As long as this debt does not make it into life insurance and pension funds, we are fine. The trouble is that private credit is taking control of some life insurance companies and off-loads this debt to these. When these fail, it will become everyone's problem.
> Risks to financial stability may also stem from entities with particularly high exposure to private credit markets, such as insurers influenced by private equity firms and certain groups of pension funds. The assets of private‐equity‐controlled insurers have grown significantly in recent years, with these entities owning significantly more exposure to less‐liquid investments than other insurers
Couldn't it be a problem given the concentration of the S&P in these companies?
At this point these companies make up a huge portion of 401k's for a huge chunk of Americans. How would it affect retirees if they dropped 40-50%, likely taking the market with them?
I suggest looking into “EQL”, or better yet, just replicating its index by taking a position in the 11 XL* sector funds from SPDR, allocating equal weighting to each. One will end up with one’s equities equal weighted by sector and with plenty of large cap exposure, as opposed to the pronounced mid-cap tilt found in whole market equal-weight strategies.
Personally, I drop the financial sector entirely (Thomistic prohibitions on usury) which leaves an even 10 funds which is easy to allocate mentally and in practice. For example, assuming a 60/40 allocation where one is holding the lion’s share in equities and the remainder in bonds (I substitute with a combination of gold, crypto, cash, and Swiss Franc here), one would allocate as follows:
(Note that XLF is consciously not taken as a position here, decide if it’s right for you. The Mortgate REITs which would make XLRE problematic are in XLF per the sector selection rules)
The remaining 40% is bonded debt if you are fine with usury, or some sort of asset negatively or neutrally correlated to equities.
Because bonds involve interest. Per Summa Theologica:
> To take usury for money lent is unjust in itself, because this is to sell what does not exist, and this evidently leads to inequality which is contrary to justice.
…Aquinas expands the analysis but it is relatively straightforward: all interest is usury.
Personally, I find it helpful to imagine two hypothetical persons representing the entire economy, one the creditor who is lending and two the borrower who is taking on the loan. In this ultra simple closed model with a fixed quantity of money, the former is in effect asking for more units of money than actually exist in the whole system. When the loan comes due the borrower owes a sum that cannot be paid in full from the circulating medium itself. Settlement then requires either default, the creditor forgiving the excess, or the transfer of real goods and property to make up the difference. Scaled up, that same pressure (the continuous generation of monetary claims that exceed the existing stock of money) is what I suspect drives a good deal of the subtle and overt strain on families and communities that people so often complain of in the West and in modern growth-oriented capital societies.
This definition of usury differs from the modern loophole-definition: that interest bearing loans are only usury when the rates cross some nebulous abusive threshold. In the above Thomistic interpretation, all interest is socially problematic and disfavored. Judaism holds to a similar prohibition on interest when loans are made between Jews. Islam likewise prohibit usury even more broadly. Despite the injunction against usury in the Middle Ages Christendom and the enduring prohibitions of usury in other faiths, there are many modern Catholics and Protestants who will favor the modern interpretation over Thomas’ understanding; I’m just not one of them.
In many historical societies, religious prohibitions on usury meant the charging of interest of any kind.
Jump in a time machine to 1515 and ask Martin Luther, or to 1260 and ask Thomas Aquinas, they'd tell you it's sinful.
And in the present age, a fair number of Islamic folk consider interest against their religion's rules. So there's a Halal finance industry where, for example, you can get a "murabahah contract" where the bank buys a house, then sells the house to you at a higher price, while allowing you to pay them in monthly instalments.
"Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, interest of any thing that is lent upon interest" (Deut 23.20 JPS Tanakh).
I love when religions have rule lawyers like this. It readily discredits the religion. As if their all powerful god can be fooled by fancy paperwork or legal loopholes.
It’s an interesting thought. The growth is so extreme that if the S&P 500 fell 50% today it would reach levels last seen in 2022. Given that the timespan is so short, I’m honestly not sure it would be as bad for 401ks as people expect unless all of your investment was concentrated in the last 4 years.
I suppose it’s worse if your calculation is, “I’ll retire when my 401k hits $X absolute value,” but I think most people just retire at a certain age instead with risk spread across decades.
One of the big issues with this is sequence of returns risk. If you retire and rely on your portfolio but the market dives for a year or two right after you leave the workforce, your total portfolio value is screwed because you were selling at a low point.
Tangentially: I think a lot of people forget/underestimate the degree to which the industries behind their job are ones that they need to diversify away-from.
In other words, a programmer should invest a bit more away from software than average, a realtor should invest a bit more away from properties than average, a coal-miner should invest a bit more away from energy and mining, etc.
If you have your job, you can weather a stock-downturn, and if investments are solid, you can weather a period of unemployment by liquidating some, but if both hit trouble simultaneously then that's much much worse.
most don't even have 3-5 years "spending money" (whatever that is) in total savings; if you're keeping that in cash you're getting 2-3% annually while the market has doubled.
Last week I was at the bank in my hometown, a small rural community. The teller took a phone call, and I overheard her say "You have $1.53 in your checking account, and $150 in savings".
Presumably this is their total net worth. I think this is way more common than people on this type of forum realize. Most will work until they literally can't anymore, then scrape by on social security until they die. I think it's important to keep that perspective.
When you're headed into retirement, one possibility is to shift to saving more in cash-like options instead of a 401k (or whatever). It's should just be part of your retirement plan to account for possibilities like this.
The tax advantages of being forced to pay ordinary income rates on your distributions as compared to long term capital gains (which are low, capped, can be exercised before a tax hike, and avoided entirely if you just need collateral)?
401k reduces your taxable income when depositing money, this is more tax efficient than paying normal income taxes and then also paying capital gains.
401k lets you rebalance a portfolio with zero tax implications.
The downsides are generally high fees and a 10% penalty for early withdrawal which makes them surprisingly bad for young people. They tend to start in lower tax brackets, have fewer reserves when unemployed, and face fewer risks from an unbalanced portfolio.
Pay down debt then Roth IRA when young 401k after 40 is often better than defaulting to a 401k, but saving anything tends to be more important than such optimizations.
I am alone in my peer group for doing something like this.
Cars, student debt, credit card debt all gone. (And I dread needing a new car). Covered downpayment on my house and cash for a nice shed that matches the house and a fence so my kid can play in the back yard with no issue.
Invested low 5 figures into myself taking a year off and now I am getting serious about the 401k at 41. And I am ok with that.
I never worked at a big tech company and I covered my mom's down payment and appliances and new carpet and part of her move for her to move close to me. Dad died when I was 11 so I am all she has and she was a public school teacher so she's on a small pension.
We all walk a different life and I know people that make my entire life savings in a year but I will eventually grow a retirement to get me through 10-15 years and then it will be what it will be. (Maybe a tank of helium and bag)
Sure, but we're not talking about people who have no savings. FIRE people have huge investment portfolios while being frugal with their spending, and understand the risk of keeping 5-10% of their total net worth in cash equivalents (not dissimilar to having insurance).
During the dot-com crisis. Nasdaq fell around 78% from its peak and S&P by around 49% so it isn't unprecedented (ironically has both aspects of being both tech and are within the same time-era)
It created an actual recession albeit thankfully short one for the case of dotcom (sadly not for 2007) and a really recessionary environment which causes unemployment and just straight up fear and panic.
I do understand what you are talking about and overall in long term, perhaps things flatten out but atleast speaking financially so, its better to be on a smooth sailing road rather than insane ups and downs with retirement money if preferable.
> I think most people just retire at a certain age instead with risk spread across decades.
The issue in my opinion is with people near that certain age you mention and who retire in the time during boom just before bust. They would then get the 50% hit on their savings instantly with an recession/inflation/unemployment environment which in my opinion might be genuinely devastating.
(supposing that they had their investments in stocks, I wouldn't consider that any retiree would have all their money in stocks but there have been some other comments which show a sizable amount, @kipchak's comment shows 50% stock for retirement. so a 50% shock on top of that could lead to a wipe out of 25% of your retirement fund which is honestly still pretty crazy.)
This kind of metric is always used to shock and awe in pop media when talking about the GFC, but it's not how actual investment works. In practice most investments are DCAed.
No person puts all of their retirement savings into QQQ or SPY at the peak and sell it off at the trough. Instead folks drip their savings into their weighted portfolio and withdraw money from their weighted portfolio as expenses accrue. Now obviously the GFC was a huge deal, but this sort of facile understanding of stock markets always leads to big misunderstandings. There's a reason Monte Carlo analyses of these events are used to model these scenarios.
(Though I imagine there were many people who tried to re-balance their portfolio into a less equity-heavy model abruptly during the GFC and based on equities performance at the time, it was probably the right move as long as taxes were taken into account.)
> (supposing that they had their investments in stocks, I wouldn't consider that any retiree would have all their money in stocks but there have been some other comments which show a sizable amount, @kipchak's comment shows 50% stock for retirement. so a 50% shock on top of that could lead to a wipe out of 25% of your retirement fund which is honestly still pretty crazy.)
What do you think the cost would be for protective puts per $1M of equity exposure of a portfolio on a monthly basis? "Bubble Insurance" if you will. Going 100% bonds is simply intolerable for the time window for most retirees, but an equity wipeout of this magnitude is equally intolerable.
They are probably not going to be implemented using long put positions, but a product with a similar return profile to what you're looking for is a buffered ETF. Basically, over a defined period, you agree to a maximum possible downside in exchange for a capped upside. They are available in ETF form from a number of providers.
For example, you could have an S&P 500 fund that, over the next year, will have a maximum of 0% capital losses (it can't go down), you will only get the first, say, 5% of gains that the equity index makes. So if stocks go up 20% the next year, your return is capped at 5%, but if they crash 50%, you don't absorb any capital losses. In practice, the return cap is going to be just a bit above the corresponding Treasury bill for the same duration.
These can be constructed in various different ways and institutionally I'm sure there are more bespoke ways that are more efficient from a fees/returns and tax perspective, but one way to do this on your own without going the ETF route is:
- Pick an amount you'd like to invest.
- Buy a Treasury bill for some duration. Treasury bills are discounted at the time of purchase and return the target amount when the bill matures. For instance, if you buy a $100k 1-year Treasury bill, it might cost $96.5k today.
- Now you have $3.5k in your pocket and a guarantee that you'll get $100k in a year when the bill matures. Use that $3.5k now to purchase call options or vertical spreads on the S&P 500 index to capture the upside that you can. Your return is limited by the structure of that options trade and what its maximum payoff is.
If you're willing to accept more than 0% downside, then you can achieve a higher potential upside cap as well.
The cost of insurance is carry e.g. when you buy an option you are paying for the convexity with time decay. It is quite expensive.
It is worth saying however that part of tail hedging is that the payoff is worth a lot more when everything else has tanked, so e.g. even if you (say) get 10% on your puts when the wider portfolio is still down 40% (made up numbers), you can deploy that capital at probably quite a high expected return.
It would cost an extreme amount. The only reason to do something like that would be to defer capital gains into retirement while protecting your position.
You can use a collar for this at somewhat reasonable cost. Not sure how rolling that would compare to just using it to defer until you can cheaply sell and buy some fixed income ladder. Probably badly.
Also, there’s no capital gains to defer if you use a retirement account, which will be a better place for fixed income anyway.
Even someone close to retirement doesn't need to go 100% bonds. It's not like someone needs all their retirement money on day 1. The part that remains in equities will continue generating dividends that will get reinvested, and recover over time.
100% of anything is a bad idea if you're going to have to draw on them any time soon. Bonds are less volatile than equity, but they're still subject to drops in value.
Sure, but a mistake I often see is people thinking that people's entire retirement savings is needed on the first day of retirement. People can and should still be invested in equities even in retirement, it's just the percentage is less depending on age and burn rate.
> What do you think the cost would be for protective puts per $1M of equity exposure of a portfolio on a monthly basis? "Bubble Insurance" if you will.
I expect that would not be a cost-effective way of attaining the risk profile you'd be looking for.
I expect there won't be a more cost-effective way of managing your portfolio risk than by simply adjusting your split of broadly-diversified equities vs bonds.
My homeowners insurance isn't "cost-effective" either but I still do it. I think the reason that investors don't is because they are greedy or irrational or both.
That was the message that I got from a financial podcast I listened to a couple weeks ago anyway.
I'd content that homeowners' insurance is quite cost-effective, because there isn't a cheaper alternative to hedge your risk.
I'm saying that for the cost of buying puts to hedge against equity downside in a retirement portfolio, for any given level of risk, you'd probably be better off just selling some of the equities and buying bonds instead.
e.g. try and find any equity-focused ETF with downside protection that generally outperforms a bog-standard stock/bond split total-market ETF for whatever measure of volatility/downside protection that you want.
I think the risk for increasing your bond exposure as compensation would be if instead of a low growth/low inflation scenario (Bonds do well) there's a low growth+high inflation scenario (1940s, 1970s, 2022) and the negative correlation between stocks and bonds doesn't hold.
Yeah, but in the abstract that's just saying "if you time the market, you can beat it", and we know that generally, the only way people are able to time the market is with random luck.
And more specifically, it's not low growth/high inflation that kills bond portfolio returns, it's interest rates increasing that devalue bonds, i.e. the transition from low inflation to high inflation. So yeah, you can construct a portfolio that hedges against that... but I'd be surprised if you can do it without decreasing your risk-adjusted expected returns below a plain stock/bond index fund - whatever hedging method you use is either going to increase your interest-rate risk (bonds), or your inflation-rate risk (cash), or is going to limit your upside (buffer etfs), or is just going sap your upfront returns (protective puts).
In that sense, isn't the 60/40 or Boglehead perspective also timing the market, in the sense that you are betting the regime of the past will continue into the near future?
To me the diversification hedge options (say GUNR) seem like they are helping you get closer to regime neutral. Or in other words you are giving up returns to cover more macro scenarios and betting less on what the future looks like.
> What do you think the cost would be for protective puts per $1M of equity exposure of a portfolio on a monthly basis? "Bubble Insurance" if you will. Going 100% bonds is simply intolerable for the time window for most retirees, but an equity wipeout of this magnitude is equally intolerable.
Investment companies have to remain profitable or at-worst neutral as such they would generally charge a decent bit of money for this type of setup. (If they end up having too big of losses then perhaps it could be similar to the the 2007 Banking/Investment companies crisis.)
Generally speaking I am not a financial advisor but you can take a look at international index funds/ETF's in general which have less exposure to AI in general.
and you can follow the age rule created by Mr Bogle where you have (age)% in bonds and (100-age)% in stocks, so at 70 you have 70% bonds, 30% stocks.
So again taking the example of dot com bubble, International Index funds fell from my understanding 30-40% and suppose that you had 30% stocks and 70% bonds.
So that would only have a 30% times 30 % which is 9% which perhaps might be more managable as compared to the previous 25%. There might be some other strategies as well which can help in diversification
Take SPY at a strike of $738, per lot of 100 that's $73 800. Take 14 lots, give or take, to make a cool million.
SPY260821P00738000 (OCC symbol: PUT on SPY expiring the 21th of August 2026 at a strike of $738) is $12.20 as I type this, so $1220 per lot. So $16 800 to protect for a month. So $200 K per year.
A solid 20% yearly, unless my math is way off.
Now of course you can buy, instead of a PUT, a PUT debit spread, or you can buy further from the strike, or you can finance or partially finance your PUT or PUT debit spread with a CALL you'd sell (turning it into a covered strangle) etc. That's not the point of this exercise though. And anyway I doubt many retirees have the know-how to do that.
In any case it's well known that the costs to hedge are extremely high.
In 1929 those who had 10% gold for example "only" lost 25% overall: gold has value since thousands of years. My dumb thinking is that if gold has value since thousands of years, there's an extremely high probability that it'll keep value for the few decades I've got left at most.
A more sensible strategy is probably to protect only against large down moves, so get OTM puts, and then longer maturities (like 1/2 year or so), then rotate them every quarter.
ATM options cost approximately 0.4 S sigma T^0.5 (do a Taylor expansion of the "N"s in the Black Scholes formula), so indeed, for current index vols of about 16% we are talking 0.4 * 16% * (1/12)^0.5 = 1.85% for a 1 month option, and 12 of them indeed cost 22% of your portfolio. Not a good idea.
However, if you hold the options only half the way to expiry, you lose only 1/4 of the time value. And if you buy OTM, you have convexity coming your way on the way down.
Lastly, index vols were very low (until yesterday, ha), as so many firms entered the dispersion trade: they wanted to go long dispersion (some firms do well with AI, some lose out), so short correlation, therefore long single stock vol and short index vol. Which means you could buy index vol (ie protection) quite cheap.
