Returns not there<\/p>\n
The other is a note to clients by independent economist Gerard Minack showing the AI spend simply can\u2019t generate the returns for investors to justify it.\u00a0<\/p>\n
I\u2019ll come back to that. Kohler first, adding the AI and crypto bubbles together for frightening numbers:<\/p>\n
Somewhere between $3 trillion and $6 trillion has been invested in building AI infrastructure and software, and that has been responsible for almost all US economic growth over the past year.<\/p>\n
The top 10 American AI companies have provided most of the US stock market\u2019s gains over the past two years and are now valued at $35 trillion, almost half the total market.<\/p>\n
Meanwhile there are 20,000 cryptocurrencies worth $5.8 trillion, of which Bitcoin represents more than half.<\/p>\n
The total cash in the AI and crypto bets is more than a quarter of global GDP; it\u2019s probably the greatest technology investment boom\/bubble in history.<\/p>\n
No probably about it, in my opinion. It would not take a total crash to send shocks through the financial and real economies.<\/p>\n
Jobs armageddon the quid pro quo<\/p>\n
But Kohler\u2019s Doomsday outcome is that it would be worse if the investment ends up being justified by profits created, as it would create massive long-term unemployment for the many, while the very few at the top continue on their present path of becoming even more unimaginably rich.\u00a0<\/p>\n
Gerard Minack\u2019s note has a smaller focus and thus a more concrete outcome: there\u2019s a lot of capital being burned.\u00a0<\/p>\n
Minack limits his numbers to the \u201cAI8\u201d listed entities: Alphabet, Oracle, Microsoft, Amazon, Meta, Broadcom, Nvidia and Palantir. In this bubble phase, investors keep rewarding companies that increase planned AI-related investment spending. But:<\/p>\n
\u201cThe larger the investment spend, the greater the revenue that will need to be generated to ensure an adequate return on that investment. In my view, that revenue hurdle is already implausibly high. Whatever the technical wonders that AI will generate, the investment returns will disappoint. That will inevitably lead to significant market losses.\u201d<\/p>\n
Greatly simplifying Minack\u2019s analysis, the AI8 will conservatively have investment stock of more than US$1 trillion by the end of next year. That\u2019s allowing for 20 per cent depreciation on an investment spend heading above US$2 trillion in 2027. (And a reminder that this is ignoring the investment spending of unlisted companies such as OpenAI.)<\/p>\n
$1T for a 10% return<\/p>\n
So, how much revenue will their AI businesses need to generate to get a reasonable return on this stock of invested capital? I\u2019ll skip the details of Minack\u2019s figuring, but AI would need revenue of some US$925 billion a year to achieve a modest 10 per cent return on invested capital. And that return compares with the hyper-scalers\u2019 current 25 per cent ROIC.\u00a0<\/p>\n
By comparison, Minack quotes Praetorian Capital\u2019s Harry Kupperman\u2019s observation that the incredibly successful Microsoft Office 365 subscription services had revenue of US$94 billion last year.\u00a0<\/p>\n
\u201cIn other words, to achieve an average ROIC, the AI industry will need to support 7-10 firms with businesses as widely deployed and widely subscribed to as Office 365.\u201d<\/p>\n
And then it gets harder. If the hyper-scalers\u2019 current 50 per cent gross margin falls closer to the S&P500 average, they would require additional revenue of US$1.2-$1.6 trillion. As Minack concludes, \u201cgood luck with that\u201d.<\/p>\n
A further complication is that AI will cannibalise much of the hyper-scalers\u2019 existing businesses.\u00a0<\/p>\n
I would further speculate about what competition between that many players would do to margins. There\u2019s also the well-reported phenomenon of much of the AI splurge being circular \u2013 the major players are hanging out and taking in a lot of each other\u2019s washing.<\/p>\n
Show me the money<\/p>\n
It\u2019s all good fun until investors reach the imminent \u201cshow me the money\u201d stage and the music stops.\u00a0<\/p>\n
That\u2019s when the big boys take a hit and the fringe players, the bubble startups, lose their shirts.\u00a0<\/p>\n
As for the concurrent crypto-bubble, RBA Governor Bullock last week pointed to the challenge for the financial system\u2019s security if quantum computing ever works effectively.\u00a0<\/p>\n
\u201cIf you believe what they say on the tin of quantum computing, what takes 200 years to decrypt now, to break, will take a matter of minutes. So it is a big threat,\u201d she said.\u00a0<\/p>\n
Decrypted crypto is no crypto at all.\u00a0<\/p>\n
And the Toddler King<\/p>\n
Then there is the little matter of the world\u2019s biggest economy being run by a febrile toddler king and a mob of self-enriching accomplices.\u00a0<\/p>\n
It all adds up to the biggest mystery: how markets are so willingly charging higher to yet more records, regardless of risk, with the biggest gains at the riskiest end.<\/p>\n
On one hand, there\u2019s the view that the reckoning is always a little further off. On the other hand, the second law of \u201cold bond dog\u201d Anthony Peters comes to mind:<\/p>\n
Nobody gets fired for being long a falling market, but woe betide anyone short a rising market.<\/p>\n
Good luck with that, too.\u00a0<\/p>\n
All the way with Donald J. Albo supporting mass murder<\/a><\/p>\n<\/p>\n
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