The AI Bubble

Follow the money.

For over a year, there’s been mounting concern of an AI bubble. And I’ve remained skeptical of this fact, instead leaning into how useful and revolutionary this technology is. That the hype is indeed real (and justified).

And while this may in fact be true, there seems to be something very illogical happening in tech markets right now.

Supply & Demand

• OpenAI reportedly made 4 billion in revenue last year

• Whereas they’ve committed to spending ~1.4 trillion on infrastructure

  • 38 billion with AWS

  • 500 billion with Oracle

  • XXX billion with Nvidia (non-publicized)

4 billion in earnings < < < 1.4 trillion in spend

See the predicament? OpenAI has already spent 350x more than they’re earning. That’s like saying my coffee shop makes $400 a year, but I spent $140,000 on Columbian coffee grounds and a fancy expresso machine. The math doesn’t math. Earnings don’t reflect reality. Where is all this money coming from? Humans aren’t spending 1.4 trillion on ChatGPT subscriptions. In fact, OpenAI reportedly has 800 million active weekly users and only 10 million of these (1.25%) are paying for it.

Demand < < < Supply

Fundamental economics don’t apply to OpenAI? Oracle? Nvidia?

These companies are spending money they don’t have. And therein lies the problem.

The 2009 Financial Crisis

• Banks were issuing massive amounts of risky mortgages to people who couldn’t afford them, then bundling those loans into complex securities (MBS and CDOs) that were rated far safer than they actually were.

• Financial institutions aggressively leveraged themselves, bet on rising housing prices, and used short-term borrowing to fund long-term risky assets — all while assuming home prices would never fall nationwide.

• When homeowners started defaulting and housing prices dropped, those securities collapsed in value, banks couldn’t cover their obligations, and the entire system seized up, triggering the global 2008–2009 financial crisis.

Americans were living in homes they couldn’t afford. Spending money they didn’t have. And the big banks were printing money under the assumption that Americans would continue to make their mortgage payments…until they couldn’t. Then the bubble popped.

A fundamental disconnect between reality and global markets.

What Triggers a Recession?

Panic. When people stop buying things. Stop taking risks. Sell their stock and horde their savings.

Warren Buffet has sold more stock than he’s bought for 12 straight quarters. 56% of his portfolio is in cash right now (a record high for Berkshire Hathaway).

Peter Thiel sold 100% of his Nvidia stake last week. 76% of his Tesla stake.

Not to be a doomer, but something doesn’t seem right here.

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PS — The Implications

During a recession, your money doesn’t go as far. Thereby you spend less of it (and only on things you truly need/want).

Utilities — Electric, Gas, Oil

Commodities — Food, Water, Lumber

Recession-less Products — Alcohol, Tobacco, Women’s Cosmetics

PPS — Berkshire Hathaway’s Top Holdings

As of November 25th:

• 56% — Cash

• 14% — Financial

  • American Express

  • Bank of America

  • Moody’s

• 10% — Tech

  • Entirely Apple

• 7% — Utilities / Energy

  • Chevron

  • Occidental Petroleum

• 5% — Food

  • Kraft Heinz

  • Coca-Cola