Inherited IRA's, if you aren't the spouse, have some pretty strict draw down rules.
As the boomers die off - if they have these accounts - their kids are quickly going to be forced to liquidate them over the course of 10 years. With some of them having to sell a chunk annually.
NVidia makes up 7.5% of the SP500. If it lost 50%, it would be a 3% loss for the index. The concentration is bad, but it would not cause a drop of 50% retirement funds by itself. If you take an all world index, it's even less.
Still, if NVidia lost 50% of their market share, we would probably see a big collapse of the stock market.
EDIT: to note, the top ten companies in SP500 make up an unprecedented concentration but they're not "mostly AI".
This is what caused the 08' crash. Everything was all tied together so as one massive bank failed it sent a cascading ripple effect through the entire industry which became a sort of black hole that took down many seemingly stable, profitable banks with it.
A risk in this situation is that in names that are dominated by passive flows there is a pro-cyclical effect where because the name is valued in terms of the overall index but is also part of said index that you end up with a positive feedback loop - which will eventually be arrested by speculators.
An AI collapse would represent a generational buying opportunity for companies like Meta, Google, and MS. It would be bumpy for a bit while things unwind, but eventually all this FCF they have been dumping into AI would start dropping to the bottom line instead. It's like when Meta stopped dumping money in Reality Labs, but on a much larger scale.
For it to be a buying opportunity would require the mega corps to continue growing post bubble pop. This is questionable given how large they already are.
And a lot of their apparent growth post 2022 is AI, but most likely at subsidized, unsustainable prices. So demand that isn't real.
Plus apparently at least for Google, but from other news sources I've seen, at least Amazon and Oracle have basically mortgaged their future in other business units to fund AI, so it's likely many of these other business units will underperform (or already are).
So lots of new debt, unverifiable growth that could be shady, coupled with a slow down of their other businesses could be a really bad combo.
I have this cheap B movie in my head with a primitive people living on an island. They compete in hunting, fishing, building boats, houses, cutting trees, growing crops etc they use sea shells as currency. Someone finds a spot with countless sea shells, 95% of the population spends their days digging up more and more. Almost everyone is insanely rich, everyone except from the dumb people still hunting, fishing, building boats, houses, cutting trees, growing crops etc
Isn't that considered a likely case? I always assume that my sp500 holdings are worth roughly half of what they are (and base retirement and spending decisions on that number). and most financial advisors will tell you future returns of sp500 for 10 years out will barely keep pace with inflation, if that.
I don’t think concentration risk is itself overly concerning. The nature of a market cap weighted index means it will always be heavy on whatever is currently trending. You’ll certainly be hurting if your plan is to retire at the top of the market with just enough, as the inevitable downturn will hammer your portfolio down into not enough. So invest until you have enough to handle volatility or a lost decade with a dip and slow recovery.
For those who stick to a meaningful asset allocation (e.g. 60/40, 80/20, etc), this does not pose significant problem -- they would not be buying much stock in the last 3 years. Instead, they would be buying mostly fixed-income. Probably mostly in 401k/IRA accounts.
There is no data showing that high concentration is bad in an index.
No correlation with future returns.
On the other hand the world is leveraged to insane levels not seen since world wars or global recessions.
At the same time yields are low while inflation is high.
There is definitely a high level of risk in the financial markets.
A risk nobody, especially politicians, want to look at, because it would unavoidably lead to some major pains, so procrastinating until it's unavoidable seems the way to go.
The problem some have pointed out is that these companies are such a huge portion of the market right now.
The sound advice for the past decades has been, just invest in a low-cost ETF tracking the S&P instead of picking stocks to minimize risk and invest in the market broadly.
So a huge number of people have done that, believing they're diversified, while tech makes up 40% of the index.
Yes you could sell your S&P and find things to invest in least likely to be impacted by a potential bubble, but your average 9-5'er with automated contributions to their 401k is probably not sophisticated enough to do that.
And that's assuming only these companies would be affected if there was a massive draw-down in tech/AI related stocks. We haven't really seen a situation like this before, so it's not easy to predict what effects there might be in the broader economy.
no one that needs to rely on their investments for their actual retirement still has them in equities. theres a reason target date funds automatically adjust asset allocation as it nears its target date. you should be in majority bonds and cds well before your actual retirement date.
That is an overly conservative approach that sacrifices a lot of growth for not much more safety. It also exposes you to inflation risk, which is a significant concern these days.
Most people in actual retirement I know do something like keep ~2 years of cash in short-term treasuries and everything else in equities. That gives you a lot of buffer to time-shift equity drawdown, which is the main risk with equities, while retaining almost all of the benefit of equities. Simple and relatively robust.
i dont think you want to ever be in a position where you arent making money and your net worth could drop 50% in a year. but hey, if you want the risk go for it i guess.
It literally doesn't matter if drops 50% in a year. That is a paper loss and you have years worth of cash you can spend while waiting for it to recover. If you panic-sell at the bottom of that market then that's on you. It isn't necessary in order to pay the bills.
What you propose takes on a huge amount of inflation risk. How are you hedging that risk? A guaranteed yield doesn't mean you aren't getting poorer. Obsessing over one type of risk and ignoring another isn't rational.
Reducing variance of net worth has a very high cost. Over-indexing on that singular property, particularly when most people can afford some variability, is a recipe for relative impoverishment.
It’s probably not even a good idea to try and defend against the bubble by switching up your stock allocation. After all the whole reason passive investing works is that active investment rarely beats the market and if you’ve just been in SPY the whole time it’s unlike you have any edge to gain by switching to an active strategy every time fear creeps up
The employer selects a financial company to manage the 401k. When you switch jobs, you can roll the 401k from the previous employer into the new one, or into an IRA (Individual Retirement Account).
Usually the financial services company will offer several options: more aggressive/high risk, or less aggressive/lower risk. Most people will just go with whatever is the default option.
So much of the American S&P 500 is dominated by handful of companies that the risk is not that easy to avoid. If or when the AI bubble pops, it's going to take down a lot of the economy with it. You can direct your retirement savings into the lowest yield/lowest risk assets offered by the firm, but you'll forego whatever growth happens in the mean time.
Will the bubble pop next week? Next month? Next year? Who knows. Timing the market is incredibly difficult.
There's a famous quote, attributed (perhaps apocryphally) to John Maynard Keynes: "The market can remain irrational longer than you can remain solvent."
The whole idea of a pension fund is that you don't need to time the system it is the system.
Like my country pension scheme. It went through ups and downs for a hundred years but has always come on top. All you need is a long horizon and a trillion dollars and you basically can't lose.
retirees arent suppose to have their active retirement funds in stocks dude. Any financial advisor with a brain would not make such a ridiculous asset allocation error.
Regardless of whether it's a good idea, it absolutely happens and as a result would impact retirees, both in individually managed accounts and target date funds. For example here 70+ are 45% equity.[1] TROW retirement 2020 funds are about 50% stock, for example, and only decrease to a floor of 30%.
Yeah, hence all the talk about forcing "public" ownership. Becomes easier to justify a bailout when you create some legal fiction compelling the government to do so.
Yes of course life insurance and pension funds are going to buy this debt. This is the highest quality debt that's out there. If you don't want life insurance and pension funds to buy debt from big tech companies because you believe it's too risky, then you believe that bonds are just too risky in general.
OK, wait a minute. Elsewhere in this discussion, people are saying that only a few of these AI companies are going to survive. For stocks, that can still be a reasonable investment - low odds, but still a positive expectation value - but for bonds, it's terrible. You're paying me single-digit interest when there's only a 20% chance that you live long enough to give me my principle back? Get outta here. Literally nobody should be investing in such bonds.
FWIW, a firm can go bankrupt and the stocks be worth zero with the bond holders being paid 100%. In fact, that's sort of the goal and "ideal" scenario (ideal given bankruptcy, of course, which in turn is not ideal).
In the real world, recovery rates for corporate bonds are between 30% to 70% or so, depending on the seniority of the debt and the collateral.
If big tech bonds are a terrible deal for investors at 8%, then Google or OpenAI is getting a screaming deal by raising debt at that rate. Saying nobody should be investing in these bonds is very similar to saying that big tech should raise more debt.
Agree with you on that. I just wanted to point out that Big Tech debt being a bad purchase for things like pension funds means its a good deal for big tech. Everyone else in the thread seems very negative on big tech debt for some reason. You can't have it both ways.
> When these fail, it will become everyone's problem.
Debt is senior to equity. For private credit to start taking haircuts, the equity has to have already gone to zero. At that point, this will already have been everyone's problem for some time.
Are you suggesting that holding private credit assets is relatively risk free?
Equity is a risky asset, so equity being wiped out should not be a surprise to anyone, but life insurance and pension funds failures is indeed a public problem.
There's a wide spectrum of 'private credit', and it varies from low-risk to quite high risk, depending on the debtor. In the case of "AI Companies", their debt is low-risk, but many are creating special-purpose-entities which will build and own some or all of their newer datacenters. Those datacenter companies are issuing a great deal of somewhat risky debt; with the exact level of risk depending on the off-take agreement.
You probably meant to say that practically, high leverage tends to leak into companies of public interest. For example, when high net worth individuals start trimming their private credit holdings, which eventually end up with insurers. That is why the regulators have to watch carefully that it does not happen.
No, I meant that having a lot of debt puts you in a position to be more vulnerable to any kind of negative outcome. Intuitively, this seems to hold true across the spectrum from the personal level to the government level.
If a person has a lot of debt and no savings, and they lose their job, then they will find themselves in trouble a lot faster than someone who owns their home and car and has 6 months in a savings account.
If a company has a lot of debt, they might find themselves in trouble with credit rating agencies as soon as they have a bad quarter. Or they might have cashflow issues if rates increase. Both of these can lead to an accelerating negative feedback loop.
Governments (at least those with fiscal independence) have a unique set of tools to work around this situation, but they too can struggle with high debt loads acting as a drag on future prosperity.
Debt plays a critical societal role in allowing new production in advance of revenues, but it can also be a dangerous trap.
These AI and tech companies are priced as if they are still running a capital-light, 0-marginal-cost SaaS business. That's no longer what's happening. This economic engine makes up a substantial amount of both the value and the growth in the American stock market.
If there's a loss in confidence, high leverage will make things fall faster. This could be infectious. Not just the AI and tech companies, but the whole market might suffer.
> As long as this debt does not make it into life insurance and pension funds, we are fine.
I think for small to even large numbers you are correct, but given how yuge this debt amount is a broad-based default will probably cause a contagion. I will not predict how far and wide.
You say this as though every company doesn't take on debt, and all debt isn't a risk. I'm sure you have some much riskier debt than ChatGPT already in your portfolio, and interest rates are adjusted by relative as judged by the market. I'm sure some debt will fail, but certainly all of it won't, and while anything could cause a market crash saying "when these fail" holds a lot of incorrect assumptions.
> As long as this debt does not make it into life insurance and pension funds, we are fine. The trouble is that private credit is taking control of some life insurance companies and off-loads this debt to these. When these fail, it will become everyone's problem.
Three things:
1) at least SpaceX is already in pension funds "thanks" to NASDAQ and MSCI relaxing their rules. Everyone who invests in NASDAQ or in MSCI World has SpaceX exposure, and assuming the bonanza lasts for 11 more months, so will everyone who invests into S&P 500. In addition NVIDIA, Google, Microsoft, Oracle and Amazon all have been in pretty much every investor's / pension fund depots. No matter what, everyone is going to get fucked when the party crashes, and it will make 2007 look harmless by comparison.
2) The debt of the AI companies is bad enough, but there's all the downstream credit as well, chiefly construction companies and public utilities that are undertaking absurd amounts of buildout. When the party crashes and the demand stops, there will be a lot of construction companies and possibly even a few large utility companies that will be unable to service their debt (because no datacenter means no income) or have to hike rates even more than they already are.
3) All this debt and speculation unwinding will cause an economic downturn. Most of Europe already is in or near recession territory, and the US would be in a recession if it weren't for the wash trading and circular investments artificially propping up the GDP. But unfortunately, with the exception of infamously austere Germany, everyone else has already fired all the guns during 2007ff and Covid, and all the ZIRP money never got slowly deflated out of the market, which means this time there will be no government help possible, it will be a hard crash. No way out of that one.
Do they? Is a company with $200 billion annual revenue and earnings (EBITDA) of $100 billion having $420 billion of off-balance-sheet debt really staggering?
In many other industries that would be a perfectly normal amount of debt to have. It's only unusual because we are used to tech companies having so much cash on hand they don't know where to put it
These companies have valuations reflecting a debt light business. At a minimum, 420 billion in debt is enough to change the stock price by 10-20%. If the company plans to add another 400 billion in debt you need to give it the side eye.
If 50 billion in revenue is from other companies debt spending… then You have a problem.
> These companies have valuations reflecting a debt light business.
Sorry, but this doesn’t make sense. The valuations of these companies reflect their growth.
In finance there’s nothing inherently virtuous about a “debt-light business”. It’s all an allocation decision based on how you expect to grow relative the cost of that growth.
Try and reframe it: are cash-heavy businesses given a premium?
Growth of what exactly? AI doesn't have the normal leverage factor that software usually does where a simple codebase can drive a billion dollars of subscription revenue with 90%+ gross margin. There's no eventual state where the capex is in place and the margins flip. They're in the datacenter business, which is real estate, with tenant improvements consisting of rapidly depreciating/obsoleting equipment. These margins have no path to flip around and allow for a huge amount of revenues to flow through. If they start testing price sensitivity in the way that would justify the valuations, it will just accelerate the transition of AI from datacenter to local.
>Experts continue to warn of an AI bubble, noting the enormous and widening gulf between company valuations and their comparatively measly profits
I think your analysis assumes current closed SOTA models have no moat, which isn't a given considered the protectionism the Trump administration is already considering for US AI firms.
My point was more of an exercise to point out that finance is about mutating resources. A lot of cash can be a good thing or a bad thing. Same for debt. There’s nothing inherently bad about levels.
> The valuations of these companies reflect their growth.
If you look at was happening around 2022 - 2023, their growth was slowing down. Lots of the new growth is based on AI but since almost everything AI based is subsidized to hell and back, we have no way of knowing yet if that AI demand is real at unsubsidized AI prices.
There was an article on Hacker News just the other day explaining that no one knows what the value of these used GPUs are going to be and that people underwriting are just, essentially, just guessing.
Bob spends $5 on Alice’s lemonade. Alice spends $1 on lemons from Jack. $15 on wood for the stand from Jill. Jack spends $5 on pesticide from Bob. Jill leases the plot for the tree from Jack for $10. Jack spends $5 on lemonade from Alice. Jill spends $10 on lemonade from Alice. Alice spends $3 on more lemons from Jack. Jack builds a stand to sell lemons with $20 in wood from Jill. Jill leases more land from Jack.
Take the circular money and add even more spend, even less profit, and somewhere in the background is a money tree that is about to die.
To be fair to the author, they have no background in finance and work at a site that knows that anti-AI stories get a ton of traffic. The entire site is now just doom-and-gloom clickbait headline after clickbait headline.
Which routed those funds through the economy's financial circuit and caused ZIRP, inflation in asset prices, and the evaporation of risk premiums.
But the pendulum swinging rapidly to the other side has routed all those funds through the real economy, caused goods inflation, and looks like it will crash the economy.
There are many reasons to use subsidiaries for things like this, like to invite outside investment, ringfence risk, cede operational risk, and many more.
This is all like CFO 101 type stuff, and not nefarious. I find it amusing that people assume the worst for things they understand little about, rather than trying to learn.
Maybe the best way I can explain it to the programming crowd is this: imagine how ridiculous it would sound if outsiders were saying that Google was on the verge of collapse because its codebase has billions of lines of code.
> I find it amusing that people assume the worst for things they understand little about, rather than trying to learn.
I don't know if you intended this to be exclusive of the opposite, but I do often find actually the opposite thing is true. That is people tend to be wildly, inappropriately optimistic for things they don't understand well and more likely to be skeptical in the details of things they do.
> There are many reasons to use subsidiaries for things like this, like to invite outside investment, ringfence risk, cede operational risk, and many more.
Agreed, there are many valid reasons to have subsidiaries of course.
The issue is rather with the fact that we are having the assumption that the threat is outside rather than inside and so systems with mechanisms to be less transparent are far more prone to this risk.
It has been academically shown that most corporate/ white paper scams aren't done from outside but rather from inside the company itself through genuine structures and incentives which go wild. (Something shockingly visible in AI space), Enron's example also comes to my mind.
The best way I can explain it to the programming crowd is this: Imagine how ridiculous it would sound if you are ranked with how many lines of code you ship and how much token you would spend and so we end up with tokenmaxxing and hearing stories about people literally burning tokens in innovative ways because they want to get on top of a leaderboard. Oh wait, it is already happening or has happened.
