Monologue: What Bursts A Bubble?

0:00This is an iHeart Podcast.

0:04Parking shouldn't slow you down. ParkWiz gives every driver a shortcut. Book ahead, save up to 50 % and skip the hassle of circling the block. Park smarter, park faster. ParkWiz. Download the ParkWiz app today and save every time you park. Call Zone Media Okay, Dystopia, these fuckers are ripe for containment. This is your Better Offline Monologue for the week and I'm your host, Ed Zitron.

0:41Now today I'm going to go over a question I get asked a lot. What actually bursts a bubble? As I'm writing and recording this, I'm watching NVIDIA's stock wobble up and down after analyst TD Cohen revealed that Microsoft has canceled agreements for multiple data centers. Cohen also mentioned that Microsoft had, and I quote Bloomberg, pulled back on converting so-called statements of qualifications, which are the precursor to agreements that include things like financing deals and payment structures, meaning that Microsoft does not just cancel agreements, but made it clear they don't intend to carry on building more.

1:12Microsoft responded to this by saying that they were still sticking to their egregious, stupid plan to spend more than$80 billion on capital expenditures in 2025, with one note that they, and I quote, may strategically pace or adjust their infrastructure in some areas. It was one of those things that ostensibly looks like an obvious statement of intent, but if you read between the lines, you see plenty of wiggle room for Microsoft to backtrack. This comes off the back of last week's interview with Microsoft CEO Satya Nadella with Duakesh, Duakesh podcast, pretty good, kind of bland stuff, where he said that there will be overbuild of data centers pursuing AI, and this is the shit you want to hear as an investor in the AI revolution.

1:50You want to hear a guy being like, yeah, maybe people built too much. Now, this caused both Microsoft and NVIDIA's stocks to wobble. But as I sit here and write this on Wednesday morning, the day of NVIDIA's earnings, by the way, both stocks appear to have recovered a tiny bit and they're actually going up, though not by much. And no doubt by the time I'm finished writing this script, things will have changed again, which is why I tend not to do a lot of stock related stuff. That and I'm not a financial analyst, different kind of analyst, I guess. But anyway, the Magnificent Seven stocks, Apple, Microsoft, Amazon, Alphabet, Meta, NVIDIA, and Tesla, make up about 30 % of the value of the S &P 500, an index of the 500 largest companies in the American stock market, with NVIDIA being the golden goose, growing over 900 % since 2023, thanks to being the one company that sells the specialized GPUs needed to make generative AI work, making up just under 20 % of the value of the Magnificent Seven itself.

2:43As a result, the markets are deeply dependent on the success of NVIDIA, which in turn is dependent on the continued hyperscaler investment in generative AI. One other worrying fact for you. NVIDIA's top customers like Microsoft, Google, and Meta make up more than 60 % of its revenues. Right now, the vibes are rancid. Tuesday and Wednesday's headlines, and this episode will come out after NVIDIA's earnings, so forgive me, echo a deep market anxiety, saying things like, Nvidia's earnings could be bad, how to protect your portfolio, and why Nvidia's earnings are so important to the entire stock market.

3:18Now, admittedly, a lot of these headlines were plucked from the popular financial press, which, to put it mildly, can be kind of dog shit. They're content farms that churn out articles where, underneath the sensational clickbait title, you have a thinly written body of text that tries to persuade you that a particular stock will pop or bomb. You can't really read too much into them, but it's telling that the same sentiments have appeared in more prestigious publications, where standards are measurably higher than, say, Seeking Alpha or The Motley Fool. Even if earnings are good for NVIDIA, it's hard to see how they'll be good enough to please a market that'll have a tantrum if they can't perpetually make the number go up.

3:52NVIDIA has beaten analyst expectations eight straight quarters, and the continual expectation that they'll do so is terrifying, especially when you consider that NVIDIA has long held the reputation as a boom or bust stock, and oscillates between peaks and valleys based on whatever the latest tech trend is. There's no logical reason to believe that NVIDIA can continue to grow at this ridiculous rate. Right now, its market cap is over 11 % of America's gross domestic product, but because the market's like giant, petulant trillion-dollar babies, these are the demands put upon NVIDIA and Jensen Huang.

4:25But even if NVIDIA shits the bed mightily tonight. It isn't obvious whether that will burst the bubble, because so much of the stock's value, and the economy in general, if I'm honest, is based on a mishmash of people pretending they understand numbers and, well, vibes. In short, the bubble will not burst in the sense that one big event will bring everything to an abrupt end. Now, NVIDIA is not going to drop 30 % in one day, nor will OpenAI immolate overnight. That's just not how this works. What will happen if the bubble bursts, which I genuinely believe it will, will be a series of smaller calamities that chain together to bring an end to this hype cycle.

4:59It'll be like the dominoes scene from Viva Vendetta, where Detective Finch threads the needle between the disparate events that will eventually lead to the ouster of Chancellor Sutler. I've referred in the past in an episode called Burst Damage to the pale horses of the AI apocalypse, and one of them was the reduction of capital expenditures by a major hyperscaler, because in doing so, the hyperscalers, such as Microsoft, would be admitting that it's time to slow down investment in revolutionary products that they allegedly claim are revolutionary and that they're selling tons of. Right? Wrong.

