\n Nvidia CEO Jensen Huang even argued that AI compute \u2013 the hardware and software underpinning AI models \u2013 is transforming into an \u201cinvestable class.\u201d\n <\/p>\n
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\n It\u2019s 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<\/a> between open and closed AI models; and many supply chain bottlenecks \u2013 from access to chips and local opposition to data centers<\/a> to the enormous power needs of the buildout.\n <\/p>\n \n Nvidia\u2019s blockbuster deal is a reminder of an innovative, and arguably dangerous, characteristic of the AI boom: circular financing.\n <\/p>\n \n 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\u2019s products.\n <\/p>\n \n It\u2019s one of those things that works \u2013 until it doesn\u2019t.\n <\/p>\n \n During booms, these arrangements can create a virtuous circle. But they can also fuel speculative bubbles by creating the illusion of rapid growth \u2014 and those bubbles eventually burst.\n <\/p>\n \n It brings back bad memories of the dotcom bubble, when some telecom equipment companies lent money to customers to buy their gear.\n <\/p>\n \n \u201cCircular financing will end badly,\u201d Gokhman said. \u201cYou are living on not just borrowed time, but levered time.\u201d\n <\/p>\n \n But Gokhman said he\u2019s still a believer in the AI boom and doesn\u2019t think leverage has gotten to alarming levels, at least not yet.\n <\/p>\n \n As in the late 1990s, the AI boom has allowed some investors to make fortunes, even as others experience sudden disaster.\n <\/p>\n \n Late last month, Situational Awareness<\/a>, a little-known hedge fund focused on AI investments, imploded after hits highly leveraged bets blew up.\n <\/p>\n \n Run by a former OpenAI employee, Situational Awareness was forced to sell most of its portfolio at a steep discount to Citadel. The AI hedge fund is still up big over the past two years \u2013 just not as much as it had been.\n <\/p>\n \n Tellingly, Situational Awareness didn\u2019t run into trouble because it was wrong directionally on its belief that AI is for real.\n <\/p>\n \n The problem was that thesis got derailed by a temporary loss of momentum in AI stocks \u2013 and that derailment was magnified by leverage, which magnifies both gains and losses.\n <\/p>\n \n Torsten Slok, chief economist at Apollo Global Management, warns that the math in the AI space doesn\u2019t add up yet. The massive profits at the top of the AI food chain are driven by investors, not customers, he said.\n <\/p>\n \n \u201cCapital can bridge the gap for a while, but not indefinitely,\u201d Slok wrote in a report last week. \u201cAnd therein lies the risk: Will the ROI show up for AI\u2019s end customers fast enough to sustain the spending that is generating those upstream margins?\u201d\n <\/p>\n \n After analyzing profit margins in the S&P 500, Slok found no evidence <\/a>that AI is boosting the profitability of healthcare, consumer staples, energy or real estate.\n <\/p>\n \n However, Jeetu Patel, president and chief product officer at Cisco, said it\u2019s hard to equate the AI revolution with the dotcom bubble because supply was built ahead of demand in the late 1990s.\n <\/p>\n \n Patel, whose company is building infrastructure supporting the AI boom, expects AI agents to go mainstream, allowing demand to continue its explosive growth.\n <\/p>\n \n \u201cThe demand is there (today), and supply is massively short on power, data center capacity, compute, memory and network,\u201d Patel told CNN at Ai4, an industry conference in Las Vegas, this month. \u201cWe\u2019re in the very, very early infancy.\u201d\n <\/p>\n \n The stakes are massive \u2013 and not just for little-known hedge funds gambling on AI stocks. The US economy has become more reliant on AI and its enormous spending.\n <\/p>\n \n The eye-popping gains of Nvidia, Micron, Alphabet and other AI stocks have helped inflate the net worths of millions of Americans by lifting the value of their retirement nest eggs, college savings plans and brokerage accounts.\n <\/p>\n \n \u201cWithout the AI boom, we probably would be in a recession,\u201d economist David Rosenberg said during a recent episode <\/a>of the \u201cExcess Returns\u201d podcast.\n <\/p>\n \n And timing is everything in booms and busts. As economist John Maynard Keynes famously said: \u201cThe market can remain irrational longer than you can remain insolvent.\u201d\n <\/p>\n![\"The](\"https:\/\/www.newsbeep.com\/ie\/wp-content\/uploads\/2026\/08\/gettyimages-2286830769.jpg\")
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