Generally speaking, It is preferable to be transparent with debt and other things rather than not especially so for long term because sooner rather than later you might get caught. Obviously if there is some stuff which prefers from ringfencing risk then sure.
Also as I spoke of Enron, but the exact structure was used by Enron as well as @fzeroracer discusses in their comment[0] so it might be a genuine question.
"There are many reasons to use subsidiaries for things like this, like to invite outside investment, ringfence risk, cede operational risk,..."
In other words, they are intentionally deceiving investors and hiding the risk from them. That does not sound like CFO 101, it sounds like fraud. But if grift is your business, I guess those are as valid reasons as any.
"Companies disclose such future debt not in their balance sheets, but in annotations to their quarterly financial statements. This is a legitimate practice under accounting rules, but may make it difficult for retail investors to recognize risks."
"Today's AI industry is partly supported by demand generated by circular investment. Nvidia and tech giants invest in data center operators and AI companies, with that money then turning into GPU and cloud usage fees. Actual demand is difficult to see, increasing the likelihood of over investment in data centers."
Retail investors shouldn’t be investing in individual stocks outside of industries they understand well. Following GAAP is the definition of not hiding the obligations.
Maybe GAAP should be changed? Professional investors have the time to comb through the small print. These off balance sheet activities seem designed to bamboozle the small investor.
The essence of the Enron scandal was the perpetration of accounting fraud. It took down Arthur Andersen. We went from the "Big 5" accounting firms to the "Big 4" because of this. They very much violated GAAP.
>but may make it difficult for retail investors to recognize risks
Ok, so just to be clear: institutional investors are (a) the ones investing the large proportion of capital in these companies and (b) are well equipped to decipher financial statements. The idea that any significant amount of retail investors have even seen a financial statement, let alone is making decisions based on their analysis of a financial statement, is laughable. And, even then, if someone is putting in that effort, then presumably they're not going to get tripped up by a legitimate practice that they ought to specifically be looking for given the context.
And all of that doesn't even take into account that every article discussing the financials of AI firms over the last half a decade have been pointing out these dynamics. We're literally in a thread discussing this exact dynamic. Retail investors are certainly far more likely to make investing decisions based on these kinds of articles and threads than they are based solely on independent financial statement analysis that they're conducting. At a minimum, I think anybody taking any of this seriously has gotten the hint by now.
If it comes out that these firms are committing straight-up fraud, then there will be a lot more to discuss. But, as of now, the sentiment is that these firms are behaving perfectly legitimately, just abnormally and maybe irresponsibly compared to their historical context. If an investor isn't equipped to handle this kind of analysis under these circumstances, then I'm not going to feel too bad if they lose their money "investing" when they're really just gambling.
they aren't trying to hide anything, those are accounting rules that are applied to the letter. I'm feeling like I'm taking crazy pills whenever I see this stuff about AI, your hate boner for a specific technology shouldn't trigger you saying things that are provably untrue.
the downvotes are just further proof of how stupidly this kind of discussion is handled on hacker news. It's demoralizing the lack of quality this community shows lately.
Datacenters that have not and might not be built to accommodate for future AI demand that may or may not grow to the extent or as fast as the companies anticipate.
Whether the datacenters will end up profitable is a different question than whether they are a real risk for the business. This whole thing could be a massive mistake and all the big tech companies will come out the other end just fine. I think the executives at these companies realize that, this whole build out is a massive case of FOMO. No one wants to be microsoft missing the boat on mobile and theyre willing to flush money away to ensure that never happens.
Are they really "trying to hide" this debt? I think it's pretty common knowledge that a lot of these companies are using debt/bonds for funding. The debt not showing up where the author wants is a reporting formality not an attempt to hide it.
I think the point is that it’s not showing up on the standard financial filings. If you were to pull the annual reports for these companies, you wouldn’t see it. That doesn’t mean it’s impossible to find it. Obviously, it is otherwise the article wouldn’t have been written. But you’re going to have to go the extra mile. To be clear, none of this is illegal. It’s just covered in the advanced CFO accounting class.
It's not hidden at all. Financial blogs very accessible to laymen like Matt Levine's Money Stuff have talked about this structure months ago. If you are an investor and surprised by this news you weren't sufficiently prepared and shouldn't have been investing in the first place.
A legitimate reason to do this is so that you can sell it all off or restructure it later without it being intertwined with your main books. So, for instance, it you’re an AI company, your main business is developing models and selling inference, but you need data centers to do that. You could buy those data centers yourself, or you could create a data center subsidiary that would take on debt and build your data centers and then rent them back to you. In the future, if you decide you don’t need that capability any longer, you just sell the subsidiary and you don’t have to tease apart the P&L and personnel to do it. It’s clean and separate because it was structured that way up front.
Now, that’s not to say that there aren’t other benefits of having a separate balance sheet related to moving numbers around. But it doesn’t have to be nefarious.
If you open the annual report and look at the numbers they’re citing, they’re adding lease payments from uncommenced leases and future purchase commitments. Accounting rules prohibit either of these as being listed as debt. It’s also not possible to agree to a future lease without reporting it like this.
Generally speaking after commencement the former will become both liabilities (for a smaller amount than the number they listed due to discounting) and an asset (representing the asset of the right to occupy the lease)
The latter will generally become some sort of asset
I have no idea what the people going on about subsidiaries could even possibly be referring to as it relates to this article, this is just lease accounting
The structures theyre using reduce risk. The 2 big moves here are 1. agreeing to lease a datacenter from developer instead of building it yourself and 2. using subsidiaries to finance and own the datacenters. Both these moves exist so that the company isnt left holding the bag if something goes wrong with the construction. They dont need to worry about zoning and construction because their partners are doing that. This also means the companies dont need to take out debt themselves, since these agreements dont count.
Take-or-pay contracts appear as "contractual commitments" in 10-K. They are not hidden. That's the way they are reported in all industries where take-or-pay contracts exist. There's nothing nefarious about it.
Yes, the contractual obligation shows up, but not the debt the subsidiaries took on. You have to follow the entity structure and look at their books for that piece. And it’ll show up as a different accounting category, “services rendered,” for instance, not as debt repayments.
If it didn't matter, why would they bother jumping through hoops to keep the debt off their balance sheet?
In the run-up to 2008 a big factor in the bubble forming was that poor quality loans were packaged in a way to hide the risk in those investments. I'm not expert enough in finance to know if it's the case now, but we do know that clever accounting to hide debt can lead to the incorrect valuation of assets, potentially leading to financial ruin.
They're not jumping through any hoops, I think they're simply complying with reporting requirements. It's not on their balance sheet because being recorded as strait debt would itself be misleading. My understanding is that these sort of off-balance sheet "debt" is mostly in the form of deal terms that may or may not be expressed at some point in the future.
An analogy that comes to mind is when companies used to book future sales in the present. They got in trouble for this and is now forbidden. I recall reading that one deal had terms that transferred assets if certain conditions were not met. If terms-based debt should be booked now, then terms-based assets should as well. This stuff makes my head hurt.
Either way, as long as it's not hidden (and it's not for the public companies), then it's fine.
Because this isnt actaully debt. Almost all of it is agreements to pay for completed datacenters from developers. Its just a way to offload operational risk when constructing datacenters. If the construction somehow fails theyre not stuck with the bill.
You couldn't just characterize them that way, they are using literally the exact same setup that Enron did in order to hide the massive amount of debt and liabilities they had that eventually sunk the company. People jumping in to defend this as being totally legit or not-fraud seem quite insane to me: companies should not be trying to hide these things to pump up their stock prices or to entice investors that otherwise might not see it.
It's an interesting counter to the efficient market hypothesis. "Everybody" knows about this debt. It's in the most public news outlets there are, and the word has been getting around. It's about as secret as Taylor Swift's concert schedules. Any serious investor knows about this debt.
And yet... the companies do this because it works. If they held this debt on balance sheet, the sensible assumption is that their stock values would take a rather substantial hit, and they could face other sorts of scrutiny. It works like pull-in sales works. It works like channel stuffing works. It works even when everybody knows that's what's happening. It works even when everybody knows that everybody knows that's what's happening.
There's something broken here. In an era where AIs move millions upon millions of dollars around because of some blip of a headline somewhere and every AI improvement of any kind is immediately scrutinized for its ability to be used by the financial system, it is completely incredible that the system doesn't know and react to these things. I'm not sure what's broken. My first best guess would be the increasingly mindless investment via index funds in pensions and the slow-but-ever-increasing ability of financial engineering to abuse that mindless investment, but I call that a "guess" for a reason. Possibly there's still a lot of really stupid AIs hooked up to the stock market that just look at the most basic of numbers and are easily fooled by this? But who is running such a precise combination of "huge" and "stupid" on the market? I dunno. Something's weird here.
> In an era where AIs move millions upon millions of dollars around because of some blip of a headline somewhere
[...]
I'm not sure what's broken.
I think there is some sort of collective collusion. Like a school of fish moving. If there is an external stimuli the price can rise or fall eventhough it doesn't make sense from a 10y dividend perspective.
One of Meta's SPVs building a data centre for them, Meta own only 20% of it; 80% is owned by other investors. That's the issue here; the market thinks that only these handful of money-go-round FAANGs/Mag7 companies, are exposed but analysis shows that SPVs are spreading really significant risk to many more investors.
Is that why China pushing for open weight models? If these models are on par with the quality of the proprietary ones, the US stock market will go south fairly fast, imho.
If you're talking about dodgy accounting at hyperscalers, a larger worry might be that they are overstating profits by depreciating their assets (such as datacenters and CPUs/GPUs) too slowly.
Estimates are that this could overstate profits by tens of percent. (However, this only allows earnings to be "pulled forward" - sooner or later the servers must be written off and the accounting catches up.)
Meta makes $60 billion profit a year and is still crazy bloated. $420 billion in debt legitimately is not an issue for them. The only companies with actual problems are oracle and spacex
Meta making 60B a year doesn't make this any less scary.
If Meta put every cent towards their debt, it would take at least 6 years, assuming 0 interest and 0 new debt. The interest alone in the next 5-10 years likely would push it close to 1T debt.
I counted all 27 stories on Futurism's frontpage and every single one was "AI bad" "Elon bad" except for 1. a story about Trump's diarrhea 2. a story about lettuce at Whole Foods
If I were nearing retirement and had a decent pension pot where I could control it in fine detail...I would be diversifying away from tech stocks and holding some cash for immediate needs. There probably won't be much time when it unravels...I wouldn't be over exposed to the Nasdaq 100, for instance. Although you could probably pick some AI safe companies out of it.
The real problem will be figuring out where all this debt is
The problem is 1) the Nasdaq 100 is where the majority of gains are coming from, and 2) it very well might be another 3+ years before anything unravels, if it unravels at all.
If you're truly at retirement, absolutely cycle out. But if you're still young and trying to maximize portfolio growth, it's not obvious that a non-tech strategy would yield better returns.
Another thing to remember - rebounds are highly compressed. If you try to get out ahead of a downturn, you will not only likely mistime your exit but also miss the rebound. It can keep going down or stay flat for sometime. But when it rebounds, it does so quickly [1].
Don't try to be too smart. Especially if this is not your full time job. The market is not rational. Dollar cost averaging and proper risk allocation is the way.
You should have at least some money outside of tech to hedge though. There are "everything but tech" mutual funds and ETFs, and I keep about 15% of my investments in there.
Oh, that's crazy when you buy every single piece of computing hardware that's ever been made in the last five years, for inflated prices to preempt competition, then sit on it because there isn't enough electric in the entire world to power it, do you think that would be pure profit?
Article appears to be conflating big tech companies that print money with AI startups like OpenAI and Anthropic.
After the opening paragraphs about the accounting practices of meta, Microsoft, alphabet, etc - which, it should be noted are not “houses of cards” and earn plenty of money - the article quietly transitions to
> Experts continue to warn of an AI bubble, noting the enormous and widening gulf between company valuations and their comparatively measly profits.
I think hoping people will apply the “house of cards” logic by that analyst they quoted to the startups, when instead the analyst was talking about the megacorps’ accounting.
The lease agreement does become a financial liability and corresponding asset when it commences. In this case the article is adding leases that haven’t started yet, so GAAP accounting rules prohibit it from being listed as a liability. As a result it’s disclosed in the notes. nb the typical US investor way to analyze it is to still not treat operating leases as debt, since the rent is already reducing the EBITDA (a proxy for cash flow before debt items are paid). The other way to do it is you add back the rent to your cash flow proxy and count the leases as debt. You end up in a similar place.
For the last 20+ years i was really relaxed about tech industry - the fat cash positions maintained by the companies as a lesson from the early 2000-s crash (when companies were running out of cash and failing or severely downsizing, etc.) almost guaranteed that the tech will easily weather any trouble times - and that was clearly demonstrated in 2008 and in 2020.
Now i'm starting to get scared - these cash positions are basically gone if matched against the new debt and various creative financing taken on for the AI buildouts. That looks a lot like 2000 - very promising tech everybody is piling money in. And i'm sure that several years later it will provide several decades of tremendous success like Internet did in the last 20 years. It is just those few initial choppy years of the hockey stick trough that we may be coming upon and that many may not survive not having that fat cash position anymore, and thus those years may happen to be very painful for the tech and for the whole economy.
25 years ago there were a lot (estimates put even as high as 95%) of dark fiber left as a result of the dotcom buildout and crash. It was successfully put back into action several years later. I wonder whether we will have similar dark datacenters in a few years.
Really feels like the govt + industry, through protectionism and fear-mongering, are propping up a "Too big to fail" situation.
Long term, I think the best thing the economy could do is to make training on model outputs fair-use, as suggested by Ben Thompson[1]. Short of that, the companies should enter into distillation agreements with other US labs to let them make near-Fable models.
As it stands now, the companies want to hold all the upside. While also being culturally so safety focused - "only we have the right to regulate this" that its IMO counterproductive to US leadership in AI.
A different universe where X.ai, Meta, and everyone were also building Fable competitive open weights models - because they can distill - would probably be better for the US long term. But there's too much capital on the line right now behind OpenAI / Anthropic for them to do this.
Well that's a big of a separate issue. You aren't violating copyright law to use the output of one LLM to train your own, but that doesn't mean they need to let you do it. You likewise aren't violating Apple's copyright if you use iTunes to make a missile, but Apple doesn't have to let you do it. (Example chosen because that carveout is/was in their EULA)
Something doesn't quite smell
right about this story. Here's a key paragraph from the Nikkei story that this Futurism story re-tells:
> Companies disclose such future debt not in their balance sheets, but in annotations to their quarterly financial statements. This is a legitimate practice under accounting rules, but may make it difficult for retail investors to recognize risks.
Does that justify a "tries to hide" headline?
This is also one of those cases where the headline is free but the details are behind a paywall.
I do think the story itself is notable, but I expect the discussion is going to lack some nuance.
Futurism has a pretty strong anti-AI bias. Both article titles and the articles themselves tend to be editorialized. On a scale of zero to Ed Zitron, they're somewhere around the middle.
I don't treat it as a reliable publication when it comes to anything AI related.
Wouldn't improving LLM efficiency make them even more useful across the board, then they can enjoy the nice economies of scale?
The plan is to have LLM working completely autonomously, in that case, the more resources you have, the better.
Perhaps people will use local LLM to ask questions, or coders use them for their personal projects, but that's not where the real money is.
The problem is that if the AI companies pass through the actual costs they're incurring, then charges to those companies will >10x.
If the companies don't see that kind of value (so LLMs don't become dramatically better in some kind of quantum leap from where they are now), they won't want to pay those costs. Already, most AI projects in corporations tend to fail.
If the efficiency of LLMs gets 10x better, then either corporations will "private cloud" their own AI or start using competitors that aren't carrying those kinds of debt loads from the "gold rush" phase.
If it's efficient enough you just run it all locally & screw all the rent seekers who want to tell you how you can't use their model & who will sell and misuse all your data they capture.
Truly, people have been saying this since 2017 and the Apple Neural Engine has proven them wrong time immemorial.
Apple's own desktops, with the fastest Apple Silicon GPUs and TDPs 20x higher than an iPhone still can't compete for real-world datacenter use even with RDNA clustering. Apple's GPGPU architecture is behind AMD at this point, there's a reason why Apple Intelligence is critically reliant on Nvidia and Google to provide inference backends.
Given how heavily subsidized it is at the moment, the efficiency isn’t as important. Typically efficiency would give you more at lower cost, but with token prices so removed from actual cost that plays less of a role here.
