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How is this NOT a Bubble? | How Money Works | YouTubeToText
YouTube Transcript: How is this NOT a Bubble?
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The AI investment market is widely perceived as a bubble, yet its resilience and continued funding suggest underlying factors beyond mere speculation, potentially driven by large tech companies' accumulated cash reserves and strategic investments across the AI ecosystem.
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If you ask anybody what they think about the investment market surrounding AI,
they are all going to say the same thing. Internet bubble bubble. There will be a bubble. We are in
an AI bubble. Bubble. Bubble. Bubble. Yeah, that's right. We are in a bubble. And it's easy to see
why they might think so. The entire market is being carried by a few firms speculating about
the future of AI. They are all playing a game of say a bigger number every quarter. The products
they are releasing are a long way from covering the cost they are incurring. And every day it just
looks like this whole game is being held together by tech CEOs passing around the same pile of money
to make their numbers look good. This is to say nothing of the outside geopolitical risk
that could smother this whole industry. The more you look into the current state of the market,
the less flattering it looks behind the scenes. But the most dangerous thing in the world is not
what you don't know. It's what you know for sure that simply ain't true. If everybody has agreed
that this is a bubble, then why are informed investors still piling billions of dollars
into it every month? Are they dumber than us or do they see something that regular people don't? Now,
I want to say that for the record, I think this whole thing is absolutely cooked. However, the
best way to really understand something is to not seek out information that confirms your beliefs,
but instead those that challenge them. So, to play devil's advocate, how is it possible that
this whole thing is not just speculative mania? We as a country need these investments if we're going
to be the leader in AI technology. Jensen, Nvidia is making a hundred billion investment in open
AI. The world's top tech companies are pouring billions into building new data centers in the US.
It'll be a world of incredible material abundance. It'll be a world where individual ability, impact,
whatever, is just so far beyond what a person can do today. But the economic impact of these deals,
it turns out, is indistinguishable from full control. Now, the thing about bubbles is that
usually they take some kind of outside force to pop them. The dot collapse was kicked off
by a combination of factors, but three really stand out. Microsoft being sued for violation
of antitrust laws, Micro Strategy doing a massive revising of their financial results,
causing their stock to fall 60% in a single day and getting them into hot water with the
SEC. And a single article that pointed out the unviable business model that a lot of companies
were running on. A few years later, the housing bubble was popped by the subprime mortgage crisis,
which itself was kicked off by rate resets and loan originators filing for bankruptcy. So,
if the AI industry was in a bubble, it's had a lot of things that have come a long way which could
have popped in. Market instability around tariffs, legislative controls over AI chips, rising
interest rates, legal challenges over training data, organizational shocks, infrastructure
problems, concerning studies over business use cases, and what looks like increasingly desperate
attempts to generate any kind of revenue. That's not to mention that if one article back in 2000
could start unraveling the dot-com bubble, surely the daily articles coming out about the problems
in this industry should do the same, right? Well, so far at least, the market has pretty much just
shrugged all of this off. And it's been able to do this for three very important reasons. The first
is where all of this money is actually coming from. Over the last decade and a half, big US tech
companies have slowly built up an enormous pile of cash. Outside of insurance or financial firms,
which are legally mandated to have cash on hand for compliance reasons, tech companies
like Microsoft, Meta, Apple, and Alphabet have more cash than any other companies on the planet
after saving it away for the better part of two decades. They had been doing this for two reasons.
The first was that before 2017, tax laws heavily incentivized shifting cash into offshore accounts
primarily held in Ireland. The exact structures that they used to erode these profits into a
haven like this were very complicated. or once the cash was there, they couldn't really touch
it unless they wanted to pay tax on it. This means that they just slowly accumulated cash waiting for
something to use it on. However, in 2017, these companies were offered a one-time deal to bring
back these offshore savings into America for a small tax concession, which gave them all a lot
of dry powder to make some big local investments. Now they have used a lot of that money to do share
buybacks and they have kept a lot of it abroad to fund their international operations but
they also earmarked billions for future capital expenditures. Now the second reason they built
such huge cash reserves was because for a while these companies were actually struggling to find
projects worth investing in. They had become so dominant in their respective markets that spending
a lot of money on development was seen as an unnecessary expense that wasn't really worth the
risk. Today that has obviously changed and the big companies that are driving most of the expenditure
on data centers are almost making up for a lost decade where they were arguably not investing
enough money into new projects. This also applies to all of the money they are introducing into the
system to support less established firms like Open AI. Sure, the money is getting passed around a lot
once it's in the system, but the initial source of these funds is largely coming from piles of
cash these companies had sitting on the sidelines. This means compared to something like the housing
bubble which was propped up on a lot of debt and rigid derivatives, these companies are at least
building a top a solid fiscal foundation. Now, of course, having a strong foundation does not
guarantee that the house you build on top of it will also be good. Similarly, just because these
companies happen to be holding on to trillions of dollars doesn't necessarily mean that setting
it all on fire to chase one single bet is a good idea. It also doesn't mean that regular
investors won't get burned if this money suddenly gets yoked back off the table. So, it's time to
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That's cape.co/getcape. One of the most concerning trends that has developed in the space is the
circular dealing between all of the companies involved in different areas of this industry.
