All the financial engineering to prop up the bubble is going to end badly, it always does.
Edit: I think it's fair to say there is a fair bit antics by companies that are actually illegal, like in every bubble, that have been hidden by the mania. They get exposed as the tide goes out.
Buried lede: what is the transformative potential of ML/AI?
It's not a bad bet that many are making that "changes everything" is real in this case. Hitching a ride to the technology getting civilization over the hill is a reasonable goal.
But what institution, technology, play...?
Following the money shows where bets are being placed. But none are safe, the disruptive consequences of network effects make diversification appear wise. The industry is littered with the bones of giants.
Personally I am looking at ML/AI as analogous to the Great Oxygenation Event. What things look like—at least, on land—afterward, none know, least of all the cranky old oligarchs who are hell bent on consolidating control and ownership.
This article is pretty low quality IMHO. Lots of conjecture about the value of LLMs. We are far too early in this hype cycle to know what will come of this new tech. There is, however, no doubt that incredible amounts of capital are flowing into data center construction and much of that capital allocation will end in tears. There will be losers.
This article is all vapor. After reading it in it's entirety, there is only a short section that's actually about the headline, and it communicates nothing about what the headline means. What is 17x what?
The mistake this article makes is assuming LLM scaling is one thing. It's not.
RL is spiky. It produces narrow improvements on specific capabilities. They're not making the model generically smarter, they're RLing in holes in the model's capabilities. In reality we don't have one scaling curve, we have thousands of them. We're in diminishing returns in "top line smarts" but we're raising the floor in a wide variety of areas that people who don't heavily eval models for a living might not notice.
The AI hype bubble now represents something like 20-30% of the stock market depending on who you ask. For reference the great depression started with a 24% drop of the stock market. The people running this AI game know there is 0% chance the government will let this play out naturally because it would cause another great depression. Bailout Guaranteed.
The plebs can take some inflation,higher taxes and national debt increase for the hucksters to get some yachts and lambos. I mean what were you going to do with that money? Feed your family? Pay rent? Jeeze get a life....
In this round of con there is not even a way for an average pleb to get any scraps since the AI bubble is almost completely hidden behind private equity. Except maybe Nvidia stock.
The bubble is starting to froth/pop IMO. An incestuous cycle of players propping each other up with circular investments(ie I'll loan you money to buy my product so I can sell it to you) began last month with Nvidia "funding" OpenAI datacenters. Actions like that mean they are out of external ways to keep shuffling the debt. Like when WeWork CEO started loaning the company its own money to buy its own product to rent.
Edit: Oh $hit AMD just did the same thing with a circular funding deal with OpenAI. https://news.ycombinator.com/item?id=45490549 Channel Stuffing Money printer go brrr. I can't belive there is even discussion if there is a bubble at this point. Its literally wolf of wall street "Never let them cash out that makes it real" style deals all over the place.
Index funds, generally. Ideally something more diversified than just an S&P500 one, but honestly historically it usually hasn't made _that_ much difference in the long run.
Assuming you're talking decades away, it usually all comes out in the wash.
Now, where you should really potentially worry is if you were retiring imminently and needed to pull out a bunch of money to make that happen. But if you're retiring in 20 years or whatever, and, say, the S&P halves next year, is it really, in the scheme of things, _that_ big a deal?
If you could time it perfectly, you could come out better by selling now and reinvesting after the crash, but bear in mind that you probably cannot time it perfectly. People were predicting the 2008 crash imminently from about 2004 on, say, whereas the dot-com crash went from dark mutterings to chaos in a year or so. These things are very hard to time.
The weird thing that makes it different to subprime is that AI is real and really could become AGI. But it might also be overvalued.
So it's not like there isn't a product (there is) and there's no growth prospect (there is). But it is scary how much now hangs in the balance of one bet.
It almost feels like it's going to end badly either way. If the Great AI Bet succeeds, a tiny proportion of the world will own all intellectual power. But if it fails, the impact of the write-offs on the broader economy will be terrifying.
I wonder how the tech job market would look without the AI bubble. Is the AI the cause of the unemployment crisis(if we believe the CEOs who layoff a quarter of the company because "AI is replacing thousands of developers") or if we didn't have this crazy AI bubble, the market would be a much worse bloodbath.
Who gets hurt when the bubble pops? And who will the government need to bail out?
Last time, a lot of the companies were public and the general public saw stock losses. This time the only companies that are publicly really exposed by the AI bubble are Nvidia with all of their circular financing and Oracle. Of course Tesla has always been a meme stock.
Defined contribution plans - for now - can’t have private equity in their funds. Defined benefit plans and endowments are exposed.
Apple famously hasn’t invested that much in AI, Google is spending a lot on infrastructure. But between search and GCP and YouTube they have a real business plan and are funding based on profits. Amazon is in the same boat. Microsoft is bowing out of spending money on training and focused on inference - and they also have Azure. Meta is making money using AI for ad targeting and probably in the future to generate ads.
I can also see consulting companies being hurt (I work in cloud consulting) as businesses are throwing money at them to “AI enable” their business.
If you marvel at the output of generative AI be it pictures, logo, music, 3D models, prose or code - you probably are yourself way too under-skilled to be gainfully employed or not yourself capable of generating similar or better output.
Conversely - any expert (prolific writer, coder, painter, photographer, videographer or log/web designer) isn't as much amused or going to scream out of excitement that what these models are producing (vides, pictures, logos, essays, code) - they could never ever have thought anything better than that.
This fact alone is enough to warrant that a big bust is coming. Not a matter of if but when.
Has anyone articulated a theory for what the profit model might actually look like for the big LLMs? In the .com era, the valuations were crazy, but people generally understood how you could eventually make money on all of this stuff.