If the inference gets an order of magnitude cheaper, labs can afford to subsidise an order of magnitude more usage for the same marketing cost. So that part of usage will, if not accelerate with efficiency, at least still grow linearly with it. And there is a substantial amount of usage at or above true costs - everyone using a 3P harness, everyone on enterprise contracts, and everyone self-hosting an open weights model in a 3P cloud.
I assume the reference was to the Jevons paradox, as described in Jevons' 1865 book, "The Coal Question". Watt's steam engine massively increased the efficiency of coal in steam engines, which increased the use of coal fired steam engines, which increased coal consumption.
The (any!) comparrison to photovoltaics is
not acurate.Photovoltaics (PV) are primary energy producing infrastructure that produces its own fuel and is now verticly integrated into it's own supply chain, nothing other than life itself posseses this atribute.
AI, is exceptionaly likely to work in exactly the opposite fashion and take its host out as it goes down.
PV had to prove that it was truely indispensable and also prove to have realistic prospects for improvement and volume production before investments were made, and then prices came down.
AI has proven that it burns more money faster than anything else, ever.
I will admit that I am an early adopter of solar, but an AI refusenic, but still there is no reasonable comparison of AI and
anything outside of religion.
We haven't even started with a lot of things were we need a lot more compute:
Your real personal agent which knows you and helps you like "good morning elmer2, your calendar invite for dinner is today, you will need to leave at 18:18 if you want to use your normal public transport route per train. I put an alarm in your phone for you"
Agents to agents
Agentic teams.
Finetuned models for everything like Java/spanish coding model.
Very long term research like multiply hours or days or weeks and plenty of these in parallel.
I disagree in a way, part of the reason they can't really succeed at the moment is because it's way too expensive to really deploy at scale for most companies, but even for those AI companies themselves. If they can make business access subsidized/cheap the same way pro/plus/max/whatever plan are for regular users while still being profitable, this can work out. The other solution is if they do reach that "it's so super smart it's reinventing the world every day", but that one is much more of a maybe possibly one day.
What they can't do is the rug pull of pricing like Fable did, hoping for profitability while playing the "it's so super smart" card. It's very profitable, but customer will be very happy to leave for cheaper pasture and that's why the recent news about this or that cheaper chinese models make headlines.
Essentially, the rush now is "if I make it a boring profitable company I'm not worth a trillion AND i'm overshadowed that plays the singularity card even if they're bullshitting"
You do realize "subsidizing" means charging less for something than it costs to provide, right? So they'll lose a dollar on every sale, but they'll make up for it in volume? E2E is usually where the profit comes from. If they're subsidizing getting regular users on board (pro/plus/max), and they're subsidizing to get businesses on board (massive deploys), where can the profit possibly come from without a pricing rug pull?
I do, my point was answering to the "if it comes so cheap that" they would stop losing money of that, they would still need to subsidize for acquisition or some big clients or for rush times. It's the all-you-can-eat-buffet strategy.
I'm not saying I see them going that way or that I would, but at least THAT would possibly work.
Thank you for the clarification. I figured I was missing something in your meaning. Although "if it comes so cheap that..." means it will probably come cheap for other providers, and the margins wouldn't be there in the end because a price increase to take advantage of those big clients / rush times might lose the clients. I think we agree that their chances of becoming profitable don't look great.
How about we regulate private corporations so they can't take a "gamble" that's equivalent to a private company giving everyone ferraris on the idea that they will eventually all become formula 1 drivers and give back 10x the ferrari's cost?
Even better, that "gamble" will have to be rescued by taxpayer money.
Jevon's Paradox ("As efficiency of resource use increases, usage of the resource increases") says otherwise. One things become more efficient, we can use them in lots of ways that would not have been viable before, driving up usage.
The crux of the problem is models are not evolving anymore, they're iterating. Cheaper, faster, better. We're only seeing better, and that's because there is fierce competition with massive debt behind it. The "cheaper and faster" part is all taking place with local models. All of this adds up to a big red flag for a bubble.
They're obviously not taking on enough debt because I'm paying $200 per month for one AI, $100 per month for a second, a $20 "donation" to Gemini[1] paying for a service I never use just to fund its development, and yet here I am doing my own laundry, making my own damn breakfast, lunch, and dinner and manually tracking my Calories and macros, I'm putting my own damn dishes away, racking and unracking my own damn weights at home, and taking minutes to set up and record my exercise form and then take screenshots of it of key frames that I manually ask the AI's to form check (they don't consume video natively as an input) rather than have a robot do any of the above (including act as a fitness coach) because where's my household robot I can rent on a monthly payment? Can't be that expensive, servos and pressure sensors and cameras are cheap, what's missing here is that here we are and AI can't do shit for me day to day other than knowledge work and software engineering. I'd like these companies to take on as much debt as possible and rent me a robot that can do stuff for me. I have a petition for this that you can sign here if you want:
[1] I don't use Gemini for anything ever, I pay just to put my vote to them making a useful model (I know my $20 isn't much but I apply Kant'e categorical imperative - if everyone did it they'd take their AI seriously and not be in last place behind OpenAI, Anthropic, and even open-weight models).
If they continue investing in compute, memory, memory bandwidth, network infrastructure, etc. it makes a relevant contribution of progress in all of these fields which I will leverage.
A small form factor PC with 100gb fast memory and being able to run something like sonnet or opus level LLM would be massive.
I have so many things i want to do and still sitting it out due to cost.
Lots of people didn't invest in mortgage backed securities but still got screwed in 2008. When something is systemic, you don't have to be directly exposed to be effected when it goes sideways.
Is this in practice what's going to happen, or are (1) the prices going to hike (and never go down) for the consumer and (2) the memory companies will just continue doing what they already do because they're still selling their old shovels to the gold diggers?
I don't see how this will benefit the consumer, but I might be missing some second order effect?
I read somewhere that the memory companies were massivly pushed for lowest prices especially by companies like apple.
I want to hope that this money will lead to more capacity, more R&D and lower prices in the long term again.
Nvidia would have changed its GPU strategy a long time ago if the demand wouldn't be real. They still can afford the GPU prices. But memory is not a monopoly.
For memory though i do assume a lot more people and companies want a massive amount more memory than ever before. I have 64gb in my pc for a few years now, i was quite happy with that. It became a no brainer. But today? Hey give me 100, 300 and even more. I really want to run bigger LLM models locally.
If hyperscalers flop, and there’s a good chance they will, memory and disk prices will crater. They are historically the most volatile asset in tech. If Samsung, Micron et al can’t sell to hyperscalers they will switch back to consumer, because they can’t just turn off a memory fab without losing billions.
only that is not so. disk prices maybe, the memory will not be available to consumers because it's a tech that makes sense only for datacenters full of GPUs and massive power/cooling. by now all fabs have converted to it, there might be a lot of HBM capacity freed but no consumer devices that can use it. retooling all fabs to produce consumer level memory will take a lot of time if they even do it at all instead of just pushing for consumers to rent datacenter capacity directly.
all three major remaining players in the mem sector have already tried in the past to collude for memory price fixing.
this is the first time I'm rooting for chinese chip tech to reach more or less parity.
That switch will actually take a few months, technically speaking. What may delay it is manufacturers strategizing to avoid oversupply and trying to minimize their loses from all the investment in tooling they cannot longer repurpose. It will be a logistical and financial nightmare for them too.
Yes that is unfortunate for sure don't get me wrong this affects me but the overall benefit will still be bigger i assume.
10 years ago i watched a talk about the problem of compute vs. memory. Compute increased significantly while memory speed did not.
This gigantic investment will solve this problem.
So either this blows and we will have way too much capacity which will lead to cheap and mass amount of memory for everyone + cheap GPUs again OR AGI. So win - win.
There are several ways that ordinary investors and even simple pension holders could end up stuck with the downside of this.
The debt risk hidden in CDOs wasn't your debt either but if you had a pension plan, the crisis absolutely cost you money you would have earned, and in many cases pension fund values dropped by five to ten per cent within a year.
The SPV/CDO comparison being made is by no means exact, but hidden debt at this scale surprising analysts tends to cause problems. If more institutions are severely exposed than anyone thought, it is bad.
Especially since any success strategy is predicated on literally unbelievably rosy predictions.
AFAIK they have heavily relaxed the rules for IPO. Pension funds are practically forced to buy from the top-100 companies, and these companies risk crashing much more than the others.
SpaceX value is already lower than at launch. If this costs are externalized to the common public, this will be your debt.
All these companies are too big to fail, in an environment where you can buy pardons and laws.
Hell, a 3T$ crash will have global repercussion and probably partially crash many other countries, too.
Luckily so far only one index changed its rules to cover SpaceX and what the AI IPOs would need.
I don't know how specifically significant SpaceX being lower than at launch is, because actually most IPOs underperform the market and their own targets for the first three to five years. What is happening to it is not that unusual; its overvaluation is.
I do think there is a major risk here, and ordinary investors and pension holders will be hurt.
I am not sure any individual AI company is too big to fail, though probably one of the big two will be rescued, most likely Anthropic. I think OpenAI will fail, and it'll be stripped for parts. As will Oracle, who are overexposed to it.
If it crashes the global economy will crash and they will have to print money for a bail out which means another 30% increase to the price of everything
Exactly, this is how capitalism works. Let them shoot for the moon and let them fail. Worst case their over-valued assets are liquidated and continued on with at a more reasonable valuation. Just make sure they play by the rules and don't make new rules in the name of national security, ie boxing out open source.
Except this is not how American capitalism works at this scale, and it’s ridiculous to think their debt isn’t your debt when you have the entire country’s history to look back on and count the numerous government bailouts.
You could say this but the previous administration was not talking about taking a 10% share in both companies; this one is (thanks to Sam Altman's very personal lobbying of the president)
We also may be at the wealth inequality level where prices become… weird.
If there is really only a few dozen people doing the buying and the selling at the top on a weighted basis, then the prices are whatever they convince themselves of.
The housing market, which is backed mostly by the mortgage interest rate, will crash right along with the stock market. Houses will become much more affordable!
the business model is burning billions, hiding the debt, and telling investors the losses are actually R&D. we used to call this fraud. now it's a pitch deck.
As long as this debt does not make it into life insurance and pension funds, we are fine. The trouble is that private credit is taking control of some life insurance companies and off-loads this debt to these. When these fail, it will become everyone's problem.
> Risks to financial stability may also stem from entities with particularly high exposure to private credit markets, such as insurers influenced by private equity firms and certain groups of pension funds. The assets of private‐equity‐controlled insurers have grown significantly in recent years, with these entities owning significantly more exposure to less‐liquid investments than other insurers
https://www.imf.org/-/media/files/publications/gfsr/2024/apr...
https://www.imf.org/-/media/files/publications/gfsr/2024/apr...
Couldn't it be a problem given the concentration of the S&P in these companies?
At this point these companies make up a huge portion of 401k's for a huge chunk of Americans. How would it affect retirees if they dropped 40-50%, likely taking the market with them?
I suggest looking into “EQL”, or better yet, just replicating its index by taking a position in the 11 XL* sector funds from SPDR, allocating equal weighting to each. One will end up with one’s equities equal weighted by sector and with plenty of large cap exposure, as opposed to the pronounced mid-cap tilt found in whole market equal-weight strategies.
Personally, I drop the financial sector entirely (Thomistic prohibitions on usury) which leaves an even 10 funds which is easy to allocate mentally and in practice. For example, assuming a 60/40 allocation where one is holding the lion’s share in equities and the remainder in bonds (I substitute with a combination of gold, crypto, cash, and Swiss Franc here), one would allocate as follows:
XLC 6% XLY 6% XLP 6% XLE 6% XLV 6% XLI 6% XLB 6% XLK 6% XLU 6% XLRE 6%
(Note that XLF is consciously not taken as a position here, decide if it’s right for you. The Mortgate REITs which would make XLRE problematic are in XLF per the sector selection rules)
The remaining 40% is bonded debt if you are fine with usury, or some sort of asset negatively or neutrally correlated to equities.
Why do you consider bonds usury?
Because bonds involve interest. Per Summa Theologica:
> To take usury for money lent is unjust in itself, because this is to sell what does not exist, and this evidently leads to inequality which is contrary to justice.
https://www.newadvent.org/summa/3078.htm
…Aquinas expands the analysis but it is relatively straightforward: all interest is usury.
Personally, I find it helpful to imagine two hypothetical persons representing the entire economy, one the creditor who is lending and two the borrower who is taking on the loan. In this ultra simple closed model with a fixed quantity of money, the former is in effect asking for more units of money than actually exist in the whole system. When the loan comes due the borrower owes a sum that cannot be paid in full from the circulating medium itself. Settlement then requires either default, the creditor forgiving the excess, or the transfer of real goods and property to make up the difference. Scaled up, that same pressure (the continuous generation of monetary claims that exceed the existing stock of money) is what I suspect drives a good deal of the subtle and overt strain on families and communities that people so often complain of in the West and in modern growth-oriented capital societies.
This definition of usury differs from the modern loophole-definition: that interest bearing loans are only usury when the rates cross some nebulous abusive threshold. In the above Thomistic interpretation, all interest is socially problematic and disfavored. Judaism holds to a similar prohibition on interest when loans are made between Jews. Islam likewise prohibit usury even more broadly. Despite the injunction against usury in the Middle Ages Christendom and the enduring prohibitions of usury in other faiths, there are many modern Catholics and Protestants who will favor the modern interpretation over Thomas’ understanding; I’m just not one of them.
In many historical societies, religious prohibitions on usury meant the charging of interest of any kind.
Jump in a time machine to 1515 and ask Martin Luther, or to 1260 and ask Thomas Aquinas, they'd tell you it's sinful.
And in the present age, a fair number of Islamic folk consider interest against their religion's rules. So there's a Halal finance industry where, for example, you can get a "murabahah contract" where the bank buys a house, then sells the house to you at a higher price, while allowing you to pay them in monthly instalments.
Older than any of those:
"Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, interest of any thing that is lent upon interest" (Deut 23.20 JPS Tanakh).
the letter but not the spirit, like Amish workers using batteries
I love when religions have rule lawyers like this. It readily discredits the religion. As if their all powerful god can be fooled by fancy paperwork or legal loopholes.
It’s an interesting thought. The growth is so extreme that if the S&P 500 fell 50% today it would reach levels last seen in 2022. Given that the timespan is so short, I’m honestly not sure it would be as bad for 401ks as people expect unless all of your investment was concentrated in the last 4 years.
I suppose it’s worse if your calculation is, “I’ll retire when my 401k hits $X absolute value,” but I think most people just retire at a certain age instead with risk spread across decades.
One of the big issues with this is sequence of returns risk. If you retire and rely on your portfolio but the market dives for a year or two right after you leave the workforce, your total portfolio value is screwed because you were selling at a low point.
Tangentially: I think a lot of people forget/underestimate the degree to which the industries behind their job are ones that they need to diversify away-from.
In other words, a programmer should invest a bit more away from software than average, a realtor should invest a bit more away from properties than average, a coal-miner should invest a bit more away from energy and mining, etc.
If you have your job, you can weather a stock-downturn, and if investments are solid, you can weather a period of unemployment by liquidating some, but if both hit trouble simultaneously then that's much much worse.
Which is why you keep 3-5 years of spending money in cash (or a bond ladder if you want to be fancy).
most don't even have 3-5 years "spending money" (whatever that is) in total savings; if you're keeping that in cash you're getting 2-3% annually while the market has doubled.
Last week I was at the bank in my hometown, a small rural community. The teller took a phone call, and I overheard her say "You have $1.53 in your checking account, and $150 in savings".
Presumably this is their total net worth. I think this is way more common than people on this type of forum realize. Most will work until they literally can't anymore, then scrape by on social security until they die. I think it's important to keep that perspective.
It is either that, or they have tons of debt. (Sometimes both!)
The average person is struggling in modern America.
When you're headed into retirement, one possibility is to shift to saving more in cash-like options instead of a 401k (or whatever). It's should just be part of your retirement plan to account for possibilities like this.
And lose the tax advantages? That's crazy
The comment parent to you said it poorly. The 401k is the container, you don’t move stuff out of it you change the investments inside of it.
The tax advantages of being forced to pay ordinary income rates on your distributions as compared to long term capital gains (which are low, capped, can be exercised before a tax hike, and avoided entirely if you just need collateral)?
401k reduces your taxable income when depositing money, this is more tax efficient than paying normal income taxes and then also paying capital gains.
401k lets you rebalance a portfolio with zero tax implications.
The downsides are generally high fees and a 10% penalty for early withdrawal which makes them surprisingly bad for young people. They tend to start in lower tax brackets, have fewer reserves when unemployed, and face fewer risks from an unbalanced portfolio.