5:29And by extension, by the way, they're tacitly admitting that perhaps these revolutionary products weren't actually that revolutionary, kind of an obvious point. Now, one argument against this being a pale horse is that OpenAI has partnered with SoftBank and Oracle to build out up to, and that is what it's called, up to$500 billion in data centers. And the answer there is that this is right now pretty much theoretical and is dependent on OpenAI raising another$19 billion because they've committed that much to this project. Another thing about this Stargate thing, I get a lot of emails about Donald Trump, US government, they're not putting any money into this.

6:05This is all private partnerships. And SoftBank and Open AI have given$19 billion, well, they're claiming they're going to give$19 billion each. And Open AI is now raising up to$40 billion with$25 billion or up to$25 billion of that coming from SoftBank. So it's like, what actually is happening here? Anyway, if Microsoft was so invested in the generative AI revolution, why would they reduce their investments in it? Surely this supposedly incredible demand and the incredible opportunities of generative AI would mean that they needed more data centers. Right? Right? So strange. Nevertheless, if you see Google or Meta or Amazon pull back on capital expenditures, that is the bell ringing.

6:44But here are some other pale horses to watch out for. If OpenAI and Anthropic raise their prices, it means that they're finally having to cover their ruinous, horrible, unprofitable, and unsustainable expenses. OpenAI spent$9 billion to lose$5 billion in 2024, and Anthropic lost$5.6 billion and only made just over$900 million in the same period. All of their products are deeply unprofitable, and thus any price increases are a sign that they need money. They need money now. Money me money now. Conversely, if you see any dramatic price decreases, this isn't necessarily a sign of improvements in efficiency.

7:22Sundar Pashai of Google just announced that Google's Gemini Code Assist is now free for up to 180 ,000 code completions a month. This puts a direct price pressure on both OpenAI and Anthropic, who just launched a new version of their Claude model, and Microsoft, which owns GitHub and by extension GitHub Copilot, which costs$20 per month and reportedly still loses $20 to$80 a month a user. It's insane. But if prices are forced to drop, this is a bad sign. These are very unprofitable businesses. Now, if you see anything about any prominent AI companies, Anthropic, OpenAI, Scale, Cohere, Perplexity, so on and so forth, if you see they're having trouble raising money, that means venture capitalists are scared, which means everybody should be scared.

8:04Similarly, if you hear any discord within these companies, people leaving en masse, layoffs, senior executives fleeing, that is also a bad sign. It means that they no longer have faith in these companies. And no, if they jump to another generative AI company, that is also not a good sign. It's kind of like jumping from the Titanic to the Enola Gay. And we've already had a lot of this with OpenAI, with the departures of Chief Researcher Barat Zoff, and Chief Technology Officer Mira Morati. When that trickle becomes a flood, you know that a We've already had a few of these, but bullshit companies raising bullshit money are one of the biggest tells that we're in a bubble.

8:38OpenAI co-founder Ilya Sutsukeva is currently raising a billion dollars at a fucking stupid valuation of$30 billion for his company Safe Superintelligence. Now you'd think with all that cash, there'd be something to show. Wrong-o. You imbecile. You dipshit. You moron. You pig. He doesn't have a product at all. There's no product. They're pre-product. But they're worth$30 billion. What are we doing here? Similarly, former OpenAI CTO Miramirati, she has a new company called Thinking Machines, and you'd think with the Wired headline saying they're finally ready to announce what they're working on, they would announce, I don't know, what they're working on.

9:15You'd be fucking wrong. Stephen Levy should be absolutely bloody ashamed of himself. Stephen's done some good journalists in the past, and he's also done some progenitive AI stuff that I wouldn't wipe my arsehole with. Fucking disgusting, both the thing I just said and the thing happening now. Anyway, if you're wondering what this company does. They, and I quote, develop top-notch AI with an eye towards making it useful and accessible. I wish I could get away with just saying nothing and getting a big pile of money. Wait, is that what a podcast is? Anyway, there are, of course, other pale horses, but the core problem with bubbles is that they're based less on tangible events and more on everybody sharing the same delusion, which in this case is that large language models will turn into something magical somehow, and the only way to make them do so is to plow billions of dollars into a fucking furnace.

10:01One pale horse would be a vibe shift, where people stop talking about open AI and generative AI in this breathless wank tone, but rather with an air of disdain and skepticism. That, in and of itself, is pretty hard to measure. What breaks narratives and pops bubbles is when the consensus shifts from dreaming to cold, harsh reality. As investors realize there's no growth to be had from generative AI, they'll turn their backs on both the generative AI revolution and the companies that pushed it. And if they ever turn on NVIDIA, that will accelerate the AI apocalypse, because NVIDIA, despite their overblown valuations, actually makes a profit and sells real physical things, though their consumer graphics cards are currently melting at the 50, 90.

10:41Not great. But really though, NVIDIA is really the only company to make serious money from generative AI, and if that narrative changes, if people turn on NVIDIA, it's not going to be great. Either way, I'll be here to walk you through it.

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