AI Companies Are Trying to Hide a Staggering Amount of Debt

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.)

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.

They're mostly either AI proper, or hardware manufacturers benefitting from AI boom, or provide cloud services to AI companies...

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"

The COVID crash nearly hit those levels also

https://workplace.vanguard.com/content/dam/inst/iig-transfor... (page 78)

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.

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."

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?

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.

All other things being equal, debt is a downward force on that perception.

That is a general point, although I'll stipulate it isn't a factor in AI picks because they are approximately all doing the same and because the market is giddy with FOMO. More strongly, i believe that some Schmanthropic with equivalent offering and unit cost and userbase but with sustainable finance would signal, through lack of recklessness, that it is not "going to the moon". I'm willing to call this "irrationality". But hey, I'm not exposed, other than being a taxpayer with savings who will inevitably foot the bill for the bailouts.

>Experts continue to warn of an AI bubble, noting the enormous and widening gulf between company valuations and their comparatively measly profits

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.

1. It's widely known that Spacex is overvalued. How is it possible for it to be widely known, and yet still overvalued? Either it is fairly valued, or these issues are _not_ already priced in.

2. If people read Enron's filings, they could have been aware of the shady reporting, and should have seen the reduction in price coming. But clearly most did not! Enron persisted for a long time despite shady tactics, that essentially were happening "in the open" if you dug into the paperwork.

3. The same argument can be made about housing loans during 2008, the dot com boom in 2000, and the response to covid in 2020

If you're interested I have much more to say on the topic! It's fascinating and I've only recently been convinced that the efficient market hypothesis is untrue (or at least it is suspect). I also highly recommend any of patrick boyle's videos, he makes great content often touching on this topic.

disclaimer: I'm not an expert in this industry, or really in this industry at all. I just like learning about it.

Here is the link (oddly I could not find it with HN Search): https://news.ycombinator.com/item?id=48917135

No need to worry or discuss further, it’s all priced in! Everything’s totally fine!!

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.

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

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.

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."

My concern is that the subprime mortgages were not perceptible to even savvy fund managers, and the same thing could happen again; and also, even if that insidious risk-poisoning of institutional funds does not occur, them a collapsing bubble still fucks us all into recession.

Who is stuck with that bill and what is their ultimately their primary source of financing?

but now the story is different. while the effects of ai on other industries and classes may be unpredictable, (a) the tendency toward ai itself (the market demand for economically useful intelligence) seems plausibly more inevitable than any tendency in the history of capitalism (certainly more inevitable than any in the history of these big tech companies) and (b) the technical scaling laws have been eerily steady (intelligence as log of compute). taken together, (a) and (b) make it much easier to finance than anything meta or google or microsoft have ever worked on. there are risks, but there is at least also a model, a projection; that model did not formerly exist, for these companies. anything outside their core business was literally a guess.

the upshot of these stabilizing patterns is that the industry is in a certain sense just maturing. that is, its financial profile is starting to look more like other mature industries that are mostly juggling around known quantities to try to get a small edge that they can, with financial leverage, magnify enough to M&A the competition away and thereby secure the only relief possible in a well-delineated, well-populated niche: monopoly by scale/consolidation rather than by differentiation. (which is not to say that these mature industries are less competitive! they are actually more competitive; the intensity of the competition is what drives the "anti-competitive" behavior.)

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.

Very much unlike with software. Where the goal for long while is to burn as many resources as possible on end user devices.

I'm not saying I see them going that way or that I would, but at least THAT would possibly work.

"Big Tech" as a pejorative started on the Right. That never changed.

Remember the hubbub about companies having "free speech" while they deplatformed and censored critics? That never sat well with a certain group of people. And they're the kind of people with long memories, that might have guests entertained as a visible sign of submission, and not as friends.

The more interesting revelation will be if certain persons can psychologically come to admit the people they are against are politically aligned with them, and their opponents are more intelligent than they are willing to let on.

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.

But minimal real impact