Pay down debt then Roth IRA when young 401k after 40 is often better than defaulting to a 401k, but saving anything tends to be more important than such optimizations.
I am alone in my peer group for doing something like this.
Cars, student debt, credit card debt all gone. (And I dread needing a new car). Covered downpayment on my house and cash for a nice shed that matches the house and a fence so my kid can play in the back yard with no issue.
Invested low 5 figures into myself taking a year off and now I am getting serious about the 401k at 41. And I am ok with that.
I never worked at a big tech company and I covered my mom's down payment and appliances and new carpet and part of her move for her to move close to me. Dad died when I was 11 so I am all she has and she was a public school teacher so she's on a small pension.
We all walk a different life and I know people that make my entire life savings in a year but I will eventually grow a retirement to get me through 10-15 years and then it will be what it will be. (Maybe a tank of helium and bag)
Keep in mind post tax income sources are king when retiring before age 65 and looking for ACA subsidies.
Sure, but we're not talking about people who have no savings. FIRE people have huge investment portfolios while being frugal with their spending, and understand the risk of keeping 5-10% of their total net worth in cash equivalents (not dissimilar to having insurance).
People return with less than 4 years expenses in retirement funds
Surely you need about 20 years?
Look back at the grandparent comment. If someone doesn't have 3-5 years in total savings, then they had better not try to retire.
3 to 5 years of cash or a bond ladder won't help in a 1970s stagflation scenario.
During the dot-com crisis. Nasdaq fell around 78% from its peak and S&P by around 49% so it isn't unprecedented (ironically has both aspects of being both tech and are within the same time-era)
It created an actual recession albeit thankfully short one for the case of dotcom (sadly not for 2007) and a really recessionary environment which causes unemployment and just straight up fear and panic.
I do understand what you are talking about and overall in long term, perhaps things flatten out but atleast speaking financially so, its better to be on a smooth sailing road rather than insane ups and downs with retirement money if preferable.
> I think most people just retire at a certain age instead with risk spread across decades.
The issue in my opinion is with people near that certain age you mention and who retire in the time during boom just before bust. They would then get the 50% hit on their savings instantly with an recession/inflation/unemployment environment which in my opinion might be genuinely devastating.
(supposing that they had their investments in stocks, I wouldn't consider that any retiree would have all their money in stocks but there have been some other comments which show a sizable amount, @kipchak's comment shows 50% stock for retirement. so a 50% shock on top of that could lead to a wipe out of 25% of your retirement fund which is honestly still pretty crazy.)
This kind of metric is always used to shock and awe in pop media when talking about the GFC, but it's not how actual investment works. In practice most investments are DCAed.
No person puts all of their retirement savings into QQQ or SPY at the peak and sell it off at the trough. Instead folks drip their savings into their weighted portfolio and withdraw money from their weighted portfolio as expenses accrue. Now obviously the GFC was a huge deal, but this sort of facile understanding of stock markets always leads to big misunderstandings. There's a reason Monte Carlo analyses of these events are used to model these scenarios.
(Though I imagine there were many people who tried to re-balance their portfolio into a less equity-heavy model abruptly during the GFC and based on equities performance at the time, it was probably the right move as long as taxes were taken into account.)
> (supposing that they had their investments in stocks, I wouldn't consider that any retiree would have all their money in stocks but there have been some other comments which show a sizable amount, @kipchak's comment shows 50% stock for retirement. so a 50% shock on top of that could lead to a wipe out of 25% of your retirement fund which is honestly still pretty crazy.)
What do you think the cost would be for protective puts per $1M of equity exposure of a portfolio on a monthly basis? "Bubble Insurance" if you will. Going 100% bonds is simply intolerable for the time window for most retirees, but an equity wipeout of this magnitude is equally intolerable.
They are probably not going to be implemented using long put positions, but a product with a similar return profile to what you're looking for is a buffered ETF. Basically, over a defined period, you agree to a maximum possible downside in exchange for a capped upside. They are available in ETF form from a number of providers.
For example, you could have an S&P 500 fund that, over the next year, will have a maximum of 0% capital losses (it can't go down), you will only get the first, say, 5% of gains that the equity index makes. So if stocks go up 20% the next year, your return is capped at 5%, but if they crash 50%, you don't absorb any capital losses. In practice, the return cap is going to be just a bit above the corresponding Treasury bill for the same duration.
These can be constructed in various different ways and institutionally I'm sure there are more bespoke ways that are more efficient from a fees/returns and tax perspective, but one way to do this on your own without going the ETF route is:
- Pick an amount you'd like to invest. - Buy a Treasury bill for some duration. Treasury bills are discounted at the time of purchase and return the target amount when the bill matures. For instance, if you buy a $100k 1-year Treasury bill, it might cost $96.5k today. - Now you have $3.5k in your pocket and a guarantee that you'll get $100k in a year when the bill matures. Use that $3.5k now to purchase call options or vertical spreads on the S&P 500 index to capture the upside that you can. Your return is limited by the structure of that options trade and what its maximum payoff is.
If you're willing to accept more than 0% downside, then you can achieve a higher potential upside cap as well.
This is exactly what I was looking for, thank you for taking the time to reply!
The cost of insurance is carry e.g. when you buy an option you are paying for the convexity with time decay. It is quite expensive.
It is worth saying however that part of tail hedging is that the payoff is worth a lot more when everything else has tanked, so e.g. even if you (say) get 10% on your puts when the wider portfolio is still down 40% (made up numbers), you can deploy that capital at probably quite a high expected return.
It would cost an extreme amount. The only reason to do something like that would be to defer capital gains into retirement while protecting your position.
You can use a collar for this at somewhat reasonable cost. Not sure how rolling that would compare to just using it to defer until you can cheaply sell and buy some fixed income ladder. Probably badly.
Also, there’s no capital gains to defer if you use a retirement account, which will be a better place for fixed income anyway.
Even someone close to retirement doesn't need to go 100% bonds. It's not like someone needs all their retirement money on day 1. The part that remains in equities will continue generating dividends that will get reinvested, and recover over time.
100% of anything is a bad idea if you're going to have to draw on them any time soon. Bonds are less volatile than equity, but they're still subject to drops in value.
Indeed, we have just been through arguably the largest (nominal) drawdown in the history of fixed income.
Sure, but a mistake I often see is people thinking that people's entire retirement savings is needed on the first day of retirement. People can and should still be invested in equities even in retirement, it's just the percentage is less depending on age and burn rate.
> What do you think the cost would be for protective puts per $1M of equity exposure of a portfolio on a monthly basis? "Bubble Insurance" if you will.
I expect that would not be a cost-effective way of attaining the risk profile you'd be looking for.
I expect there won't be a more cost-effective way of managing your portfolio risk than by simply adjusting your split of broadly-diversified equities vs bonds.
My homeowners insurance isn't "cost-effective" either but I still do it. I think the reason that investors don't is because they are greedy or irrational or both.
That was the message that I got from a financial podcast I listened to a couple weeks ago anyway.
I'd content that homeowners' insurance is quite cost-effective, because there isn't a cheaper alternative to hedge your risk.
I'm saying that for the cost of buying puts to hedge against equity downside in a retirement portfolio, for any given level of risk, you'd probably be better off just selling some of the equities and buying bonds instead.
e.g. try and find any equity-focused ETF with downside protection that generally outperforms a bog-standard stock/bond split total-market ETF for whatever measure of volatility/downside protection that you want.
I think the risk for increasing your bond exposure as compensation would be if instead of a low growth/low inflation scenario (Bonds do well) there's a low growth+high inflation scenario (1940s, 1970s, 2022) and the negative correlation between stocks and bonds doesn't hold.
Yeah, but in the abstract that's just saying "if you time the market, you can beat it", and we know that generally, the only way people are able to time the market is with random luck.
And more specifically, it's not low growth/high inflation that kills bond portfolio returns, it's interest rates increasing that devalue bonds, i.e. the transition from low inflation to high inflation. So yeah, you can construct a portfolio that hedges against that... but I'd be surprised if you can do it without decreasing your risk-adjusted expected returns below a plain stock/bond index fund - whatever hedging method you use is either going to increase your interest-rate risk (bonds), or your inflation-rate risk (cash), or is going to limit your upside (buffer etfs), or is just going sap your upfront returns (protective puts).
In that sense, isn't the 60/40 or Boglehead perspective also timing the market, in the sense that you are betting the regime of the past will continue into the near future?
To me the diversification hedge options (say GUNR) seem like they are helping you get closer to regime neutral. Or in other words you are giving up returns to cover more macro scenarios and betting less on what the future looks like.
In a macro sense, I agree with that, but it's very difficult to compete with Vanguard for the fees/overhead to hedge in more regime neutral ways.
It's effectively impossible to hedge against every possibility, including temporary drawdowns, while still having positive returns after inflation.
investors are irrational but actually tend to go the other way - too risk adverse. I'm not sure what a "greedy" investor is, TBH.
> What do you think the cost would be for protective puts per $1M of equity exposure of a portfolio on a monthly basis? "Bubble Insurance" if you will. Going 100% bonds is simply intolerable for the time window for most retirees, but an equity wipeout of this magnitude is equally intolerable.
Investment companies have to remain profitable or at-worst neutral as such they would generally charge a decent bit of money for this type of setup. (If they end up having too big of losses then perhaps it could be similar to the the 2007 Banking/Investment companies crisis.)
Generally speaking I am not a financial advisor but you can take a look at international index funds/ETF's in general which have less exposure to AI in general.
and you can follow the age rule created by Mr Bogle where you have (age)% in bonds and (100-age)% in stocks, so at 70 you have 70% bonds, 30% stocks.
So again taking the example of dot com bubble, International Index funds fell from my understanding 30-40% and suppose that you had 30% stocks and 70% bonds.
So that would only have a 30% times 30 % which is 9% which perhaps might be more managable as compared to the previous 25%. There might be some other strategies as well which can help in diversification
Hope this helps!
Take SPY at a strike of $738, per lot of 100 that's $73 800. Take 14 lots, give or take, to make a cool million.
SPY260821P00738000 (OCC symbol: PUT on SPY expiring the 21th of August 2026 at a strike of $738) is $12.20 as I type this, so $1220 per lot. So $16 800 to protect for a month. So $200 K per year.
A solid 20% yearly, unless my math is way off.
Now of course you can buy, instead of a PUT, a PUT debit spread, or you can buy further from the strike, or you can finance or partially finance your PUT or PUT debit spread with a CALL you'd sell (turning it into a covered strangle) etc. That's not the point of this exercise though. And anyway I doubt many retirees have the know-how to do that.
In any case it's well known that the costs to hedge are extremely high.
In 1929 those who had 10% gold for example "only" lost 25% overall: gold has value since thousands of years. My dumb thinking is that if gold has value since thousands of years, there's an extremely high probability that it'll keep value for the few decades I've got left at most.
A more sensible strategy is probably to protect only against large down moves, so get OTM puts, and then longer maturities (like 1/2 year or so), then rotate them every quarter.
ATM options cost approximately 0.4 S sigma T^0.5 (do a Taylor expansion of the "N"s in the Black Scholes formula), so indeed, for current index vols of about 16% we are talking 0.4 * 16% * (1/12)^0.5 = 1.85% for a 1 month option, and 12 of them indeed cost 22% of your portfolio. Not a good idea.
However, if you hold the options only half the way to expiry, you lose only 1/4 of the time value. And if you buy OTM, you have convexity coming your way on the way down.
Lastly, index vols were very low (until yesterday, ha), as so many firms entered the dispersion trade: they wanted to go long dispersion (some firms do well with AI, some lose out), so short correlation, therefore long single stock vol and short index vol. Which means you could buy index vol (ie protection) quite cheap.
Inherited IRA's, if you aren't the spouse, have some pretty strict draw down rules.
As the boomers die off - if they have these accounts - their kids are quickly going to be forced to liquidate them over the course of 10 years. With some of them having to sell a chunk annually.
NVidia makes up 7.5% of the SP500. If it lost 50%, it would be a 3% loss for the index. The concentration is bad, but it would not cause a drop of 50% retirement funds by itself. If you take an all world index, it's even less.
Still, if NVidia lost 50% of their market share, we would probably see a big collapse of the stock market.
EDIT: to note, the top ten companies in SP500 make up an unprecedented concentration but they're not "mostly AI".
It is unlikely that a 50% drop in NVidia wouldn't be paired with a significant drop in the valuation of every other company heavily invested in AI.
Unless they too were somehow tied into Nvidia.
This is what caused the 08' crash. Everything was all tied together so as one massive bank failed it sent a cascading ripple effect through the entire industry which became a sort of black hole that took down many seemingly stable, profitable banks with it.
I can easily see the same happening with AI.
A risk in this situation is that in names that are dominated by passive flows there is a pro-cyclical effect where because the name is valued in terms of the overall index but is also part of said index that you end up with a positive feedback loop - which will eventually be arrested by speculators.
> EDIT: to note, the top ten companies in SP500 make up an unprecedented concentration but they're not "mostly AI".
They're mostly either AI proper, or hardware manufacturers benefitting from AI boom, or provide cloud services to AI companies...
An AI collapse would represent a generational buying opportunity for companies like Meta, Google, and MS. It would be bumpy for a bit while things unwind, but eventually all this FCF they have been dumping into AI would start dropping to the bottom line instead. It's like when Meta stopped dumping money in Reality Labs, but on a much larger scale.
For it to be a buying opportunity would require the mega corps to continue growing post bubble pop. This is questionable given how large they already are.
And a lot of their apparent growth post 2022 is AI, but most likely at subsidized, unsustainable prices. So demand that isn't real.
Plus apparently at least for Google, but from other news sources I've seen, at least Amazon and Oracle have basically mortgaged their future in other business units to fund AI, so it's likely many of these other business units will underperform (or already are).
So lots of new debt, unverifiable growth that could be shady, coupled with a slow down of their other businesses could be a really bad combo.
Regarding unprecedented concentration, wasn't the nifty fifty era comparable for the top 10, about 40%?
Idunno man. Am I the only one that remembers the day the first DeepSeek model came out?
It wasn't like, "Nvidia took a hit and everyone else was fine". It was more like, "One or two companies were fine, and ALL others took a hit"
how are they not “mostly AI”?
"This tree only makes up 0.0001% of the forest. If it is lit on fire, the forest will be fine"
I have this cheap B movie in my head with a primitive people living on an island. They compete in hunting, fishing, building boats, houses, cutting trees, growing crops etc they use sea shells as currency. Someone finds a spot with countless sea shells, 95% of the population spends their days digging up more and more. Almost everyone is insanely rich, everyone except from the dumb people still hunting, fishing, building boats, houses, cutting trees, growing crops etc
Isn't that considered a likely case? I always assume that my sp500 holdings are worth roughly half of what they are (and base retirement and spending decisions on that number). and most financial advisors will tell you future returns of sp500 for 10 years out will barely keep pace with inflation, if that.
Even if theres a massive drawdown it will recover in the medium term (and in the short term is a great buying opportunity).
For the people who are close/early to retirement and can't do that, well, they need to manage sequence of returns risk.
Edit: I think some ppl might interpret this as me being bullish on the SP500. I'm not, I'm bullish on everything evens out and returns to the mean.
I don’t think concentration risk is itself overly concerning. The nature of a market cap weighted index means it will always be heavy on whatever is currently trending. You’ll certainly be hurting if your plan is to retire at the top of the market with just enough, as the inevitable downturn will hammer your portfolio down into not enough. So invest until you have enough to handle volatility or a lost decade with a dip and slow recovery.
For those who stick to a meaningful asset allocation (e.g. 60/40, 80/20, etc), this does not pose significant problem -- they would not be buying much stock in the last 3 years. Instead, they would be buying mostly fixed-income. Probably mostly in 401k/IRA accounts.
But if their debt goes bad, isn’t that debt the very bonds that make up the other part of those asset allocations?
Typical total bond market fund like BND is ~70% in USG -- pretty solid:
https://investor.vanguard.com/investment-products/etfs/profi...
There is no data showing that high concentration is bad in an index.
No correlation with future returns.
On the other hand the world is leveraged to insane levels not seen since world wars or global recessions.
At the same time yields are low while inflation is high.
There is definitely a high level of risk in the financial markets.
A risk nobody, especially politicians, want to look at, because it would unavoidably lead to some major pains, so procrastinating until it's unavoidable seems the way to go.
I'm not familiar with 401k rules but presumably they get a choice of markets and products?
If one is over concentrated its easily avoided.
The problem some have pointed out is that these companies are such a huge portion of the market right now.
The sound advice for the past decades has been, just invest in a low-cost ETF tracking the S&P instead of picking stocks to minimize risk and invest in the market broadly.
