What’s the pin to bust the AI bubble?
A) “the market can remain irrational longer than you can remain solvent”
B) The big players in AI aren’t highly leveraged. If MSFT or Nvidia have their valuations drop overnight, the consequences to them are minimal
How Money Works released a good video on this recently
The big players in AI aren’t highly leveraged
It’s not traditional leverage but the recent deals being announced where the AI companies are raising money from Microsoft, Nvidia, Amazon, Google, AMD, Oracle, etc. and paying it back in stock or purchase commitments have a certain circular bootstrappy notion to them. The formulas for the valuations rely on feedback loops that are less stable and might create runaway feedback conditions at the slightest hiccup.
In any highly capital intensive business, you always run the risk that the thing you build is worth less than the cost it took to build it. And when that happens, collapses can happen pretty quickly, as everyone invested in these companies rushes towards the offramp.
I can think of a few catalysts that could trigger that initial realization that the thing made isn’t actually worth the cost to build it:
- A new model comes out from a competitor that was cheaper to build and almost as good. (Deepseek reminded everyone that this might happen.)
- New money stops coming in and the companies building things have to tighten their belts. This could be driven by a failure to monetize as much as previously modeled, so that the value of the company itself is questioned.
- Some kind of legal flaw threatens the entire foundation of some expensive models.
- Some kind of technical flaw causes one company’s flagship model to lose the race against other companies.
- Some key personnel are incapacitated in a way that robs the company of its momentum (this almost happened with the board of directors revolt at OpenAI).
- Something else I haven’t thought of.
But once a hiccup happens, something built on so many self-reinforcing loops is less resilient against the unknown, the chaos of the real world.
Stock prices are set by what people think stocks are worth. Buying a stock is a bet that it will become more valuable in the future (and/or pay dividends). Even with the rise of algorithmic trading, those algorithms are betting the stocks are will rise in value. In theory the cost should be related to the fundamentals of the stock like the company’s revenue, but in practice they are also set by investor’s opinions about the stock’s future price.
So what causes stocks to go down is people thinking that stocks will go down, and selling before they lose any more money.
In the case of the AI stock bubble, it’s hard to know what will cause investors to say “this stock is likely to drop on value, or at least not grow as quickly as other investments I could make.” The fact that most AI companies are burning cash and not getting much revenue out of it hasn’t dampened the excitement yet, so I guess investors still believe there’s a way forward that will result in more revenue. Or at least they believe the hype cycle isn’t coming to an end so they’re holding on while the prices go up and hope to sell before their holdings lose too much value. It won’t pop until something deflates the expectations of enough investors to start a sell-off. What’s that going to be? Who knows. It might just be a herd mentality thing where a few people begin to sell and more people follow suit.
Nothing is gonna make the so called bubble pop, since its not a bubble. Its more like the foundation for a high tech society that is being built right now.
High tech power stations, data centers, learning robots, surveillance systems, military systems… All based on Ai.
So while you watch dystopia grow up around you, you can make a few bucks in the stock market at least.
Not making a couple of loan payments. As soon as a big player does this, everyone else will be on edge.
A layer higher? Expose Palantir’s role in Israeli targeting and manipulation that includes global espionage with Epstein and others.
An easier way would be to restore democracy by making the right to digital slavery – ownership and trade of the digital presence of a person for exploitation and manipulation – illegal. That is the profitable and massive political capital driving the machine.
Any bad news could trigger it. Noone knows exactly what or when.
“AI war-machine exterminates 90% of human race”
Would that work? Or would that just make the AI companies more valuable?
It could be not paying back loans. Lots of market boubles pop when that happens.
when people hunt down liquidity and don’t put it back in the casino
Ultimately it will be when the credit dries up and circular nature of the “investments” breaks down.
A Couple things that come to mind:
- data centre operators borrowing money to buy GPUs and then using those GPUs as collateral for loans to buy more GPUs
- nVidia investing money into companies contingent on their purchase of GPUs worth an order of magnitude greater than than their investment
- Microsoft selling Copilot below cost, provided by OpenAI selling GPT services below cost, in exchange for compute offered below cost
- A consensus that the cost of scaling users is not going to be the same as it has been with e-commerce and software (ie one user using Amazon.com vs 1 million users is roughly the same cost to build the software that runs Amazon.com while the cost scales directly with number of users of chatbots)
- a consensus that hallucinations are not a solvable problem
One way could be a failure to deliver on a contractual obligation with regards to a payout (eg company X will receive $100 billion when Y is complete) will lead to the failure to make a debt payment (company X has borrowed money based on the money promised by company Y), which will precipitate a scramble as investors try to recoup the money they’ve put in the firms, which will crash them.
For example, and I don’t know what happened here, CoreWeave had a balloon payment to make on a loan in October; if they didn’t make that payment, it could lead to a panic. But it seems that didn’t happen.
https://www.jameslavish.com/p/why-qt-is-dead-and-qe-is-coming
I found this article explained the situation well. They are saying by q1 2026 or earlier and explain why they think that.
I was excited to read that, but the writing style is a little too chaotic for my taste.
Truly, it could be anything that unsettles the market. A bubble popping is essentially a cascading failure, where the dominos fall, when the house of cards collapses, when fear turns into panic, even when everyone is of sound mind.
The Great Depression is said to have started because of a colossally bad “short squeeze”, where investors tried to corner the market on copper futures, I think. That caused some investment firms to go broke, which then meant trust overall was shaken. And then things spiraled out of control thereafter, irrespective of whether the underlying industries were impacted or not.
So too did the Great Financial Crisis in 2008, where the USA housing market collapsed, and the extra leverage that mortgagees had against their home value worked against them, plunging both individuals and mortgage companies into financial ruin. In that situation, the fact that some people lost their homes, coupled with them losing their jobs due to receding market, was an unvirtuous cycle that fed itself.
I can’t speculate as to what will pop the current bubble, but more likely than not, it will be as equally messy as bubbles of yore. But much like the Big One – which here in California refers to another devastating earthquake to come – it’s not a question of if but when.
Until it (and the AI bubble popping) happens though, it is not within my power to do much about it, and so I’ll spend my time preparing. That doesn’t mean I’m off to move my retirement funds into S&P500 ex-AI though, since even the Dot Com bubble produced gains before it went belly up. I must reiterate that no one knows when the bubble will pop, so getting on or getting off now is a financial risk.
Preparation means to build resilience, to decouple my home from my job, to keep my family and community safe even when the shaking starts. For some, this means stocking food and water. For others, it means building mutual aid networks. And for some still, it means downsizing and making their lives more financially sustainable, before the choice is made for them.
This is a rollercoaster and we’re all strapped in, whether we like it or not.
I’d like to add that the bust is not really predictable. If you invest into the stock market and now sell before everything crashed - it is more likely you will lose more money in the time waiting for the crash than you would have lost during the crash itself. The financial strings are complex and chaotic and the market often acts irrationality. While it can be clear to us that AI is one of the worst business ideas ever only consisting of burning money and circular investments - it may go on like this for another 3 years.
