Monologue: What Bursts A Bubble? - Better Offline

Summary

Better Offline Podcast Summary

Episode Title: Monologue: What Bursts A Bubble?
Host: Ed Zitron
Release Date: February 27, 2025

Introduction

In this episode of Better Offline, host Ed Zitron delves into the precarious state of the technology sector, particularly focusing on the volatile dynamics surrounding artificial intelligence (AI) and its major players. Titled "Monologue: What Bursts A Bubble?", Zitron examines the factors that could potentially deflate the current AI investment bubble, drawing insights from recent market movements and corporate strategies.

The Current AI Investment Climate

Zitron opens the discussion by analyzing the fragile balance within the AI-driven stock market, highlighting the significant influence of key players like Nvidia and Microsoft.

Nvidia's Market Dominance:
- Quote: “Nvidia is 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” ([05:10]).
- Insight: Nvidia's prosperity is heavily tied to the demand for GPUs essential for generative AI, making it a linchpin in the tech stock ecosystem.
Microsoft's Unstable Commitments:
- Quote: “Microsoft had, and I quote, Bloomberg pulled back on converting so called statements of qualifications... Microsoft does not just cancel agreements, but made it clear they don't intend to carry on building more” ([01:15]).
- Insight: Microsoft's withdrawal from expanding data center agreements signals potential overinvestment and raises questions about the sustainability of current AI ventures.

Signs of a Looming Bubble Burst

Zitron identifies several indicators that suggest the AI investment bubble may be nearing its end, each serving as potential triggers for widespread financial repercussions.

Reduction in Capital Expenditures:
- Quote: “One of them was the reduction of capital expenditures by a major hyperscaler” ([06:45]).
- Analysis: Major players like Microsoft scaling back investments hint at a slowdown in AI expansion, undermining previous bullish projections.
Financial Struggles of AI Companies:
- Quote: “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” ([08:30]).
- Insight: Significant financial losses by leading AI firms highlight the unsustainable nature of current investment levels and operational models.
Price Adjustments in AI Services:
- Quote: “If OpenAI and Anthropic raise their prices, it means that they're finally having to cover their ruinous, horrible, unprofitable and unsustainable expenses” ([07:50]).
- Analysis: Price hikes are indicative of underlying financial distress, while forced price drops signal heightened competition and reduced profitability.
Talent Exodus and Corporate Instability:
- Quote: “The departures of chief researcher Barrett Zoff and Chief Technology Officer Mira Morati... when that trickle becomes a flood, you know that a calamity won't be far behind” ([09:15]).
- Insight: A mass departure of key personnel reflects diminishing confidence within organizations, foreshadowing potential operational failures.
Venture Capital Withdrawal:
- Quote: “If OpenAI and Anthropic scale, Cohere, Perplexity... are having trouble raising money, that means venture capitalists are scared” ([10:05]).
- Analysis: Reduced venture capital interest signals broader market apprehension about the future viability of AI investments.

The Nvidia Dependence

Zitron emphasizes Nvidia's critical role in the tech market's current landscape, explaining how its fortunes are intertwined with the broader AI investment narrative.

Market Capitalization Concerns:
- Quote: “Right now, its market cap is over 11% of America's gross domestic product” ([07:20]).
- Insight: Nvidia's substantial market capitalization relative to the U.S. GDP underscores the disproportionate influence it wields, making the market vulnerable to its performance.
Revenue Concentration:
- Quote: “Nvidia's top customers like Microsoft, Google and Meta make up more than 60% of its revenues right now” ([07:35]).
- Analysis: Heavy reliance on a few major clients exposes Nvidia to significant risk should these companies adjust their investment strategies.

The Inevitability of a Bubble Burst

According to Zitron, the AI investment bubble is not bound to burst from a single catastrophic event but rather through a series of interconnected financial and operational setbacks.

Chain Reaction of Failures:
- Quote: “It will be a series of smaller calamities that chain together to bring an end to this hype cycle” ([10:50]).
- Insight: The collapse is expected to unfold gradually, with multiple failures reinforcing each other, leading to a systemic downturn in AI investments.
Cultural and Sentiment Shifts:
- Quote: “A vibe shift where people stop talking about OpenAI and generative AI in this breathless wank tone, but rather with an air of disdain and skepticism” ([10:30]).
- Analysis: Changing public and investor sentiment from exuberance to skepticism can erode the foundational hype that supports sustained investment.

Conclusion and Future Outlook

Zitron concludes by cautioning listeners about the fragility of the current AI investment landscape. He underscores the importance of monitoring the identified "pale horses" or warning signs that could indicate the imminent bursting of the bubble. Despite the potential downturn, Zitron assures his audience of his commitment to navigating and explaining the complexities of the evolving tech market.

