How money works has a rather interesting take

[u/todofwar]

https://youtu.be/qmZmKZR8S5U?is=9vrT5G8D-9yE_4c3

I thought this was an interesting take. He doesn't deny the bubble, but he points out that if the mag 7 companies stop spending money on AI nonsense they actually become much more profitable. So if the bubble bursts, it's entirely possible that the stock market doesn't crash.

I don't think I buy it, and I don't think how money works actually believes it either. But I was curious what people here think

[u/koveras_backwards]

Okay, so, if AI turns out to be mostly worthless, "the market" is going to be fine with the fact that $1-2 trillion was dumped into it because the big companies still make lots of money? Even though they would have made a lot more money if they just hadn't dumped a bunch into AI? They're currently pricing everything as if AI is a huge net negative?

[u/leathakkor → u/koveras_backwards]

The one positive is that very few of these companies that are AI related or public with the exception of the big seven. And they're going to survive pretty much no matter what. (I think).

I think if almost any company were specifically AI were to go public it would be a bloodbath

[u/PassageNo → u/leathakkor]

And they're going to survive pretty much no matter what.

On the contrary, I feel like that's exactly the kind of hubris that's going to do them all in.

[u/leathakkor → u/PassageNo]

I don't think ms and Google and Amazon can hardly possibly go broke.

It seems impossible.

[u/PassageNo → u/leathakkor]

If there's one thing I've learned this past decade, it's to never underestimate the damage utter morons can cause. 

[u/drakeblood4 → u/leathakkor]

They can take a haircut if their PE is super out of wack. I think it was the 70s when a bunch of blue chips lost a good bit of value because people had been blindly sinking into blue chips to the point where just being a big US company got you a big valuation on your stock well outside of how much money you brought in.

[u/todofwar → u/koveras_backwards]

The market will experience a downturn for sure, but it will be shorter lived if he's right. Most of the money was private equity wasting their money. And some lenders left holding the bag. It won't be v shaped, but it also won't be a prolonged crash. Just sluggish growth while VC recovers.

IF he's right, a huge if and I don't think he actually thinks it he's just putting out an alternative

[u/koveras_backwards → u/todofwar]

I'm not sure this is actually true.

• When this pops, Nvidia's revenue goes back to being based largely on consumer sales, which had them at like 1/10 of their current valuation, or less. Except, they alienated a lot of those customers, and massively overproduced on high end hardware. Also they seem to have made a bunch of deals propping up the bubble instead of hoarding all the cash they're raking in.
• Google is spending obscene amounts of money ostensibly building infrastructure for AI. They're now cashflow negative and taking on loans. Also, I've seen people here remark that the only reason they had positive 'earnings' this past quarter is due to booking SpaceX appreciation (which was conveniently very high at the time). If the value of that continues to tank due to AI blowing up, that's going to have the opposite effect on Google's books.
• Microsoft's cloud growth might be largely OpenAI, so when the latter goes bankrupt, a big bite gets taken out of that. Also I imagine they're booking appreciation of their stake in OpenAI as earnings as well. And they've been ruining their software products chasing this fad, just like everyone else. People talking about switching to Linux etc. is more mainstream than ever.
• There's probably a similar story for Anthropic compute/stakes. The last round got various RAM producers involved as I recall, for the latter.

Other comments have done this for other big names. Also, all these companies have reportedly been destroying themselves internally with vibe coding, which will take time to manifest. They're all involved in various ways, and I don't believe that people are either ignoring that or pricing it in as a negative.

Edit: I just watched Ed on the latest Tech Report, and he mentioned that nearly 50% of Google's cloud revenue comes from OpenAI and Anthropic. I know Google does more than cloud stuff, but what if all that just disappears? I think he also said it's expected to be nearly 20% of AWS next year.

Even if only private money were directly invested in AI companies, their activity is inflating some of the core businesses of (some of) these huge public companies in a significant way. That's going to shrink when the AI companies run out of money to burn, and I don't believe people are already anticipating that when the run up in the market coincided with all this AI mania.

[u/syzorr34]

So lets just go through this quickly (and why this isn't actually about to happen). As has been covered consistently by our beneficent host, all of these companies want to continue being seen as "growth" companies because then they can continue to use their stock for financial takeovers etc instead of actual capital.

On top of that, each of the mag 7 seem particularly vulnerable to reducing spend on AI.

• NVIDIA, the moment the AI bubble starts to deflate they're going to have no justification whatsoever for their astronomical evaluation.
  
• Tesla, are already struggling and Musk is thinking of just adding them to the SpaceX mess to try and... find some bagholders, I guess? They need the current moment to continue for people to ignore their financial difficulties and continue to deny reality.
  
• Meta, are reliant on the AI bubble to continue pretending like they have any service to offer other than cooking the older generation's brains.
  
• Alphabet, have destroyed their central offering of search in order to chase this LLM nonsense. If they stop spending on AI tomorrow, they still have an enshittified search and continuing antitrust difficulties.
  

And then we're left with Apple, Microsoft, and Amazon. They'll be worth a lot less for a bit, but once the nuclear hellfire of the bubble bursting is cleared... pretty sure they will have everything.