So a huge number of people have done that, believing they're diversified, while tech makes up 40% of the index.
Yes you could sell your S&P and find things to invest in least likely to be impacted by a potential bubble, but your average 9-5'er with automated contributions to their 401k is probably not sophisticated enough to do that.
And that's assuming only these companies would be affected if there was a massive draw-down in tech/AI related stocks. We haven't really seen a situation like this before, so it's not easy to predict what effects there might be in the broader economy.
no one that needs to rely on their investments for their actual retirement still has them in equities. theres a reason target date funds automatically adjust asset allocation as it nears its target date. you should be in majority bonds and cds well before your actual retirement date.
That is an overly conservative approach that sacrifices a lot of growth for not much more safety. It also exposes you to inflation risk, which is a significant concern these days.
Most people in actual retirement I know do something like keep ~2 years of cash in short-term treasuries and everything else in equities. That gives you a lot of buffer to time-shift equity drawdown, which is the main risk with equities, while retaining almost all of the benefit of equities. Simple and relatively robust.
i dont think you want to ever be in a position where you arent making money and your net worth could drop 50% in a year. but hey, if you want the risk go for it i guess.
It literally doesn't matter if drops 50% in a year. That is a paper loss and you have years worth of cash you can spend while waiting for it to recover. If you panic-sell at the bottom of that market then that's on you. It isn't necessary in order to pay the bills.
What you propose takes on a huge amount of inflation risk. How are you hedging that risk? A guaranteed yield doesn't mean you aren't getting poorer. Obsessing over one type of risk and ignoring another isn't rational.
Reducing variance of net worth has a very high cost. Over-indexing on that singular property, particularly when most people can afford some variability, is a recipe for relative impoverishment.
> That is a paper loss and you have years worth of cash you can spend while waiting for it to recover.
not if you're 80 dude...
It’s probably not even a good idea to try and defend against the bubble by switching up your stock allocation. After all the whole reason passive investing works is that active investment rarely beats the market and if you’ve just been in SPY the whole time it’s unlike you have any edge to gain by switching to an active strategy every time fear creeps up
All of that is only true if the market is sufficiently diversified and not manipulated for profit extraction.
Right now it's not clear that is true.
The employer selects a financial company to manage the 401k. When you switch jobs, you can roll the 401k from the previous employer into the new one, or into an IRA (Individual Retirement Account).
Usually the financial services company will offer several options: more aggressive/high risk, or less aggressive/lower risk. Most people will just go with whatever is the default option.
So much of the American S&P 500 is dominated by handful of companies that the risk is not that easy to avoid. If or when the AI bubble pops, it's going to take down a lot of the economy with it. You can direct your retirement savings into the lowest yield/lowest risk assets offered by the firm, but you'll forego whatever growth happens in the mean time.
Will the bubble pop next week? Next month? Next year? Who knows. Timing the market is incredibly difficult.
There's a famous quote, attributed (perhaps apocryphally) to John Maynard Keynes: "The market can remain irrational longer than you can remain solvent."
The whole idea of a pension fund is that you don't need to time the system it is the system.
Like my country pension scheme. It went through ups and downs for a hundred years but has always come on top. All you need is a long horizon and a trillion dollars and you basically can't lose.
retirees arent suppose to have their active retirement funds in stocks dude. Any financial advisor with a brain would not make such a ridiculous asset allocation error.
Regardless of whether it's a good idea, it absolutely happens and as a result would impact retirees, both in individually managed accounts and target date funds. For example here 70+ are 45% equity.[1] TROW retirement 2020 funds are about 50% stock, for example, and only decrease to a floor of 30%.
https://workplace.vanguard.com/content/dam/inst/iig-transfor... (page 78)
Retirees relying on short term equity returns to cover expenses only have themselves to blame.
There is ZERO chance the modern oligo-kleptocracy isn't going to socialize the losses onto the little guy
Yeah, hence all the talk about forcing "public" ownership. Becomes easier to justify a bailout when you create some legal fiction compelling the government to do so.
> As long as this debt does not make it into life insurance and pension funds, we are fine.
Already happened: https://finance.yahoo.com/markets/stocks/articles/michael-bu...
Yes of course life insurance and pension funds are going to buy this debt. This is the highest quality debt that's out there. If you don't want life insurance and pension funds to buy debt from big tech companies because you believe it's too risky, then you believe that bonds are just too risky in general.
OK, wait a minute. Elsewhere in this discussion, people are saying that only a few of these AI companies are going to survive. For stocks, that can still be a reasonable investment - low odds, but still a positive expectation value - but for bonds, it's terrible. You're paying me single-digit interest when there's only a 20% chance that you live long enough to give me my principle back? Get outta here. Literally nobody should be investing in such bonds.
FWIW, a firm can go bankrupt and the stocks be worth zero with the bond holders being paid 100%. In fact, that's sort of the goal and "ideal" scenario (ideal given bankruptcy, of course, which in turn is not ideal).
In the real world, recovery rates for corporate bonds are between 30% to 70% or so, depending on the seniority of the debt and the collateral.
If big tech bonds are a terrible deal for investors at 8%, then Google or OpenAI is getting a screaming deal by raising debt at that rate. Saying nobody should be investing in these bonds is very similar to saying that big tech should raise more debt.
Yes, they should, if they can. But on the other side, life insurance companies and pension funds should not be buying it.
Agree with you on that. I just wanted to point out that Big Tech debt being a bad purchase for things like pension funds means its a good deal for big tech. Everyone else in the thread seems very negative on big tech debt for some reason. You can't have it both ways.
> buy debt from big tech companies because you believe it's too risky, then you believe that bonds are just too risky in general
Uh, no? Ignoring the rating, I think there are plenty of other bonds to be found that are less risky.
Dutch government bonds just to name one? The yield wont be the same but that's probably a good indicator?
> When these fail, it will become everyone's problem.
Debt is senior to equity. For private credit to start taking haircuts, the equity has to have already gone to zero. At that point, this will already have been everyone's problem for some time.
Are you suggesting that holding private credit assets is relatively risk free?
Equity is a risky asset, so equity being wiped out should not be a surprise to anyone, but life insurance and pension funds failures is indeed a public problem.
There's a wide spectrum of 'private credit', and it varies from low-risk to quite high risk, depending on the debtor. In the case of "AI Companies", their debt is low-risk, but many are creating special-purpose-entities which will build and own some or all of their newer datacenters. Those datacenter companies are issuing a great deal of somewhat risky debt; with the exact level of risk depending on the off-take agreement.
I disagree - high leverage inherently makes systems less stable.
You probably meant to say that practically, high leverage tends to leak into companies of public interest. For example, when high net worth individuals start trimming their private credit holdings, which eventually end up with insurers. That is why the regulators have to watch carefully that it does not happen.
No, I meant that having a lot of debt puts you in a position to be more vulnerable to any kind of negative outcome. Intuitively, this seems to hold true across the spectrum from the personal level to the government level.
If a person has a lot of debt and no savings, and they lose their job, then they will find themselves in trouble a lot faster than someone who owns their home and car and has 6 months in a savings account.
If a company has a lot of debt, they might find themselves in trouble with credit rating agencies as soon as they have a bad quarter. Or they might have cashflow issues if rates increase. Both of these can lead to an accelerating negative feedback loop.
Governments (at least those with fiscal independence) have a unique set of tools to work around this situation, but they too can struggle with high debt loads acting as a drag on future prosperity.
Debt plays a critical societal role in allowing new production in advance of revenues, but it can also be a dangerous trap.
These AI and tech companies are priced as if they are still running a capital-light, 0-marginal-cost SaaS business. That's no longer what's happening. This economic engine makes up a substantial amount of both the value and the growth in the American stock market.
If there's a loss in confidence, high leverage will make things fall faster. This could be infectious. Not just the AI and tech companies, but the whole market might suffer.
> As long as this debt does not make it into life insurance and pension funds, we are fine.
I think for small to even large numbers you are correct, but given how yuge this debt amount is a broad-based default will probably cause a contagion. I will not predict how far and wide.
You say this as though every company doesn't take on debt, and all debt isn't a risk. I'm sure you have some much riskier debt than ChatGPT already in your portfolio, and interest rates are adjusted by relative as judged by the market. I'm sure some debt will fail, but certainly all of it won't, and while anything could cause a market crash saying "when these fail" holds a lot of incorrect assumptions.
> As long as this debt does not make it into life insurance and pension funds, we are fine. The trouble is that private credit is taking control of some life insurance companies and off-loads this debt to these. When these fail, it will become everyone's problem.
Three things:
1) at least SpaceX is already in pension funds "thanks" to NASDAQ and MSCI relaxing their rules. Everyone who invests in NASDAQ or in MSCI World has SpaceX exposure, and assuming the bonanza lasts for 11 more months, so will everyone who invests into S&P 500. In addition NVIDIA, Google, Microsoft, Oracle and Amazon all have been in pretty much every investor's / pension fund depots. No matter what, everyone is going to get fucked when the party crashes, and it will make 2007 look harmless by comparison.
2) The debt of the AI companies is bad enough, but there's all the downstream credit as well, chiefly construction companies and public utilities that are undertaking absurd amounts of buildout. When the party crashes and the demand stops, there will be a lot of construction companies and possibly even a few large utility companies that will be unable to service their debt (because no datacenter means no income) or have to hike rates even more than they already are.
3) All this debt and speculation unwinding will cause an economic downturn. Most of Europe already is in or near recession territory, and the US would be in a recession if it weren't for the wash trading and circular investments artificially propping up the GDP. But unfortunately, with the exception of infamously austere Germany, everyone else has already fired all the guns during 2007ff and Covid, and all the ZIRP money never got slowly deflated out of the market, which means this time there will be no government help possible, it will be a hard crash. No way out of that one.
bingo - if the firms holding the debt keep holding the debt & the debt doesn't get passed to other entities - the system will be fine.
if say meta owes 720Bn, they wouldn't have trouble paying that back in 10 years.
this doesn't take away the fact that 'a.i' right now is a bubble.
Do they? Is a company with $200 billion annual revenue and earnings (EBITDA) of $100 billion having $420 billion of off-balance-sheet debt really staggering?
In many other industries that would be a perfectly normal amount of debt to have. It's only unusual because we are used to tech companies having so much cash on hand they don't know where to put it
These companies have valuations reflecting a debt light business. At a minimum, 420 billion in debt is enough to change the stock price by 10-20%. If the company plans to add another 400 billion in debt you need to give it the side eye.
If 50 billion in revenue is from other companies debt spending… then You have a problem.
> If 50 billion in revenue is from other companies debt spending… then You have a problem.
we may have a problem then.
> These companies have valuations reflecting a debt light business.
Sorry, but this doesn’t make sense. The valuations of these companies reflect their growth.
In finance there’s nothing inherently virtuous about a “debt-light business”. It’s all an allocation decision based on how you expect to grow relative the cost of that growth.
Try and reframe it: are cash-heavy businesses given a premium?
Growth of what exactly? AI doesn't have the normal leverage factor that software usually does where a simple codebase can drive a billion dollars of subscription revenue with 90%+ gross margin. There's no eventual state where the capex is in place and the margins flip. They're in the datacenter business, which is real estate, with tenant improvements consisting of rapidly depreciating/obsoleting equipment. These margins have no path to flip around and allow for a huge amount of revenues to flow through. If they start testing price sensitivity in the way that would justify the valuations, it will just accelerate the transition of AI from datacenter to local.
>Experts continue to warn of an AI bubble, noting the enormous and widening gulf between company valuations and their comparatively measly profits
I think your analysis assumes current closed SOTA models have no moat, which isn't a given considered the protectionism the Trump administration is already considering for US AI firms.
The pertinent comparison in valuations is debt vs equity, not debt vs cash as you noted.
My point was more of an exercise to point out that finance is about mutating resources. A lot of cash can be a good thing or a bad thing. Same for debt. There’s nothing inherently bad about levels.
> The valuations of these companies reflect their growth.
If you look at was happening around 2022 - 2023, their growth was slowing down. Lots of the new growth is based on AI but since almost everything AI based is subsidized to hell and back, we have no way of knowing yet if that AI demand is real at unsubsidized AI prices.
> These companies have valuations
By the time we're reading headlines about this debt, it has been known to institutional investors for a long time.
The debt is priced into the valuation.
There was an article on Hacker News just the other day explaining that no one knows what the value of these used GPUs are going to be and that people underwriting are just, essentially, just guessing.
Here is the link (oddly I could not find it with HN Search): https://news.ycombinator.com/item?id=48917135
Ooh look! “The x is priced in”! My favourite financial thought terminating cliche!
No need to worry or discuss further, it’s all priced in! Everything’s totally fine!!
Bob spends $5 on Alice’s lemonade. Alice spends $1 on lemons from Jack. $15 on wood for the stand from Jill. Jack spends $5 on pesticide from Bob. Jill leases the plot for the tree from Jack for $10. Jack spends $5 on lemonade from Alice. Jill spends $10 on lemonade from Alice. Alice spends $3 on more lemons from Jack. Jack builds a stand to sell lemons with $20 in wood from Jill. Jill leases more land from Jack.
Take the circular money and add even more spend, even less profit, and somewhere in the background is a money tree that is about to die.
> $200 billion $100 billion
That's a fun way to say is not profitable and loses billions a year
To be fair to the author, they have no background in finance and work at a site that knows that anti-AI stories get a ton of traffic. The entire site is now just doom-and-gloom clickbait headline after clickbait headline.
People used to complain that these big companies were sitting on money and not investing.
Which routed those funds through the economy's financial circuit and caused ZIRP, inflation in asset prices, and the evaporation of risk premiums.
But the pendulum swinging rapidly to the other side has routed all those funds through the real economy, caused goods inflation, and looks like it will crash the economy.
It is not just that they have the debt, it. is they are trying to hide the debt. Why would a legitimate company try to hide their debt?
There are many reasons to use subsidiaries for things like this, like to invite outside investment, ringfence risk, cede operational risk, and many more.
This is all like CFO 101 type stuff, and not nefarious. I find it amusing that people assume the worst for things they understand little about, rather than trying to learn.
Maybe the best way I can explain it to the programming crowd is this: imagine how ridiculous it would sound if outsiders were saying that Google was on the verge of collapse because its codebase has billions of lines of code.
> I find it amusing that people assume the worst for things they understand little about, rather than trying to learn.
I don't know if you intended this to be exclusive of the opposite, but I do often find actually the opposite thing is true. That is people tend to be wildly, inappropriately optimistic for things they don't understand well and more likely to be skeptical in the details of things they do.
> There are many reasons to use subsidiaries for things like this, like to invite outside investment, ringfence risk, cede operational risk, and many more.
Agreed, there are many valid reasons to have subsidiaries of course.
The issue is rather with the fact that we are having the assumption that the threat is outside rather than inside and so systems with mechanisms to be less transparent are far more prone to this risk.
It has been academically shown that most corporate/ white paper scams aren't done from outside but rather from inside the company itself through genuine structures and incentives which go wild. (Something shockingly visible in AI space), Enron's example also comes to my mind.
The best way I can explain it to the programming crowd is this: Imagine how ridiculous it would sound if you are ranked with how many lines of code you ship and how much token you would spend and so we end up with tokenmaxxing and hearing stories about people literally burning tokens in innovative ways because they want to get on top of a leaderboard. Oh wait, it is already happening or has happened.
Generally speaking, It is preferable to be transparent with debt and other things rather than not especially so for long term because sooner rather than later you might get caught. Obviously if there is some stuff which prefers from ringfencing risk then sure.
Also as I spoke of Enron, but the exact structure was used by Enron as well as @fzeroracer discusses in their comment[0] so it might be a genuine question.
[0]: https://news.ycombinator.com/item?id=49023596
"There are many reasons to use subsidiaries for things like this, like to invite outside investment, ringfence risk, cede operational risk,..."
In other words, they are intentionally deceiving investors and hiding the risk from them. That does not sound like CFO 101, it sounds like fraud. But if grift is your business, I guess those are as valid reasons as any.
She's a witch!
> is they are trying to hide the debt.
They aren't hiding it though. The contracts are recorded in regular filings.
Rope a doped with cope. Maybe you should buy some $ORCL?
https://asia.nikkei.com/business/technology/five-us-tech-gia...
"Companies disclose such future debt not in their balance sheets, but in annotations to their quarterly financial statements. This is a legitimate practice under accounting rules, but may make it difficult for retail investors to recognize risks."
"Today's AI industry is partly supported by demand generated by circular investment. Nvidia and tech giants invest in data center operators and AI companies, with that money then turning into GPU and cloud usage fees. Actual demand is difficult to see, increasing the likelihood of over investment in data centers."
