Discussion – Are We in an A.I. Bubble?
We discuss the recent downturn of tech stocks and crypto – specifically the investment hype around Artificial Intelligence and the Magnificent 7 “Hyperscalers.”
Background
Remember Michael Burry? He was the hedge fund manager behind the movie “Big Short” who saw the flaw of assumptions in subprime housing lending that led to the financial crisis where he shorted CDOs and other derivatives.
Well, Michael Burry has issued another warning about A.I. investment valuation.
His argument? Tech companies across the board are artificially inflating earnings by extending depreciation schedules of their massive GPU purchases from 1-3 years to 4-6 years (decreases cost, increases earnings). Nvidia itself only uses a 1 year depreciation for it prior generation of GPUs.
Here’s more on that front…
You can see on the graph below that the huge investment creates huge depreciation costs that are hard to have enough revenue to cover.
Friend of the New Breed Liz Adleta brought up the AI valuation issue this week and asked for my perspective on the stability of the financial markets. Her son Mark has thought quite a bit about it too. We will discuss as part. Here are some of the A.I. risks I see:
- A.I. investment more than half of GDP growth (1.1% A.I. of 1.6% growth)
- A.I. investment is circular (Nvidia, OpenAI, AMD, Oracle, Microsoft)
- A.I. founders selling stock (Softbank, Nvidia)
- A.I. financial assumptions are suspect (Burry)
- A.I. valuations make no sense, starting with venture capital valuations
Private Credit A.I. Lending Risk
Here is a good Bloomberg podcast with Jeffrey Gundlach, founder of DoubleLine Capital, someone who has been in the market for 40+ years. He warns of “Garbage Lending” in the booming private credit market and likens it to the subprime lending crisis of the 2000s. The private credit market has been financing the A.I. boom with an explosion of junk-level credit lending that the banks won’t touch. YouTube Bloomberg Odd Lots with Jeffrey Gundlach
Similarly, JPM Chase CEO and chair Jamie Diamond referred to private credit problem First Brands as a “Cockroach” Where you see one cockroach, there’s probably more.
And now less than one month later, his prediction came true: TriColor and Renovo Home Partners also both failed and became worthless.
Market Warnings / Systemic Risks:
- Gold has consistently gone up, and now has separated from bitcoin in terms of price (challenging the idea that bitcoin is the new gold) – this is a warning sign as noted by Ray Dalio founder Bridgewater
- Yields on long-term Treasuries have gone up for the first time in history during a Fed tightening cycle
- The US Treasury is essentially only issuing T-Bills and short bonds in an attempt to lower interest expense. Only 1.5% of Treasuries issued in the past year or two have been 20 or 30 year duration. This is creating duration risk (the same problem SVB)
- Japanese long bonds are not being issued much either (see Watch Japan series)
- Private credit growth is like junk bonds squared, but no SEC reporting to verify the numbers (opaque)
- Japan and USA debt levels and circular investments
WSJ Heard on the Street – Bonds Won’t save you from the AI Bubble
As always, the timing of any event that ends up catalyzing a big downturn or financial crisis is very hard to predict.
What to Do? How to Prepare?
- Come out of Babylon
- Sell financial/credit/intangible investments – stocks, bonds, crypto while still near all time highs
- Buy physical tangible assets such as gold, land, energy, food, water
- Invest locally as part of a Storehouse strategy of biblical economy
- Start a Storehouse in your city
- Start to exercise financial faith, trusting in Jesus as provider, not these markets
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