Here’s How the A.I. Crash Happens

Here's how the AI crash happens or could happen. I want to make clear I'm not predicting an AI crash. But I do want to talk about something that has been in the news a great deal lately and many commentators talking. According to some, America is drifting into a Nvidia state. Data centers are sprouting so fast they're visible from outer space. And one Indiana campus already draws more than 500 megawatts. AI spending is carrying growth while profits lag and financing gets, shall we say, clever. The danger runs in two directions. If AI under delivers the trades unwind, leveraged funds sell into a downdraft and the broad market indexes if AI wildly succeeds, this is the other scenario. Ultra predict productive systems could sign light millions of workers before policy catches up. That's right, you could have tens, hundreds of millions of people unemployed very quickly. Different paths, but same hard landing if leaders don't manage the transition. One company's chips have become a load bearing piece of the entire economy. The running joke is create God, then ask it for money. That's not a plan, that's a risk. So again, we talked about this earlier in the week about Nvidia becoming the first $5 trillion company and, and there are many who fear that this could, you know, one thing happens and they catch a cold. The rest of the economy can really suffer a flu or deadly pneumonia. Quickly, what's the real message here? Anyone telling you I know with absolute certainty there's going to be an AI doom loop fail our economy and it's going to happen in a set date. They don't really know what they're talking about. Everyone is guessing. But more and more people are getting nervous about our entire economy being propped up by this teeny tiny slice of AI driving everything else. Let's go a little bit deeper here and look at some of the numbers. Artificial intelligence outlays are pegged at $375 billion in 2025. But by 2026 it's going to be half a trillion dollars. This is a tremendous amount of investment tech's market weight. When you look at the big tech companies as a percentage of the overall Marketplace, it was 22% of the S&P 500 in late 22. Now it's 33%. That's up 50%. I mean it's a giant, giant increase. There are many and I'm one of them concerned. I'm not predicting a recession, I'm not predicting a market crash, but, but there are many concern that it's just such a Big, big piece that even if you buy an S&P 500 index fund, which I recommend, it may be that you're no longer spreading your bets enough. It may be that you're no longer diversified enough. If everything is tied to the top 10 companies or seven companies, or in some cases four companies, or increasingly just one company, it only takes that one company doing poorly and your diversification is over and we could be in a massive recession. I want to stress this is not a financial advice show. We do talk about companies and finance from time to time. But I'm not here to tell you buy more of this or sell this. I'm not telling you to buy or sell Nvidia, for example. And full disclosure, I do own a lot of Nvidia in index fund. So I'm not talking up my book here. I'm saying I'm worried that A it could be overpriced, B it might not grow into the vision. People have. Circumstances there may be some other market winner with chip. Maybe the Chinese create some form of chip company and they give it away for free just to mess up the US economy. And if there's a better chip out there and China's giving it away for free, guess what's going to happen in Nvidia's revenues? They're going to go down, down, down to almost nothing. There are increasingly a lot of people questioning the circular finance between OpenAI paying Oracle, Oracle buying Nvidia chips, Nvidia plowing it back into OpenAI. There's a lot of circular things here reminiscent of what happened in the dot com boom. Now there are some important distinctions from the dot com bubble that did implode. Those of you old enough to remember in the late 90s and I was there in the thick of it, trying with my raising money for my own dot com startups and failing miserably. But you may remember the NASDAQ was just populated with all of these Internet startups that made no money, that lost tremendous amounts of money. They were all fueled A by venture capital, B by the public market, the people rushing in saying I gotta buy pets.com I gotta buy space.com and all these other nonsensical Internet companies that didn't really have a clear cut path to revenue, much less profitability. So when the Internet bubble went burst, now in hindsight you could say, well yeah, this was just sort of tulip mania. This was people buying stuff just because they thought the price was going to go up. Kind like crypto today, but we'll leave that for another conversation, for another day. This is different because whether you love or hate Amazon or Microsoft or Google or Apple, these are real companies with hundreds of millions of dollars of revenues every year. These are not Internet startups with a concept by a couple of 22 year olds. So there is that significant, significant difference there. But at some point it does make you worry that the entire stock market, all the broad market stock index indices are essentially no longer diversified when they're so heavily, heavily weighted by a few companies. Because as I pointed out in the Newsread at the beginning, it could go one of two ways. Either way would be bad. Clarify this again. If it doesn't work out and there's a poof and people suddenly realize, well, we're not really making any profits from all this AI investment, let's just stop. If most companies stop investing in AI, then all the spending shuts down. Companies like Nvidia see the revenues and profits plummet and their stock price is going to go way, way down. And it's one thing if some small market cap company goes down. It doesn't really affect the average. When a company as big as Nvidia goes down, it brings down the average of the entire marketplace. So that's one negative scenario. Another negative scenario is that just some other company beats them to general artificial intelligence and their AI is so good and they somehow don't even need the chips from Nvidia that they put out everyone out of business. So those are the negative side. The positive side is Nvidia does better and better and better, sells more, makes more, gets us to the point of general AI intelligence. It's so good that all of a sudden not only is every driver put out of business, every worker in an Amazon warehouse, but everyone in every profession is put out of business. And it happens so quickly that our politicians can't figure out solutions. Our social safety net doesn't work. All the old nostrums of let the free market do what it's going to do is not going to work if you have 90% of people suddenly with no job, nothing to do with, and no money other than their stock return. So if things work out really well, it could be a huge problem. Where is this going to go? I don't know this. I'm drawing information and data from the Atlantic magazine. Charlie Warzel is a commentator on technology I do respect and like to read. When he was at the New York Times, now he's at the Atlantic. I would suggest and recommend you check it out. We've got lots more to come today here on Filter. If you would like to comment, feel free to do so. You can post your comments right on the screen. I'll not always typically can see them and add them into the show. If you do watch this on Demand and post your comments, I typically respond to every single comment. 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