AI boom or bubble? Timing is everything



Artificial intelligence is a game-changing technology that’s already transforming how the world lives and works.

Yet AI can also fuel a market meltdown, a recession – or both.

Timing is everything. Money is pouring into AI so rapidly that it’s outpacing the ability to turn a profit. This unsustainable mismatch must come into balance, one way or another. The recent blow-up of a wildly successful AI-focused hedge fund demonstrates the risks and rewards of the AI boom.

Those risks are magnified by how incredibly expensive it is to build the AI revolution, where companies are scrambling to buy cutting-edge chips and build data centers the size of dozens of football fields.

“I absolutely believe the technology is transformative. But that doesn’t mean you won’t go through irrational exuberance at some point,” Max Gokhman, head of AI and digital asset solutions at investment firm Franklin Templeton, told CNN.

Timing is critical in deciding whether the AI boom endures – or if it ends in tears like past asset bubbles.

Will the gobs of money being spent to build out AI bring real returns before Wall Street’s patience runs out?

$500 billion financing arrangement

For now, the heavy hitters in finance are still going headfirst into AI.

Nvidia, the $5 trillion AI infrastructure superstar, just arranged $500 billion in financing from Apollo, BlackRock, Goldman Sachs and other Wall Street firms to bankroll customer orders for its cutting-edge chips.

Nvidia CEO Jensen Huang even argued that AI compute – the hardware and software underpinning AI models – is transforming into an “investable class.”


It’s a sign that many on Wall Street still believe in an AI-driven future. Investing in the technology has been complicated by its rapid developments; an emerging price war between open and closed AI models; and many supply chain bottlenecks – from access to chips and local opposition to data centers to the enormous power needs of the buildout.

‘Will end badly’

Nvidia’s blockbuster deal is a reminder of an innovative, and arguably dangerous, characteristic of the AI boom: circular financing.

In circular financing, one company pays money to another (in the form of a loan, investment, lease or other financial support) in exchange for that second company buying the first’s products.

It’s one of those things that works – until it doesn’t.

During booms, these arrangements can create a virtuous circle. But they can also fuel speculative bubbles by creating the illusion of rapid growth — and those bubbles eventually burst.

It brings back bad memories of the dotcom bubble, when some telecom equipment companies lent money to customers to buy their gear. 

“Circular financing will end badly,” Gokhman said. “You are living on not just borrowed time, but levered time.”

But Gokhman said he’s still a believer in the AI boom and doesn’t think leverage has gotten to alarming levels, at least not yet.


 

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