Retail investors shouldn’t be investing in individual stocks outside of industries they understand well. Following GAAP is the definition of not hiding the obligations.
Maybe GAAP should be changed? Professional investors have the time to comb through the small print. These off balance sheet activities seem designed to bamboozle the small investor.
Enron also didn't violate GAAP so by your definition, no financial wrongdoings...
The essence of the Enron scandal was the perpetration of accounting fraud. It took down Arthur Andersen. We went from the "Big 5" accounting firms to the "Big 4" because of this. They very much violated GAAP.
https://en.wikipedia.org/wiki/Enron_scandal
>but may make it difficult for retail investors to recognize risks
Ok, so just to be clear: institutional investors are (a) the ones investing the large proportion of capital in these companies and (b) are well equipped to decipher financial statements. The idea that any significant amount of retail investors have even seen a financial statement, let alone is making decisions based on their analysis of a financial statement, is laughable. And, even then, if someone is putting in that effort, then presumably they're not going to get tripped up by a legitimate practice that they ought to specifically be looking for given the context.
And all of that doesn't even take into account that every article discussing the financials of AI firms over the last half a decade have been pointing out these dynamics. We're literally in a thread discussing this exact dynamic. Retail investors are certainly far more likely to make investing decisions based on these kinds of articles and threads than they are based solely on independent financial statement analysis that they're conducting. At a minimum, I think anybody taking any of this seriously has gotten the hint by now.
If it comes out that these firms are committing straight-up fraud, then there will be a lot more to discuss. But, as of now, the sentiment is that these firms are behaving perfectly legitimately, just abnormally and maybe irresponsibly compared to their historical context. If an investor isn't equipped to handle this kind of analysis under these circumstances, then I'm not going to feel too bad if they lose their money "investing" when they're really just gambling.
Because they have even more debt than the debt we assume they’re trying to hide
they aren't trying to hide anything, those are accounting rules that are applied to the letter. I'm feeling like I'm taking crazy pills whenever I see this stuff about AI, your hate boner for a specific technology shouldn't trigger you saying things that are provably untrue.
the downvotes are just further proof of how stupidly this kind of discussion is handled on hacker news. It's demoralizing the lack of quality this community shows lately.
brother read those numbers out loud
If I make $200k I do not have $400k off-balance gambling debt
This "debt" is almost solely rental style deals with datacenter constructors. If you make 200k and have a 400k mortgage youre doing just fine.
A 400k mortgage needs a new roof after 25 years. A data center needs its hardware completely replenished after 5 (or less).
Datacenters that have not and might not be built to accommodate for future AI demand that may or may not grow to the extent or as fast as the companies anticipate.
Whether the datacenters will end up profitable is a different question than whether they are a real risk for the business. This whole thing could be a massive mistake and all the big tech companies will come out the other end just fine. I think the executives at these companies realize that, this whole build out is a massive case of FOMO. No one wants to be microsoft missing the boat on mobile and theyre willing to flush money away to ensure that never happens.
Windows Mobile predated the iPhone by like 4 years or something. MS didn't miss the boat they steered a crappy boat.
They missed the port.
> they don't know where to put it
ohh, their accountants just dont know where debt goes on the balance sheet. thanks for clearing it up
Are they really "trying to hide" this debt? I think it's pretty common knowledge that a lot of these companies are using debt/bonds for funding. The debt not showing up where the author wants is a reporting formality not an attempt to hide it.
I think the point is that it’s not showing up on the standard financial filings. If you were to pull the annual reports for these companies, you wouldn’t see it. That doesn’t mean it’s impossible to find it. Obviously, it is otherwise the article wouldn’t have been written. But you’re going to have to go the extra mile. To be clear, none of this is illegal. It’s just covered in the advanced CFO accounting class.
It's not hidden at all. Financial blogs very accessible to laymen like Matt Levine's Money Stuff have talked about this structure months ago. If you are an investor and surprised by this news you weren't sufficiently prepared and shouldn't have been investing in the first place.
What's the purpose of keeping it off the balance sheet if not to hide it?
A legitimate reason to do this is so that you can sell it all off or restructure it later without it being intertwined with your main books. So, for instance, it you’re an AI company, your main business is developing models and selling inference, but you need data centers to do that. You could buy those data centers yourself, or you could create a data center subsidiary that would take on debt and build your data centers and then rent them back to you. In the future, if you decide you don’t need that capability any longer, you just sell the subsidiary and you don’t have to tease apart the P&L and personnel to do it. It’s clean and separate because it was structured that way up front.
Now, that’s not to say that there aren’t other benefits of having a separate balance sheet related to moving numbers around. But it doesn’t have to be nefarious.
If you open the annual report and look at the numbers they’re citing, they’re adding lease payments from uncommenced leases and future purchase commitments. Accounting rules prohibit either of these as being listed as debt. It’s also not possible to agree to a future lease without reporting it like this.
Generally speaking after commencement the former will become both liabilities (for a smaller amount than the number they listed due to discounting) and an asset (representing the asset of the right to occupy the lease)
The latter will generally become some sort of asset
I have no idea what the people going on about subsidiaries could even possibly be referring to as it relates to this article, this is just lease accounting
The structures theyre using reduce risk. The 2 big moves here are 1. agreeing to lease a datacenter from developer instead of building it yourself and 2. using subsidiaries to finance and own the datacenters. Both these moves exist so that the company isnt left holding the bag if something goes wrong with the construction. They dont need to worry about zoning and construction because their partners are doing that. This also means the companies dont need to take out debt themselves, since these agreements dont count.
Take-or-pay contracts appear as "contractual commitments" in 10-K. They are not hidden. That's the way they are reported in all industries where take-or-pay contracts exist. There's nothing nefarious about it.
Yes, the contractual obligation shows up, but not the debt the subsidiaries took on. You have to follow the entity structure and look at their books for that piece. And it’ll show up as a different accounting category, “services rendered,” for instance, not as debt repayments.
If it didn't matter, why would they bother jumping through hoops to keep the debt off their balance sheet?
In the run-up to 2008 a big factor in the bubble forming was that poor quality loans were packaged in a way to hide the risk in those investments. I'm not expert enough in finance to know if it's the case now, but we do know that clever accounting to hide debt can lead to the incorrect valuation of assets, potentially leading to financial ruin.
They're not jumping through any hoops, I think they're simply complying with reporting requirements. It's not on their balance sheet because being recorded as strait debt would itself be misleading. My understanding is that these sort of off-balance sheet "debt" is mostly in the form of deal terms that may or may not be expressed at some point in the future.
An analogy that comes to mind is when companies used to book future sales in the present. They got in trouble for this and is now forbidden. I recall reading that one deal had terms that transferred assets if certain conditions were not met. If terms-based debt should be booked now, then terms-based assets should as well. This stuff makes my head hurt.
Either way, as long as it's not hidden (and it's not for the public companies), then it's fine.
Because this isnt actaully debt. Almost all of it is agreements to pay for completed datacenters from developers. Its just a way to offload operational risk when constructing datacenters. If the construction somehow fails theyre not stuck with the bill.
> If the construction somehow fails theyre not stuck with the bill.
Who is stuck with that bill and what is their ultimately their primary source of financing?
> The debt not showing up where the author wants is a reporting formality not an attempt to hide it.
Couldn't you characterize Enron that way? The liabilities are there, you "just" have to look at Raptor II or whatever!
You couldn't just characterize them that way, they are using literally the exact same setup that Enron did in order to hide the massive amount of debt and liabilities they had that eventually sunk the company. People jumping in to defend this as being totally legit or not-fraud seem quite insane to me: companies should not be trying to hide these things to pump up their stock prices or to entice investors that otherwise might not see it.
It's an interesting counter to the efficient market hypothesis. "Everybody" knows about this debt. It's in the most public news outlets there are, and the word has been getting around. It's about as secret as Taylor Swift's concert schedules. Any serious investor knows about this debt.
And yet... the companies do this because it works. If they held this debt on balance sheet, the sensible assumption is that their stock values would take a rather substantial hit, and they could face other sorts of scrutiny. It works like pull-in sales works. It works like channel stuffing works. It works even when everybody knows that's what's happening. It works even when everybody knows that everybody knows that's what's happening.
There's something broken here. In an era where AIs move millions upon millions of dollars around because of some blip of a headline somewhere and every AI improvement of any kind is immediately scrutinized for its ability to be used by the financial system, it is completely incredible that the system doesn't know and react to these things. I'm not sure what's broken. My first best guess would be the increasingly mindless investment via index funds in pensions and the slow-but-ever-increasing ability of financial engineering to abuse that mindless investment, but I call that a "guess" for a reason. Possibly there's still a lot of really stupid AIs hooked up to the stock market that just look at the most basic of numbers and are easily fooled by this? But who is running such a precise combination of "huge" and "stupid" on the market? I dunno. Something's weird here.
> In an era where AIs move millions upon millions of dollars around because of some blip of a headline somewhere [...] I'm not sure what's broken.
I think there is some sort of collective collusion. Like a school of fish moving. If there is an external stimuli the price can rise or fall eventhough it doesn't make sense from a 10y dividend perspective.
Yeah I think it went through the press on mass eh?
And even if you look at the debt, even companies like meta make 200 billion revenue in 2025 alone.
Isn't it good that these companies with these massive massive deep pockets invest?
One of Meta's SPVs building a data centre for them, Meta own only 20% of it; 80% is owned by other investors. That's the issue here; the market thinks that only these handful of money-go-round FAANGs/Mag7 companies, are exposed but analysis shows that SPVs are spreading really significant risk to many more investors.
Is that why China pushing for open weight models? If these models are on par with the quality of the proprietary ones, the US stock market will go south fairly fast, imho.
If you're talking about dodgy accounting at hyperscalers, a larger worry might be that they are overstating profits by depreciating their assets (such as datacenters and CPUs/GPUs) too slowly.
Estimates are that this could overstate profits by tens of percent. (However, this only allows earnings to be "pulled forward" - sooner or later the servers must be written off and the accounting catches up.)
See e.g. https://deepquarry.substack.com/p/depreciation-of-gpus-betwe...
https://www.ft.com/content/0dbfe94f-2136-432c-b075-4587092de...
Michael “The Big Short” Burry:
> Understating depreciation by extending useful life of assets artificially boosts earnings -one of the more common frauds of the modern era.
https://x.com/michaeljburry/status/1987918650104283372
They’re talking about accounting at big tech and not hyperscalers
> Meta alone has amassed around $420 billion in off-balance-sheet debt, according to Nikkei,
Isn't this an existential type of bet?
I hope so
yes and no. With 82 billion in cash and 22billion profit per year, they can easily service it for a while even if AI consumption takes a downturn.
That's their quarterly profit.
Absolutely disgusting.jpg
"No you guys it isn't actually an issue because it isn't."
Why?
"Because it isn't; okay?!"
oh ok.
Meta makes $60 billion profit a year and is still crazy bloated. $420 billion in debt legitimately is not an issue for them. The only companies with actual problems are oracle and spacex
Meta making 60B a year doesn't make this any less scary.
If Meta put every cent towards their debt, it would take at least 6 years, assuming 0 interest and 0 new debt. The interest alone in the next 5-10 years likely would push it close to 1T debt.
How on earth are they meant to pay for this?
“You found it didn’t you?, then we weren’t actually hiding it, so please stop looking into our finances too much”
Keep this kind of comment to reddit please.
Would have been nice if the article had any substantive facts in it
The article is a very shallow restatement of the conclusions in this paywalled piece: https://asia.nikkei.com/business/technology/five-us-tech-gia...
Here's the un-paywalled version: https://archive.is/20260722205736/https://asia.nikkei.com/bu...
I counted all 27 stories on Futurism's frontpage and every single one was "AI bad" "Elon bad" except for 1. a story about Trump's diarrhea 2. a story about lettuce at Whole Foods
Pretty much Buzzfeed level doomscroll slop
Yup, at least a table of the on-books and off-books debt of the top 5 AI-building companies would be nice
If I were nearing retirement and had a decent pension pot where I could control it in fine detail...I would be diversifying away from tech stocks and holding some cash for immediate needs. There probably won't be much time when it unravels...I wouldn't be over exposed to the Nasdaq 100, for instance. Although you could probably pick some AI safe companies out of it.
The real problem will be figuring out where all this debt is
The problem is 1) the Nasdaq 100 is where the majority of gains are coming from, and 2) it very well might be another 3+ years before anything unravels, if it unravels at all.
If you're truly at retirement, absolutely cycle out. But if you're still young and trying to maximize portfolio growth, it's not obvious that a non-tech strategy would yield better returns.
Another thing to remember - rebounds are highly compressed. If you try to get out ahead of a downturn, you will not only likely mistime your exit but also miss the rebound. It can keep going down or stay flat for sometime. But when it rebounds, it does so quickly [1].
Don't try to be too smart. Especially if this is not your full time job. The market is not rational. Dollar cost averaging and proper risk allocation is the way.
[1]https://www.hartfordfunds.com/practice-management/client-con... & https://www.fidelity.com/learning-center/wealth-management-i... (if you prefer an additional source)
It's a really good point, and you will have time for the recovery.
But counterpoint, the S&P 100 gained over 24% this year. FTSE gained nearly 18%. Still good gains vs inflation!
You should have at least some money outside of tech to hedge though. There are "everything but tech" mutual funds and ETFs, and I keep about 15% of my investments in there.
Oh, that's crazy when you buy every single piece of computing hardware that's ever been made in the last five years, for inflated prices to preempt competition, then sit on it because there isn't enough electric in the entire world to power it, do you think that would be pure profit?
Article appears to be conflating big tech companies that print money with AI startups like OpenAI and Anthropic.
After the opening paragraphs about the accounting practices of meta, Microsoft, alphabet, etc - which, it should be noted are not “houses of cards” and earn plenty of money - the article quietly transitions to
> Experts continue to warn of an AI bubble, noting the enormous and widening gulf between company valuations and their comparatively measly profits.
I think hoping people will apply the “house of cards” logic by that analyst they quoted to the startups, when instead the analyst was talking about the megacorps’ accounting.
Only Oracle is in any kind of danger from their debt load, though. I have not checked SpaceX situation.
Meta, Google, Amazon, .. they can take the hit and go on.
This post should probably get removed by now
See here https://news.ycombinator.com/item?id=49027426
Your lease agreement with your landlord isn't debt (though if you don't pay it, you will get a hit on your credit report)
The lease agreement does become a financial liability and corresponding asset when it commences. In this case the article is adding leases that haven’t started yet, so GAAP accounting rules prohibit it from being listed as a liability. As a result it’s disclosed in the notes. nb the typical US investor way to analyze it is to still not treat operating leases as debt, since the rent is already reducing the EBITDA (a proxy for cash flow before debt items are paid). The other way to do it is you add back the rent to your cash flow proxy and count the leases as debt. You end up in a similar place.
For the last 20+ years i was really relaxed about tech industry - the fat cash positions maintained by the companies as a lesson from the early 2000-s crash (when companies were running out of cash and failing or severely downsizing, etc.) almost guaranteed that the tech will easily weather any trouble times - and that was clearly demonstrated in 2008 and in 2020.
Now i'm starting to get scared - these cash positions are basically gone if matched against the new debt and various creative financing taken on for the AI buildouts. That looks a lot like 2000 - very promising tech everybody is piling money in. And i'm sure that several years later it will provide several decades of tremendous success like Internet did in the last 20 years. It is just those few initial choppy years of the hockey stick trough that we may be coming upon and that many may not survive not having that fat cash position anymore, and thus those years may happen to be very painful for the tech and for the whole economy.
25 years ago there were a lot (estimates put even as high as 95%) of dark fiber left as a result of the dotcom buildout and crash. It was successfully put back into action several years later. I wonder whether we will have similar dark datacenters in a few years.
Really feels like the govt + industry, through protectionism and fear-mongering, are propping up a "Too big to fail" situation.
Long term, I think the best thing the economy could do is to make training on model outputs fair-use, as suggested by Ben Thompson[1]. Short of that, the companies should enter into distillation agreements with other US labs to let them make near-Fable models.
As it stands now, the companies want to hold all the upside. While also being culturally so safety focused - "only we have the right to regulate this" that its IMO counterproductive to US leadership in AI.
A different universe where X.ai, Meta, and everyone were also building Fable competitive open weights models - because they can distill - would probably be better for the US long term. But there's too much capital on the line right now behind OpenAI / Anthropic for them to do this.
They're really in a bind IMO.
1 - http://stratechery.com/2026/whos-afraid-of-chinese-models/
> Long term, I think the best thing the economy could do is to make training on model outputs fair-use
AI outputs have been ruled as not even copyrightable, isn't that even better than fair use?
