambled with for years, gets sucked up from their accounts via these share sales at mega-valuations and gets sprayed widely into the real economy.

With the huge valuations of tech companies – both public such as Alphabet and still private such as SpaceX – this may be one of the best times in history for companies to raise cash by selling shares. And it makes total logical sense to do mega-amounts of it, as long as the cash can flow.

Investors are on the other side of these share sales, and if it’s one of the best times in history to raise cash by selling shares at gigantic valuations, it’s not necessarily the best time in history to provide that cash by buying these shares.

And sucking that much liquidity out of the market – rather than plowing liquidity into the market with share buybacks – might very well be what’ll break the market.

But that’s just the market.

In terms of the real economy, this massive effort to convert investors’ hoarded cash into real economic activity that gets this cash to circulate and produce products and services that will generate more activity and create jobs and keep that cash circulating is stimulative to the US economy.

We’ve already seen the beginnings of the impact of cash Corporate America had hoarded being plowed into the AI investment bubble, and that investment surge has substantially added to GDP. But that was corporate cash that Corporate America had hoarded. This new wave of cash from share sales is cash investors have hoarded that’ll be getting sprayed into the economy with a firehouse to circulate for years to come.

All this economic activity has been creating demand, and will be creating demand, and it is also creating jobs and incomes – while AI is destroying some other jobs. Prices in some segments have already surged for consumers, such as electricity to households. But for now, companies are facing much higher price pressures (PPI jumped by 6.0%) than consumers (CPI jumped by 3.8%) as companies have had a hard time passing on all their cost increases.

I have to say that seeing investor cash and corporate cash getting plowed into the economy is a breath of fresh air, after years of mega share-buybacks, which accomplish the opposite. Share buybacks are still going on at companies, such as Nvidia and Apple. But this may be the first year in a long time when share issuance exceeds share buybacks, and for the economy – though not necessarily for investors – putting this cash to work is a good thing.

Just don’t expect inflation to cool on its own in this scenario. The AI investment bubble last year, this year, and next year is adding to inflationary pressures, and that’s real and it has started.

Whether or not any efficiencies from the use of AI in the future will be deflationary is being debated as a theory – and I can see lots of reasons why it won’t be since companies are not eager to pass on their profits to consumers, unless they absolutely have to, and AI might help them not to.

Fed Chair Warsh acknowledged those two phases of the AI investment boom in his Senate confirmation hearings: The inflationary phase now and for years to come, and the potentially deflationary phase further in the future, and he acknowledged that the deflationary phase may is just a theory that may not pan out. But the inflationary pressures from the AI investment boom are real and now.

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