Those who think AI is not a bubble due to burst, please explain why?
Genuinely curious to hear someone who doesn’t think it’s a bubbles thoughts. I’ll outline my reasons for thinking it’s a bubble that will probably burst within the next 18 months below:
Demand. Demand has skyrocketed ever since ChatGPT 1 was released, every earnings with a somewhat AI related company said they’d experienced unprecedented demand and popped at least 10 percent overnight. But more recently as LLM providers like Anthropic and OpenAI are starting to need to earn ahead of IPOs they’ve had to change the way they price AI. Moving from a flat fee to a token based measurement as the flat fee could be exploited by partners to make the partnership be a loss to the LLM providers. After the token based model, Uber prolifically blew through its annual ai budget within a year, others also found that ‘token maxing’ wasn’t actually creating productivity but a means for a software engineer to give the illusion of productivity. If the demand drops from its linear rate, many projection across the ai ecosystem are due to stumble or collapse, making the overleveraged parts (like oracle and coreweaver) in danger of being left hanging and unable to pay back their debt which everballoons at high interest rates.
Hyperscalers. Hyperscalers are incredibly leveraged in what is essentially just building data centers. They are taking large loans to buy Nvidia chips which power data centers and also data centre shit to build data centers. Now one minor issue is that these companies like Amazon, oracle, Nvidia as well, google don’t really build data centers but that shouldn’t be an issue. The real issue is the slow process of joining the power grid and also the fact that power infrastructure takes ages to build and right now there is unprecedented demand for power. 8 year waiting lists will nullify these companies best efforts to build a data centre on schedule, so there will just be large data centres doing nothing. Now they might try a regulatory strategy where they line up politicians and try to jump the queue, but it is becoming more politically astute to be anti big tech in the US. Some Energy regulators are trying to protect everyday individual consumers, making it harder for data centres to be admitted to the grid. Essentially there is a very tight path that has to be taken to ensure that certain obligations are fulfilled and debts are paid back on time or else huge amounts of cash will burn, and I think there are far too many obstacles in the way that will push these companies off course and away from their obligations.
Debt. I’ve mentioned this a lot, but there is a lot of debt going into this, based on the notion that LLMs and AI will be incredibly profitable. I’m not too sure that we have a definitive answer to that we’ll have to wait to see Anthropic IPO and then their following path. The main problem is the circular financing Nvidia is accused of. My theory is that Nvidia partakes in this to keep the bubble afloat, because if more money is not being spent then demand is falling and if demand falls then projections are going to be wrong collapsing future plans and current earnings. In this circular financing realm, the bagholders are the private credit lending, that’s where the money originates from and they receive a small payment back in interest, the debt goes to the hyperscalers and llm makers who trade with each other but all buy off of Nvidia and that’s where the money ends up, so they inject cash into these companies and the companies are able to borrow more based off of better valuations and the cycle continues. But what we are seeing the private credit markets is large amounts of redemption requests. Investors into these private credit funds are getting nervous and want their money back, the fund isn’t obligated to fulfill all of their requests often capped at 5% per quarter but the funds will have to adjust if they want their fund to remain active and possibly have to pullback on lending or charge higher interest rates. Again this will either stop the money flowing or the latter situation will erode future profit projections. Debt is a huge thing in this saga, google and amazon are posting negative cash flows which is pretty insane, they’re going big on this ai and if it fails the companies will almost certainly survive but not atop of the mountain anymore.
Chips. Michael Burrys depreciation conspiracy. I’m not an electrical engineer I don’t know how well Nvidia chips perform after a while, but if there is fanciful accounting going on it could collapse projections. One thing I will posit is that if Nvidias chips have such a great performance over a long period of time and don’t depreciate fast, what’s the point of buying new ones, surely this contradicts their future earnings projections based on them releasing new chips which people will buy. If they’re older chips last so long, what’s the point of buying newer chips at an increasing rate. Of course frontier models may need the newest tech to develop but smaller scale ai related tasks can be done with cheaper and older chips if they’re don’t depreciate.
That’s my argument, feel free to criticize it, just split it into four sections that overlap a lot. Most won’t read the full thing, I don’t blame I probably wouldn’t.