Final Thoughts:
- Quote: “If they ever turn on Nvidia, that will accelerate the AI apocalypse” ([10:55]).
- Insight: The stability of Nvidia is pivotal; any significant downturns for the company could precipitate a broader market collapse in AI investments.
Personal Commitment:
- Quote: “Either way, I'll be here to walk you through it” ([13:35]).
- Conclusion: Zitron pledges to continue providing informed analysis and guidance as the situation develops, reinforcing his role as a reliable source of tech industry insights.

Notable Quotes with Timestamps

On Nvidia’s Growth: “Nvidia is the golden goose, growing over 900% since 2023...” ([05:10]).
On Microsoft’s Withdrawal: “Microsoft does not just cancel agreements, but made it clear they don't intend to carry on building more” ([01:15]).
On AI Companies' Financial Losses: “OpenAI spent $9 billion to lose $5 billion in 2024...” ([08:30]).
On Talent Exodus: “The departures of chief researcher Barrett Zoff and Chief Technology Officer Mira Morati...” ([09:15]).
On Market Capitalization: “Right now, its market cap is over 11% of America's gross domestic product” ([07:20]).
On Sentiment Shift: “A vibe shift where people stop talking about OpenAI and generative AI...” ([10:30]).
On Nvidia’s Importance: “If they ever turn on Nvidia, that will accelerate the AI apocalypse” ([10:55]).
Closing Assurance: “Either way, I'll be here to walk you through it” ([13:35]).

Final Thoughts

Ed Zitron's monologue in this episode of Better Offline serves as a critical examination of the current trajectory of AI investments and the tech industry's broader financial ecosystem. By highlighting the dependencies, financial strains, and shifting sentiments, Zitron provides listeners with a comprehensive understanding of the potential vulnerabilities that could lead to the bursting of the AI investment bubble. This insightful analysis encourages investors and tech enthusiasts alike to remain vigilant and informed amidst the rapidly evolving technological landscape.

Transcript

Oracle Representative (0:00)

AI is rewriting the business playbook with productivity boosts and faster decision making coming to every industry. If you're not thinking about AI, you can bet your competition is. This is not where you want to drop the ball, but AI requires a lot of compute power and with most cloud platforms, the cost for your AI workloads can spiral. That is, unless you're running on oci. Oracle Cloud Infrastructure. This was the cloud built for AI, a blazing, fast, enterprise grade platform for your infrastructure, database, apps and all your AI workloads. OCI costs 50% less than other major hyperscalers for compute, 70% less for storage and 80% less for networking. Thousands of businesses have already scored with oci, including Vodafone, Thomson Reuters and Suno AI. Now the ball's in your court.

Oracle Salesperson (0:45)

Right now, Oracle can cut your current cloud bill in half if you move to OCI. Minimum financial commitment and other terms apply. Offer ends March 31st. See if your company qualifies for this Special offer@oracle.com strategic that's oracle.com strategic.

Ed Zitron (1:04)

Okay, Dystopia, these fuckers are right for containment. This is your better offline monologue for the week and I'm your host Ed Zitron. Now 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 cancelled 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. Microsoft 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 Dwarkesh Dwarkesh podcast. Pretty good, kind of bland. 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. You 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 the 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 7 itself. As 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. Now, admittedly, a lot of these headlines were plucked from the popular financial press, which, to put it mildly, can be kind of dogshit. 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 will have a tantrum if they can't perpetually make the number go up. Nvidia 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 a 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 markets are like giant, petulant trillion dollar babies, these are the demands put upon Nvidia and Jensen Huang. But 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 emulate 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. It'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. And 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. This is all private partnerships. And SoftBank and OpenAI have given 19 billion. Well, they're claiming they're going to give $19 billion each. And OpenAI 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 A, 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. But 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 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. Sundar Pishai of Google just announced that Google's Gemini Code Assist is now free for up to 10, 180,000 code completions a month. This puts a direct price pressure on both OpenAI and Anthropic, who just 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. Similarly, 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 department, the departures of chief researcher Barrett Zoff and Chief Technology Officer Mira Morati. When that trickle becomes a flood, you know that a calamity won't be far behind. 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. OpenAI co founder Ilya Sutskever 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. Wrongo. 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 Miramarati, 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. You'd be fucking wrong. Stephen Levy should be absolutely bloody ashamed of himself. Steven's done some good journalists in the past. He's also done some pro generative AI stuff that I wouldn't wipe my asshole 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 and. 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. One pale horse would be a vibe shift where people stop talking about OpenAI 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. Not 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.