"Wall Street's Odor of Decay"
by Bill Bonner
Poitou, France - "A quick weather alert. All week long, our computer - somehow in league with the French authorities - has alerted us to an Extreme Heat Advisory. Today, the temperature will be pushing up to 100 degrees. Tomorrow, too. The Mirror: "Extreme heat is gripping the UK and Europe this summer, with nearly half of England and all of Wales officially in a drought. England’s Environment Agency and Natural Resources Wales announced their driest months on record, marking the third time they’ve been broken over the past five years. It comes in the wake of four record-breaking heatwaves since May, which Chloe Brimicombe, a climate scientist at the University of Oxford, explained that adaptation to and mitigation of climate change are urgently needed. “We need better long-term planning.”
The Washington Post: "Few places around the world have experienced more unusual heat and drought recently than Europe. A record late-spring heat dome was a harbinger. Then the heat domes just kept coming. These extreme conditions have turned once-lush landscapes dusty brown. Rhine and Danube rivers have been particularly affected."
Is this just the random movement of weather patterns? Or does it bespeak a more profound change...towards the final furnace? We don’t know...but here in France it feels End Times-ish. Scorched earth. Zombie trees, still standing but dead to the heartwood. Ground so dry the grass crunches like glass beneath your feet. And people, like the remnants after the fall of Rome, cower in their houses afraid to show their faces in the light of day. A heat apocalypse? We don’t know. But a summer rain is in the forecast for Saturday.
Meanwhile...There is the odor of decay on Wall Street too. It smells as though the AI brew may be getting ready to turn.
There are three main groups in the AI complex. There are the chipmakers — Nvidia leading the pack, followed by Broadcom, Micron, AMD, ASML and TSMC. They are the pick and shovel sellers. Together, they are said to be worth $11 trillion. But they have only free cash flow of $236 billion. The theoretical investor, if he could buy the whole group and pocket the FCF, could expect to get paid back by the year 2073.
That assumes that no new tech comes along in the next half-a-century to compete with them...and no further capital spending (no new innovations requiring investment) are necessary. We might as well assume that the Baltimore Orioles will win the pennant each year for the next half a century too. But at least we see, once again, how hard it is to make money from an investment when it is over-priced at the get-go.
What sends the chipmakers into orbit is spending by another piece of the confabulation - the ‘hyperscalers’ - Microsoft, Alphabet, Apple, Oracle and Meta. These are companies that survived and grew fat after the last big boom/bust cycle in tech. They are worth, together, about $16 trillion. Now, instead of sharing out earnings with stockholders, they spend their money on capital investments (Capex) trying to stay on top of the latest tech innovations. Which just goes to show how hard it is to make money in new tech at all; there is always newer tech.
Their total Capex for the next twelve months is said to equal to nearly 3% of GDP. And there’s the trick. The money, flowing into the AI cluster, flatters sales and profits for them all. Capital goes into one company...and is taken as income by another. The casual investor sees the whole whoop-de-doo as a boom...and is desperate to get a ticket before the show leaves town.
Finally, there are the explorers and miners themselves...OpenAI, Anthropic, xAI among the most prominent. In turn, they contract with the chipmakers and hyperscalers...providing more ‘proof of concept’ and further exciting the AI bulls. Behind them all is the hunch that if we were to reduce the cost of knowledge...thereby eliminating the salaries of the people who have it...we’d all be a lot better off.
But it’s all very well to make something cool. Then you have to sell it. Henry Ford doubled his auto factory wages...giving ordinary workers the money they needed to be automobile owners. In the AI revolution, however, instead of doubling their employees’ wages, AI is firing them. Forbes: "Companies Are Firing Workers To Fund AI That Isn’t Working Yet." In the Dot.com craze, investors believed internet traffic would double every 100 days. So, presumably, would sales. Success depended on getting as many ‘eyeballs’ as possible.
But now AI may actually pluck out the ‘eyeballs’ it needs to pay for itself. Eventually, as in all other big tech revolutions, the displaced workers will find new sources of revenue. Perhaps, as in ages past, they will rent themselves out as grooms, gardeners and chamber maids on the vast estates of the AI impresarios. But between the pink slip and the livery, it could be a rough transition.
And while the eyeball base may be shrinking, we are supposed to believe that the big AI ‘labs’ have a tollbooth on the road to tomorrow. This is not an impossible thing. The costs of entry into the business are so high that, like oil retailers, there are naturally only a few of them. Or, citing reasons of ‘national security,’ the feds might take charge of the turnpike themselves. The big tech bosses stood shoulder to shoulder with Donald Trump at his second inauguration. Could some public/private backroom deal be in the works, forcing AI traffic onto a few controlled highways - with regulated tollbooths? Maybe.
But every bubble eventually makes eye contact with its pin. The AI craze is facing all the prickly thorns that typically doom an investment mania. Most important, whatever trickle of profit the industry eventually produces will be dwarfed by the torrents of investment capital that have flooded in to get it.
After the high-water mark in 1999, Microsoft, a genuine success story, saw its stock price cut in half. For Intel investors, the pain was much worse. The stock did not recover until this year - more than a quarter of a century after the bust. And JDS Uniphase investors, just to take a name from one of the tombstones, lost 97% of their money. The pin is patient. But we doubt AI investors will do much better."