Probably - The issue is more about terms-of-service and whether any company wants to go to bat on a years-long legal battle over this issue
Well that's a big of a separate issue. You aren't violating copyright law to use the output of one LLM to train your own, but that doesn't mean they need to let you do it. You likewise aren't violating Apple's copyright if you use iTunes to make a missile, but Apple doesn't have to let you do it. (Example chosen because that carveout is/was in their EULA)
This is probably bad right?
Something doesn't quite smell right about this story. Here's a key paragraph from the Nikkei story that this Futurism story re-tells:
> Companies disclose such future debt not in their balance sheets, but in annotations to their quarterly financial statements. This is a legitimate practice under accounting rules, but may make it difficult for retail investors to recognize risks.
Does that justify a "tries to hide" headline?
This is also one of those cases where the headline is free but the details are behind a paywall.
I do think the story itself is notable, but I expect the discussion is going to lack some nuance.
It's cute they think 'retail investors' are reading balance sheets in the first place.
Purchase commitments aren’t even future debt, they’re a future asset
Gosh it would be ironic if they were hiding the nuances behind the firewall in a way that makes it difficult for retail investors to read.
Futurism has a pretty strong anti-AI bias. Both article titles and the articles themselves tend to be editorialized. On a scale of zero to Ed Zitron, they're somewhere around the middle.
I don't treat it as a reliable publication when it comes to anything AI related.
It won't pay off if LLMs efficiency gets good enough to make those data centers obsolete.
It's a huge gamble.
Wouldn't improving LLM efficiency make them even more useful across the board, then they can enjoy the nice economies of scale?
The plan is to have LLM working completely autonomously, in that case, the more resources you have, the better. Perhaps people will use local LLM to ask questions, or coders use them for their personal projects, but that's not where the real money is.
The problem is that if the AI companies pass through the actual costs they're incurring, then charges to those companies will >10x.
If the companies don't see that kind of value (so LLMs don't become dramatically better in some kind of quantum leap from where they are now), they won't want to pay those costs. Already, most AI projects in corporations tend to fail.
If the efficiency of LLMs gets 10x better, then either corporations will "private cloud" their own AI or start using competitors that aren't carrying those kinds of debt loads from the "gold rush" phase.
If it's efficient enough you just run it all locally & screw all the rent seekers who want to tell you how you can't use their model & who will sell and misuse all your data they capture.
What happens when the AI god doesn't appear, and these models plateau in regimes supportable with high-end laptops?
If apple puts an inference SOC in their phone, the datacenters are all dead.
Truly, people have been saying this since 2017 and the Apple Neural Engine has proven them wrong time immemorial.
Apple's own desktops, with the fastest Apple Silicon GPUs and TDPs 20x higher than an iPhone still can't compete for real-world datacenter use even with RDNA clustering. Apple's GPGPU architecture is behind AMD at this point, there's a reason why Apple Intelligence is critically reliant on Nvidia and Google to provide inference backends.
Or: increasing resource efficiency may encourage even more usage, as happened with coal, oil and photovoltaics.
https://en.wikipedia.org/wiki/Jevons_paradox
Given how heavily subsidized it is at the moment, the efficiency isn’t as important. Typically efficiency would give you more at lower cost, but with token prices so removed from actual cost that plays less of a role here.
If the inference gets an order of magnitude cheaper, labs can afford to subsidise an order of magnitude more usage for the same marketing cost. So that part of usage will, if not accelerate with efficiency, at least still grow linearly with it. And there is a substantial amount of usage at or above true costs - everyone using a 3P harness, everyone on enterprise contracts, and everyone self-hosting an open weights model in a 3P cloud.
They improved the efficiency of coal?
Absolutely. Early engines were so inefficient that they could basically only be used in coal mines.
Massively. Extracting more useful energy from coal has always been a goal.
Very much unlike with software. Where the goal for long while is to burn as many resources as possible on end user devices.
I assume the reference was to the Jevons paradox, as described in Jevons' 1865 book, "The Coal Question". Watt's steam engine massively increased the efficiency of coal in steam engines, which increased the use of coal fired steam engines, which increased coal consumption.
Of coal use, yes. That's what inspired this: https://en.wikipedia.org/wiki/Jevons_paradox
The (any!) comparrison to photovoltaics is not acurate.Photovoltaics (PV) are primary energy producing infrastructure that produces its own fuel and is now verticly integrated into it's own supply chain, nothing other than life itself posseses this atribute. AI, is exceptionaly likely to work in exactly the opposite fashion and take its host out as it goes down.
When PVs got cheaper, more of them were sold.
PV had to prove that it was truely indispensable and also prove to have realistic prospects for improvement and volume production before investments were made, and then prices came down. AI has proven that it burns more money faster than anything else, ever. I will admit that I am an early adopter of solar, but an AI refusenic, but still there is no reasonable comparison of AI and anything outside of religion.
We haven't even started with a lot of things were we need a lot more compute:
Your real personal agent which knows you and helps you like "good morning elmer2, your calendar invite for dinner is today, you will need to leave at 18:18 if you want to use your normal public transport route per train. I put an alarm in your phone for you"
Agents to agents
Agentic teams.
Finetuned models for everything like Java/spanish coding model.
Very long term research like multiply hours or days or weeks and plenty of these in parallel.
This is going to sound a bit facetious, but I'm almost certain the Gmail / maps integration on my Samsung galaxy in 2014 did that.
I disagree in a way, part of the reason they can't really succeed at the moment is because it's way too expensive to really deploy at scale for most companies, but even for those AI companies themselves. If they can make business access subsidized/cheap the same way pro/plus/max/whatever plan are for regular users while still being profitable, this can work out. The other solution is if they do reach that "it's so super smart it's reinventing the world every day", but that one is much more of a maybe possibly one day.
What they can't do is the rug pull of pricing like Fable did, hoping for profitability while playing the "it's so super smart" card. It's very profitable, but customer will be very happy to leave for cheaper pasture and that's why the recent news about this or that cheaper chinese models make headlines.
Essentially, the rush now is "if I make it a boring profitable company I'm not worth a trillion AND i'm overshadowed that plays the singularity card even if they're bullshitting"
You do realize "subsidizing" means charging less for something than it costs to provide, right? So they'll lose a dollar on every sale, but they'll make up for it in volume? E2E is usually where the profit comes from. If they're subsidizing getting regular users on board (pro/plus/max), and they're subsidizing to get businesses on board (massive deploys), where can the profit possibly come from without a pricing rug pull?
I do, my point was answering to the "if it comes so cheap that" they would stop losing money of that, they would still need to subsidize for acquisition or some big clients or for rush times. It's the all-you-can-eat-buffet strategy.
I'm not saying I see them going that way or that I would, but at least THAT would possibly work.
Thank you for the clarification. I figured I was missing something in your meaning. Although "if it comes so cheap that..." means it will probably come cheap for other providers, and the margins wouldn't be there in the end because a price increase to take advantage of those big clients / rush times might lose the clients. I think we agree that their chances of becoming profitable don't look great.
How about we regulate private corporations so they can't take a "gamble" that's equivalent to a private company giving everyone ferraris on the idea that they will eventually all become formula 1 drivers and give back 10x the ferrari's cost?
Even better, that "gamble" will have to be rescued by taxpayer money.
no - see Jevon's Paradox
Jevon's Paradox ("As efficiency of resource use increases, usage of the resource increases") says otherwise. One things become more efficient, we can use them in lots of ways that would not have been viable before, driving up usage.
Don’t worry, they’ll get bailed out
This is the tech industry's version of 2008.
It is.
A predictable reset schedule with refinancing ("valuations"). Loose money leading to debt obligations to be paid in the future. Circular financing.
And what's funny, is it's precisely the off-book debt that will make the compression happen slowly. There's no bailouts this time.
It would be better if you all read the article this article was referring to:
https://asia.nikkei.com/business/technology/five-us-tech-gia...
But it's behind a paywall, so not that easy
The crux of the problem is models are not evolving anymore, they're iterating. Cheaper, faster, better. We're only seeing better, and that's because there is fierce competition with massive debt behind it. The "cheaper and faster" part is all taking place with local models. All of this adds up to a big red flag for a bubble.
They're obviously not taking on enough debt because I'm paying $200 per month for one AI, $100 per month for a second, a $20 "donation" to Gemini[1] paying for a service I never use just to fund its development, and yet here I am doing my own laundry, making my own damn breakfast, lunch, and dinner and manually tracking my Calories and macros, I'm putting my own damn dishes away, racking and unracking my own damn weights at home, and taking minutes to set up and record my exercise form and then take screenshots of it of key frames that I manually ask the AI's to form check (they don't consume video natively as an input) rather than have a robot do any of the above (including act as a fitness coach) because where's my household robot I can rent on a monthly payment? Can't be that expensive, servos and pressure sensors and cameras are cheap, what's missing here is that here we are and AI can't do shit for me day to day other than knowledge work and software engineering. I'd like these companies to take on as much debt as possible and rent me a robot that can do stuff for me. I have a petition for this that you can sign here if you want:
https://www.change.org/p/create-a-physical-embodiment-for-cl...
[1] I don't use Gemini for anything ever, I pay just to put my vote to them making a useful model (I know my $20 isn't much but I apply Kant'e categorical imperative - if everyone did it they'd take their AI seriously and not be in last place behind OpenAI, Anthropic, and even open-weight models).
You are donating money to Google, one of the richest companies in the world?
It really doesn't need your help, and it's already way too powerful. If you have money to spare, can't you give to good causes instead?
Alternative title: Memory, GPUs, and SBCs are about to become affordable again :)
Is the bubble bursting? Amount of the news about bad shape of companies highly invested in AI in the past days are quiet alarming or is it just bias?
The market can remain irrational longer than you can remain solvent.
This media frenzy can go on forever tho.
A Bear Sterns moment would be more solid. Oracle might ge the first to collapse if things go south, so we might be fine until then(?).
> Oracle might ge the first to collapse if things go south ...
Truth be told ORCL already kinda went south: they're down 65%, at $120, compared to their all-time high.
And? Its not my debt.
If they continue investing in compute, memory, memory bandwidth, network infrastructure, etc. it makes a relevant contribution of progress in all of these fields which I will leverage.
A small form factor PC with 100gb fast memory and being able to run something like sonnet or opus level LLM would be massive.
I have so many things i want to do and still sitting it out due to cost.
Lots of people didn't invest in mortgage backed securities but still got screwed in 2008. When something is systemic, you don't have to be directly exposed to be effected when it goes sideways.
Is this in practice what's going to happen, or are (1) the prices going to hike (and never go down) for the consumer and (2) the memory companies will just continue doing what they already do because they're still selling their old shovels to the gold diggers?
I don't see how this will benefit the consumer, but I might be missing some second order effect?
I read somewhere that the memory companies were massivly pushed for lowest prices especially by companies like apple.
I want to hope that this money will lead to more capacity, more R&D and lower prices in the long term again.
Nvidia would have changed its GPU strategy a long time ago if the demand wouldn't be real. They still can afford the GPU prices. But memory is not a monopoly.
For memory though i do assume a lot more people and companies want a massive amount more memory than ever before. I have 64gb in my pc for a few years now, i was quite happy with that. It became a no brainer. But today? Hey give me 100, 300 and even more. I really want to run bigger LLM models locally.
The thing is they actually pushed the price tags of memory and disks high so we wouldn’t be able to afford it. Unless ofc you rent from them.
If hyperscalers flop, and there’s a good chance they will, memory and disk prices will crater. They are historically the most volatile asset in tech. If Samsung, Micron et al can’t sell to hyperscalers they will switch back to consumer, because they can’t just turn off a memory fab without losing billions.
only that is not so. disk prices maybe, the memory will not be available to consumers because it's a tech that makes sense only for datacenters full of GPUs and massive power/cooling. by now all fabs have converted to it, there might be a lot of HBM capacity freed but no consumer devices that can use it. retooling all fabs to produce consumer level memory will take a lot of time if they even do it at all instead of just pushing for consumers to rent datacenter capacity directly.
all three major remaining players in the mem sector have already tried in the past to collude for memory price fixing.
this is the first time I'm rooting for chinese chip tech to reach more or less parity.
That switch will actually take a few months, technically speaking. What may delay it is manufacturers strategizing to avoid oversupply and trying to minimize their loses from all the investment in tooling they cannot longer repurpose. It will be a logistical and financial nightmare for them too.
Yes that is unfortunate for sure don't get me wrong this affects me but the overall benefit will still be bigger i assume.
10 years ago i watched a talk about the problem of compute vs. memory. Compute increased significantly while memory speed did not.
This gigantic investment will solve this problem.
So either this blows and we will have way too much capacity which will lead to cheap and mass amount of memory for everyone + cheap GPUs again OR AGI. So win - win.
> And? Its not my debt.
For the moment.
There are several ways that ordinary investors and even simple pension holders could end up stuck with the downside of this.
The debt risk hidden in CDOs wasn't your debt either but if you had a pension plan, the crisis absolutely cost you money you would have earned, and in many cases pension fund values dropped by five to ten per cent within a year.
The SPV/CDO comparison being made is by no means exact, but hidden debt at this scale surprising analysts tends to cause problems. If more institutions are severely exposed than anyone thought, it is bad.
Especially since any success strategy is predicated on literally unbelievably rosy predictions.
> And? Its not my debt.
Your view seems very myopic.
AFAIK they have heavily relaxed the rules for IPO. Pension funds are practically forced to buy from the top-100 companies, and these companies risk crashing much more than the others.
SpaceX value is already lower than at launch. If this costs are externalized to the common public, this will be your debt.
All these companies are too big to fail, in an environment where you can buy pardons and laws.
Hell, a 3T$ crash will have global repercussion and probably partially crash many other countries, too.
Luckily so far only one index changed its rules to cover SpaceX and what the AI IPOs would need.
I don't know how specifically significant SpaceX being lower than at launch is, because actually most IPOs underperform the market and their own targets for the first three to five years. What is happening to it is not that unusual; its overvaluation is.
I do think there is a major risk here, and ordinary investors and pension holders will be hurt.
I am not sure any individual AI company is too big to fail, though probably one of the big two will be rescued, most likely Anthropic. I think OpenAI will fail, and it'll be stripped for parts. As will Oracle, who are overexposed to it.
Thats a Elon Musk / Space-X issue thought not a Google and co issue.
How much real impact is this really though?
If it crashes the global economy will crash and they will have to print money for a bail out which means another 30% increase to the price of everything
But minimal real impact
Is it your contention, then, that the 2008 crash had minimal real world impacts?
Exactly, this is how capitalism works. Let them shoot for the moon and let them fail. Worst case their over-valued assets are liquidated and continued on with at a more reasonable valuation. Just make sure they play by the rules and don't make new rules in the name of national security, ie boxing out open source.
Here in the US "let them fail" only happens to businesses without political pull, which I'm pretty sure these companies have.
Some dollars are more equal than others you know.
Except this is not how American capitalism works at this scale, and it’s ridiculous to think their debt isn’t your debt when you have the entire country’s history to look back on and count the numerous government bailouts.
Do you think the businessmen who sat on the dais at Trump's inauguration plan to just fail without getting him to put his small thumbs on the scales?
It has nothing to do with the administration. These companies did the same thing with the last, and they will do the same thing with the next.
You could say this but the previous administration was not talking about taking a 10% share in both companies; this one is (thanks to Sam Altman's very personal lobbying of the president)
It manifests in many different forms.
I guess "try to hide" means to be posted about all over the news weekly.
Is it time to short AI companies?
Market can remain irrational longer than you can remain solvent...
Simply choosing not to get involved might be most reasonable action.
In mice! It's already factored in to the price.
We also may be at the wealth inequality level where prices become… weird.
If there is really only a few dozen people doing the buying and the selling at the top on a weighted basis, then the prices are whatever they convince themselves of.
There's only one mostly AI company you can short right now and everyone's already doing it.
SpaceX is already 3x as expensive to short as the next biggest megacap. Good luck everybody.
What is that company?
Oracle.
I don't think the GGP meant that one. But yeah, that is one too.
Ummm, whose that?
with US Government owning huge chunks now "too big to fail"
bailout incoming
will make subprime crash seem like child's play
sure you won't be able to ever afford a home but we'll have tons of cheap super-hardware barely used
The housing market, which is backed mostly by the mortgage interest rate, will crash right along with the stock market. Houses will become much more affordable!
[dupe] Discussion on source: https://news.ycombinator.com/item?id=48987863
the business model is burning billions, hiding the debt, and telling investors the losses are actually R&D. we used to call this fraud. now it's a pitch deck.