We first covered this about 2 months ago when Oracle stock price spiked after reporting a huge
data center rental commitment from OpenAI, who had raised billions of dollars from Nvidia, who made
that money in the first place by selling graphics cards to companies like Oracle. Since then, the
deals have only gotten bigger, and reporters have done a really good job piecing together just how
far and wide this web of financial [ __ ] goes. Now, most commentary has rightfully called this
out as companies pulling themselves up by their own bootstraps. They're making their revenue look
better than they really are by investing in their own customers. Not exactly a sustainable business
model. However, to play devil's advocate again, there is something to be said about this strategy
from a risk mitigation perspective. When people look back with the benefit of hindsight at the
do-com bubble, they all say the same thing. Yeah, the market was dumb. But after a major correction,
there were still some big winners that emerged. Some of them being the same
tech companies involved in the AI market right now. Nvidia investing into a company like OpenAI
right now looks a little bit suspicious. But had a company like AOL invested in Amazon back in 1999,
we would probably be a little less critical. By investing up and down the supply chain, if you
could call it that, these companies are in theory maximizing the chance that they will capture the
value eventually generated through AI. There is also one other really important detail that a lot
of people gloss over when exposing this financial circle ch. It's easy to look at this and conclude
that this whole market is just a Ponzi scheme popped up by investor hype. The only problem
with that deduction though is that they aren't really taking investors money. Netted out, the
major players in this industry are paying out far more money through dividends and stock buybacks
than they are taking in through stock issuance or borrowing. When compared again to the dot bubble,
the story was very different. Hyped companies were dependent on bringing in a continuous stream of
investor money to keep the lights on in businesses that made no profit and often didn't even make any
revenue. A company like OpenAI is also in this position where if they don't keep on bringing
in new investors, they won't be able to continue operating, but they are not raising money from
regular investors. They are primarily getting it off companies that have plenty of cash to invest.
Now, I am not exactly going to say I feel bad for big tech companies, but nothing they do with
their money right now is going to be popular. If they make capital investments into data centers,
people will say they are blowing their money on chips that will be obsolete in 2 years time. If
they buy their own shares, people will call them out for driving up demand on an already
overvalued stock. And if they buy shares in other companies, people will call them out
for circular dealing. Yeah, I know. I am sure they are truly devastated. Now, with all of that said,
that doesn't mean that these companies and the wider economy are completely safe. Share prices
are clearly elevated on the expectation that AI products and services will eventually bring
in trillions of dollars to major participants in this industry. If this doesn't pan out, then those
prices could be reconsidered very quickly. The major incumbent players aren't at immediate risk
of collapse because they still have far more cash than debt and they still have functional
parts of the business to fall back on. Their biggest risk is that if this does go tits up,
then they will have to explain to their investors why they thought it was better to spend hundreds
of billions of dollars on redundant data centers instead of just paying out that money to them.
Now, nobody can truly predict what the future of AI will look like. And even the CEOs themselves
have admitted that, but they are framing it like this. They are betting $500 billion on
a dice roll. If it comes up to six, they will make $10 trillion. It's a risky bet, but that
doesn't necessarily mean it's a bad bet. Oh, and it takes the sting off knowing that the government
will probably be there to comp them some chips if they just keep the game going. But we don't
say that part out loud. Now, if you are still not convinced, don't worry. I'm not convinced either.
But go and watch this video next to find out why your opinions are absolutely meaningless anyway,
economically speaking. And don't forget to like and subscribe to keep on learning how money works.
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