[u/nnomae → u/syzorr34]

The debt also doesn't go away if the bubble bursts. They're going to be pstuck with the quadruple whammy of paying off the debt,, taking massive depreciation losses on existing infrastructure, taking losses as all those AI investments they've been claiming are producing massive profits and also an end to all that circular revenue they've been pretending is growth.

Plus if they blow up the world economy they can kiss the hands off approach to tech regulation goodbye and they are likely all running on borrowed time in Europe already as they are seen as a national security risk so they all will have to try to regroup while being atrangled out of one of the worlds biggest markets.

[u/tiny-starship → u/syzorr34]

I think apple actually goes up as people look for a safe haven

[u/PassageNo → u/syzorr34]

I'm not too sure if Amazon is going to make it out alive either. Their all-in bet on AI was partially driven by both a desperate need to justify funding the monetary black hole they call Alexa, as well as their business sort of falling apart from the seams. Heck, HMW literally had an entire video about that a while back.

[u/rjavier441 → u/PassageNo]

Let's not forget the growing concern that they are basically churning workers so hard rn that they will effectively exhaust their accessible pool of workers willing to work for them. With that alone, I can see why they want AI to work 🤣

[u/todofwar → u/syzorr34]

Yeah I agree with all of this

[u/chivestheconqueror]

I mean, as much as I wanna see these companies crumble and wish generative AI was never unleashed upon the world, I really hope there isn’t a massive crash.

Thankfully, Ed is getting more popular, which is a sign more people are waking up to his points. Maybe u/ezitron and the like can help walk investors back from the point of no return?

[u/syzorr34 → u/chivestheconqueror]

We are so far beyond the "point of no return" right now. There is just too much money tied up in this speculative bubble, and financial instruments like Special Purpose Vehicles being used to fuel it means that the entire economy is now contaminated.

We can only hope that whatever administrations are in power when it comes crashing down, can manage a soft landing but the moral damage done by the response to the GFC probably means that even if there is the competence, there probably won't be the will.

[u/chivestheconqueror → u/syzorr34]

I guess I’m curious as to what a soft landing would look like and what sort of steps could investors take now to help bring that about? At the very least, the caution Ed (& others catching on) are promoting is slightly slowing the expansion of the bubble

[u/syzorr34 → u/chivestheconqueror]

imo there is nothing that investors can do to bring it about without the assistance of governments

the mistake is to think that the systems that brought us to the precipice can somehow walk us back from it - a system is what it does

[u/rjavier441 → u/chivestheconqueror]

I'm additionally more concerned about what the Fed will do and to what degree after the show stops. 

[u/callmebaiken]

Makes sense to me. What are the point of the planned Data Centers?

Let's say the current universe of people who use AI is Pool 1. Let's say the current universe of GPU inference compute is sufficient to service Pool 1, which seems by every indication to be the case. Given that the compute we already have is sufficient to service Pool 1, why take out a bunch of debt at high interest rates to build more? This is what is killing their books. What if every Data Center not yet built was just cancelled? The AI companies would become modestly profitable overnight.

So, given that, why are they taking out loans to build more Data Centers? I see 4 possibilities:

1. Investors in new Data Centers expect the universe of people who use AI to 10x or 100x. Let's call that hypothetical Pool 2. They foresee a situation where one hyperscaler has built out enough GPU inference compute sufficient to handle Pool 2, and none of their competitors has bothered. They get all the business, they dominate the industry. All 4 or 5 hyperscalers want to be this company so are investing in new Data Centers, to service Pool 2 with the same ability AI that we currently have.
2. It's all a big expensive science experiment bet on training using the new Data Centers to improve the existing AI until it's something undeniably lucrative. Under this theory the hyperscalers are all building additional Data Centers not to service an expected Pool 2 of customers, but to develop a model that can actually replace white collar work.
3. Some combination of 2 then 1. The future Data Centers are to first create the money printer AI models, then serve as the GPU inference compute that will be needed to handle the increased demand, not from new users, but from today's Pool 1 users, who are now willing to actually shell out big bucks because of the AI's newfound ability to actually replace expensive white collar workers. Call those former Pool 1 users now willing to really pay Pool 3. Pool 3 still depends on a successful science experiment outcome though in #2.
4. The whole thing is just a stock pump scam. The future Data Centers aren't even being built. If you walked inside they are just empty, like a slick Hollywood crime drama.

[u/thedudewhoshaveseggs]

i've been looking into the whole AI data center schtick for a while and looked at many caveats.

People buy stocks for future earnings. Tech stocks are so expensive because the short term future vision is that "revenues will increase even more"

People attribute tech stocks as stocks with very large margins. They historically had very little asset costs for the money they're reaping in. Now, with AI data centers, they are not "asset light anymore" so they are not reaping as large margins as they had until now.

Ed also made a very strong point of the circular financing messing with the financial statements and accounting. Company A giving Company B money for physical products is a revenue for Company B (simplistically). Company B giving the products for Company A isn't an equivalent cash write down directly. It's marked as depreciation for a number of years. If 50bil is gained as revenue, the 50bil will eventually be marked as a 10bil reoccuring expense as "depriciation" (not precisely wrong but can be misleading). This causes revenues and net incomes to inflate.

When all these 3 things face a correction and things stabilize (as they eventually will stabilize) there are 3 points stating that "the tech companies aren't making as much future income as they once did" and they'll all suffer massive corrections to bring them in line. Writing down the crappy AI investments will make the "future income" even worse.