This is a significant proportion of the market. Having this amount of money not understood is harmful.
Is this money not understood by the tech giants taking on the debt? I imagine they understand exactly what’s going on.
I think the way they see it is that it’s riskier for them to miss out on timing this investment.
The other question is “where else should they put their money?” Tech giants before the AI boom made a heck of a lot of cash that they had nothing they could do with it. Remember before AI when the existential crisis was stock buybacks? That was a bunch of companies who had so much profit that all they could think to do with it was buy their own stock back.
I am sure there will be a bubble pop, correction, general downturn, or something like that, but the question remains how much it’s actually going to matter. If AI blows up in Microsoft or Google’s face they’re just going to write it off and spend a decade paying zero income tax, or whatever other clever corporate accounting gets them out of that pickle.
If you or your retirement is a shareholder in one of these companies, you'd rather they return $100 billion to you with boring buybacks or dividends than put it in an exciting AI investment that returns $1-$10 billion. Even though it didn't end up completely worthless, it's still a bad investment.
> If AI blows up in Microsoft or Google’s face they’re just going to write it off and spend a decade paying zero income tax
As a shareholder, you'd also rather they return $100 billion to you than put it in a bad investment that returns $0 -- even if that bad investment lets them write off $20 billion in taxes over the next 10 years you'd still be $80 billion better off.
> how much it’s actually going to matter. If AI blows up in Microsoft or Google’s face
An AI winter shouldn't be an existential threat to these companies -- but "the share price is 10% - 20% lower than the counterfactual where they didn't make these questionable investments" still represents a lot of lost wealth for shareholders -- billions (or trillions for the industry as a whole). A lot of that wealth is the hands of ordinary people, often through retirement investments in index funds.
E.g., if Google doesn’t invest in AI then AI will kill their search engine business. A lot of us don’t love the Google search AI Overview but now they’re competing directly with ChatGPT, and they’re essentially not a search monopoly anymore.
One way to look at a bust AI investment is the destroyed value of the stock like you mentioned, but perhaps that’s somewhat hindsight-biased? Perhaps the reality for some companies is that if they sit on their hands and do nothing they lose 40% of their company value and if they spend a ton of money on AI they lose 20% of their company value. Of course we don’t know the outcome yet.
AI has already killed their search biz. No one even clicks on results anymore. How many ads are they clicking on these days?
If you’re a retireer yeah you just want a steady dividend (or buyback).
But i mean for a 401k that won’t be spent from for 20+ years you absolutely want business to be investing into themselves. Otherwise go buy gold.
Inside a 401k dividends get reinvested, on top of that companies value income go up with inflation simply because they’re getting a similar cut of larger numbers.
That’s why long term stocks are a vastly better investment.
As a shareholder I'd rather them take the $100bn and invest it in growing the business further and generating $200bn. That's the more likely outcome anyway.
Most shareholders in Time Warner, for example, regretted giving 50%+ of the company to AOL shareholders, even if everyone was correct that 'winning the Internet' was the key to growing the business.
Maybe they are counting on taxpayers to bail them out if they crater in a 2008-scale failure.
That was with a US government that was significantly less indebted than it is now, both in real terms and as a percentage of annual GDP. The crude birth rate is about 30% lower than it was in 2007. The generation that was coming of age at the time is the first in American history to have a lower quality of living than their parents.
IMHO, unless there is some massive geographic and societal divider that stands between the likes of Sam, Dario, et al. and the rest of the country at the time of any sort of collapse, they'd be far, far better off just taking the losses and not bothering American society again. It won't be pretty if they come asking for a handout.
I hate this way of thinking. The parents, at the same stage in life, didn’t have magical devices they could hold in their hands that would answer any question ever asked in human history, for example.
Progress matters. Just because the average 20 year old at that time could rent a 10% smaller apartment than their parents could, doesn’t mean they would necissarily trade what they have access to in 2007 for what their parents could access in the eighties.
People in 2007 are vastly better off than in 1984.
I mean there's nice things now too. Working from home is exceptionally nice. But a lot of it causes extra stress too. Like social media, polarisation, constant notification nagging. I turn most of that shit off but people still manage to pull me into that at times.
You'd also reasonably imagine that every major financial institution on the planet in combination with several sovereign governments would collectively have a handle on the market and yet CDOs nearly bricked the global economy in 2008. History suggests your faith here is likely misplaced.
[1]: https://www.youtube.com/watch?v=iJ84XMTugFs
It isn't to your original question but in terms of giving a cost to misunderstandings of finance one needs look no further then American politics.
401k growth is wrongly the face of the American Economy when it should be more tangible attributes like the understanding of debt at the macroeconomic level.
So if this is in fact a bubble, nobody can really act differently until the market stops treating AI spending as a winning strategy.
If you’re a Japanese company making spanners in 1988 and you’re not speculating in land while all your competitors are, your profits are going to look terrible in comparison and the board will probably try and fire the leadership and replace them with people who’ll speculate in land.
This is part of the reason bubbles can go on for so long - there’s often a point where a lot of people sort of know it’s a bubble and it will end in tears, but they’re still incentivised to participate
It’s not like we have any other industry doing well (or could be made to do very well with such an investment that would also pay off).
Maybe a few trillion could allow us to overtake China as the world’s leader in battery technology and manufacturing…
But it would take more time, effort, and a lot of logistics. The payoff from AI is much sooner…
Well yeah, that's the most obvious way this plays out
I'm just spitballing here, so bear with me, but maybe increasing the value returned to the people doing the actual work that created the profit in the first place.
Tangentially reminds me of the Costco Hot Dog story. [0] We know that companies rather increase prices for consumers to have better balance sheets, than changing product strategies, and for sure we know actual workers get the shortest end of the stick.
[0] - https://en.wikipedia.org/wiki/Costco_hot_dog#Cultural_impact
Dividends.
Fair. I think everyone who is financially astute knows what's going on. I think pretending "oh, we didn't expect this" is at best, faux naieve. But, I think underlying "understand" is "don't care" -I think there is a segment of the investment industry which only looks to their own profit, not the "build a bigger market" outcome. And so, wiping 4T of debt out, with some recovery in the ashes can be sold as a win for them, if they can be in the right segment of the market.
I don't think it's a net win overall. I don't think driving worldwide RAM prices high was a win. Mind you, I bet RAM manufacturers are quite happy.
Look back at the “dotcom” bubble. And the Savings and Loan crisis. And the Subprime mortgage crisis.
This is going to be 10x all of those put together, minimum.
Except the size. This is really a big puffer of a bubble :(
There's a game-theoretic way of modelling this situation called, from memory, a modified Dutch auction. The way it works is that the winner pays the difference between their bid and the next highest bid, and so on all the way down. It models the way in which players are motivated to extend themselves almost infinitely in an attempt to win something unwinnable (what are the success criteria for "winning the AI race", in other words how do you know when you've "won"? And what do you get for "winning"?).
Many things change in the world but not human nature, we are doomed to repeat this forever
Wtf are the downvotes. It's a question.
We don't live in that world anymore. The bailouts changed the world forever. Since 2007 there is no such things as "with their own money" when it involves a big company risking bankruptcy. It's no longer private money.
Chancellor on the brink