If models are requiring larger and larger infrastructure buildouts, does anyone have a clear sense of what users will have to pay in order to make the businesses profitable?
I reacted more to the current administration than AI. I added a small allocation to international equities. I may increase my bond allocation a bit, but that's because I'm already heavy in stocks and want to focus a little more on preservation.
The Saudi sovereign wealth funds and similar Middle Eastern investors, Masayoshi Son, a16z (though not all of their funds), Tesla's board, and others seem to be operating in some kind of alternative reality where watching out for your limiteds and shareholders isn't a factor. Do they think they are really TBTF? Is that why JD Vance is where he is?
It's not just the size of the bubble that's scary. It's that some people obviously think they're going to get away with it.
49 comments
[ 3.5 ms ] story [ 58.6 ms ] threadEdit: I think it's fair to say there is a fair bit antics by companies that are actually illegal, like in every bubble, that have been hidden by the mania. They get exposed as the tide goes out.
It's not a bad bet that many are making that "changes everything" is real in this case. Hitching a ride to the technology getting civilization over the hill is a reasonable goal.
But what institution, technology, play...?
Following the money shows where bets are being placed. But none are safe, the disruptive consequences of network effects make diversification appear wise. The industry is littered with the bones of giants.
Personally I am looking at ML/AI as analogous to the Great Oxygenation Event. What things look like—at least, on land—afterward, none know, least of all the cranky old oligarchs who are hell bent on consolidating control and ownership.
Is that actually true? And is most of it because of the compute requirements of the models or scaling cost due to exponential growth in usage?
I hope it didn't actually cost ten times more to create ChatGPT-5 than it did ChatGPT-4.
RL is spiky. It produces narrow improvements on specific capabilities. They're not making the model generically smarter, they're RLing in holes in the model's capabilities. In reality we don't have one scaling curve, we have thousands of them. We're in diminishing returns in "top line smarts" but we're raising the floor in a wide variety of areas that people who don't heavily eval models for a living might not notice.
The plebs can take some inflation,higher taxes and national debt increase for the hucksters to get some yachts and lambos. I mean what were you going to do with that money? Feed your family? Pay rent? Jeeze get a life....
In this round of con there is not even a way for an average pleb to get any scraps since the AI bubble is almost completely hidden behind private equity. Except maybe Nvidia stock.
The bubble is starting to froth/pop IMO. An incestuous cycle of players propping each other up with circular investments(ie I'll loan you money to buy my product so I can sell it to you) began last month with Nvidia "funding" OpenAI datacenters. Actions like that mean they are out of external ways to keep shuffling the debt. Like when WeWork CEO started loaning the company its own money to buy its own product to rent.
Edit: Oh $hit AMD just did the same thing with a circular funding deal with OpenAI. https://news.ycombinator.com/item?id=45490549 Channel Stuffing Money printer go brrr. I can't belive there is even discussion if there is a bubble at this point. Its literally wolf of wall street "Never let them cash out that makes it real" style deals all over the place.
But many (many) labs around the world are working on alternative chip designs for math processing.
Once a couple open-source chip designs come online, that can compete with Nvidia, it will all come crashing down.
Think Android vs iPhone.
Stoked.
Assuming you're talking decades away, it usually all comes out in the wash.
Now, where you should really potentially worry is if you were retiring imminently and needed to pull out a bunch of money to make that happen. But if you're retiring in 20 years or whatever, and, say, the S&P halves next year, is it really, in the scheme of things, _that_ big a deal?
If you could time it perfectly, you could come out better by selling now and reinvesting after the crash, but bear in mind that you probably cannot time it perfectly. People were predicting the 2008 crash imminently from about 2004 on, say, whereas the dot-com crash went from dark mutterings to chaos in a year or so. These things are very hard to time.
Instead of waiting for a warmed over post-mortem, long after the bubble pops, before even considering their options.
It's a bubble. Of course there's malfeasance, lies, corruption, etc. Assume criminality.
These endless boom-bust cycles will continue unabated until there's credible threats of doing some hard time.
So it's not like there isn't a product (there is) and there's no growth prospect (there is). But it is scary how much now hangs in the balance of one bet.
It almost feels like it's going to end badly either way. If the Great AI Bet succeeds, a tiny proportion of the world will own all intellectual power. But if it fails, the impact of the write-offs on the broader economy will be terrifying.
Last time, a lot of the companies were public and the general public saw stock losses. This time the only companies that are publicly really exposed by the AI bubble are Nvidia with all of their circular financing and Oracle. Of course Tesla has always been a meme stock.
Defined contribution plans - for now - can’t have private equity in their funds. Defined benefit plans and endowments are exposed.
Apple famously hasn’t invested that much in AI, Google is spending a lot on infrastructure. But between search and GCP and YouTube they have a real business plan and are funding based on profits. Amazon is in the same boat. Microsoft is bowing out of spending money on training and focused on inference - and they also have Azure. Meta is making money using AI for ad targeting and probably in the future to generate ads.
I can also see consulting companies being hurt (I work in cloud consulting) as businesses are throwing money at them to “AI enable” their business.
Conversely - any expert (prolific writer, coder, painter, photographer, videographer or log/web designer) isn't as much amused or going to scream out of excitement that what these models are producing (vides, pictures, logos, essays, code) - they could never ever have thought anything better than that.
This fact alone is enough to warrant that a big bust is coming. Not a matter of if but when.
If models are requiring larger and larger infrastructure buildouts, does anyone have a clear sense of what users will have to pay in order to make the businesses profitable?
So chatgpt was released in nov 2022. Interest rates started going up shortly after.
Am i missing something, it seems like the AI bubble and very low interest rates don't overlap except maybe at the very beginning.
It's not just the size of the bubble that's scary. It's that some people obviously think they're going to get away with it.