I very much hope this, and other threads on the financially insane behaviour of the tech sector get more surface. I don't think having this die in "new" is helpful because this stuff, the norms of how business looks at the balance sheet and decides what is, and is not rational business investment, this stuff is -> important <-
This is a significant proportion of the market. Having this amount of money not understood is harmful.
Not that I don’t agree with you in many ways, but if I was going to push back a little bit I’d ask you this:
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.
> 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.
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.
> 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.
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.
I think the way many of these companies see it is that the downside risk to not investing is that some of their verticals move into irrelevancy.
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.
> 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.
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.
I think it's important to remember that we are biased in ways that aren't obvious to us, but will be obvious in retrospect.
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.
Sure but that’s besides the point. I’m not suggesting one can’t make bad decisions. I’m suggesting that framing the investments in a negative light has no meaning precisely because of this hindsight. Is everyone who said Tesla would crash (I have no direct ownership) happy they sold their shares? Don’t invest in what you want to happen. That’s a fool’s game and that’s the one that is being played here by suggesting the outcome of these investments will be bad instead of good. Nobody knows.
One possible explanation for this is that it’s basically a systemic failure of the market. Shareholders are pricing companies as if being a winner in the AI boom is the most important thing. Company leadership then must position themselves as a winner, or the market responds by devaluing their share price and they lose their jobs and probably their incentives. The most legible way for leaders to show they’re in the AI race is to spend money on AI infra, even if it means taking on debt to do so.
So if this is in fact a bubble, nobody can really act differently until the market stops treating AI spending as a winning strategy.
I don't think the root is shareholders. These numbers are getting absurdly high, and so it's predictably being driven by commercial banks and debt. And lo and behold, the US monetary supply is skyrocketing out of control - up ~6% in a year, more than a trillion dollars, driven primarily by commercial lending. [1] As the bubble starts to shake all we need is for them to start packing the debt in asset backed packages and we're good to go, or at least as good to go as 2008 was.
It’s the same in every bubble, there is a term for it that I can’t remember.
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
Microsoft is on its way to losing they have been trying desperately to find or hook on to the next great thing. And they have been failing market inertia is keeping them afloat. But they’re on their way to taking a hit like Intel, I don’t think the current CEO at Microsoft is gonna survive Copilot and the collapse of Xbox.
> Is this money not understood by the tech giants taking on the debt? I imagine they understand exactly what’s going on.
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.
A company with over a trillion dollar in market cap is extremely unlikely to be a high growth business. Big tech are (or at least were, before their recent splurge on AI) very profitable businesses, often trading at reasonable P/E. Not quite the value stocks, but regular, good investments. There is nothing wrong with staying in this model.
> 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'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.
> 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.
I think the that they feel the need to do these off balance sheet shenanigans is the issue. They're obviously extremely worried that their credit rating is going to be downgraded otherwise, why bother?
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.
> 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.
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.
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.
"I imagine they understand exactly what’s going on."
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.
They're sitting on non-cancellable commitments from Anthropic and OpenAI, which once public will become the markets problem while employees and private equity walk home paid.
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.
THIS IS NOT DEBT. With debt you are given money that you can spend, and then you have to pay interest for a while and then return all the money you spent.
These are signed contracts for future spending. However, we don't know what the terms are for those contracts and how easy it is to get out of them. For example, with Anthropic and Google's contracts with xAI's compute, they signed a long term contract, but they can get out of the contract with 3 months notice. That isn't a good indication of future spend. The same goes for all of these $3.2T, so these numbers are sus at best.
This is very much like the 2008 disaster. You effectively have debt laundering happening whereby speculative income / debt is manufactured into higher grade than it is by passing through multiple parties / steps / debt-like vehicles that look independent but in fact incorporate cumulative risk built on highly correlated factors. Downstream party D has no visibility that the specific uncertainty emanating from party A upstream is 100% correlated with their own risks, along with parties B and C through which the liability passed on the way to them. What looks like independent risks are actually all the same risk and completely fragile to a single event that has quite a high probability of occurring.
I have an example. Greater than 90% of knowledge workers in tech now are required and expected to use AI. If they aren't, their job prospects are at high risk.
That's an exposure in the Party A-Party D frame is it not?
I don't think so. If AI gets really expensive and/or proves to be useless, those requirements will go away. And it's not the knowledge workers paying for those tokens either.
yeah it's approaching the point where all risk is that AI is a bubble, and everyone is exposed to it. It's not exactly hidden, and it's not easy to escape either.
This very much is debt. Is it your contention that debt can ONLY arise with an exchange of cash? Because as an accountant I find this preposterous. Under IFRS 16 we recognise, for example, long-term leases as debt, because they are obligations to the business. An obligation to pay in the future is almost the definition of debt. An interest rate is not part of that definition, necessarily.
This is inaccurate. A conditional commitment to spend is not necessarily debt.
The difference is whether it is an executory contract.
If I sign a contract committing me to spend $10m in the future, but the other party is obligated to deliver that $10m of services, that is an executory contract and it is not considered a liability under IFRS because the commitment is contingent on the other party performing.
You're mixing this up with property leases, which create a debt because the tenant has obtained a Right of Use (ROU) asset, which is offset by the debt (lease payments). Leasing a property for ten years gives you both an asset and an offset liability, but only once the lease has commenced.
An obligation to pay that is contingent on the other party's performance of a contract is absolutely not a "debt".
Now, once that data center is built and turned over to the client, that may create an ROU that would generate both an asset (the ROU) and the offsetting liability. But if it's some future data center that will be built, it does not.
Even then, once the data center is built, an ROU may not be created: if the commitment is for a million GPU hours, with the seller having some freedom on how to deliver those GPU hours, that does not create an ROU. If it's for 100 specific GPUs for 10,000 hours each, it does, because it's about the right of use for those specific pieces of property.
For lease accounting, the asset and debt are only created at the point the lease begins, not the signing of the contract, so your reference to IFRS isn't relevant here.
It is not the same thing. In long-term lease you get immediate control of the asset you are leasing and hence the lease becomes a liability in the books of accounts (you record both the asset acquired and lease liability in the books and it balances). A contract cannot be recorded in your books as a liability as neither work is performed yet nor any cash transaction has taken place. It is just a commitment. Once the contract starts being executed, only then can you record in the books.
A liability is not necessarily debt. You can have liabilities on your balance sheet for future obligations base on current circumstance. But the terms of those liabilities might allow exiting without fully realizing them.
> long-term leases as debt, because they are obligations to the business
I don’t think this is how your average reader of this would interpret debt.
When I and most people think of debt they think a negative equity account balance that you pay off to a bank or lender like a mortgage or credit card. Not a 24 month apt lease because no equity is being exchanged.
In part because of the reason OP said which was severability which isn’t something you can do with owed debt.
Graebers debt demonstrates that this is the most common way to think about it.
Call it what you want, but if the companies who received the orders are able to treat them as assets/income then the overall macro effect will be the same as with debt: leverage. If funding begins to dry up it may not be Anthropic or Google facing a liquidity crunch, but someone will be.
Part of the problem if I understand correctly is that many of these commitments are now used to value related companies. I.e. if the some of the contracts are cancelled, many companies will drastically have reframe their profits/stock prices etc.
Exactly. This is like calling an order debt. Orders can be canceled, and market is clearly starting to price that in based on significant derating in semis over the past few months.
If OpenAI does not buy compute from Azure will they go bankrupt? Probably not - and that should be a . There is very likely a lot more discretion in these agreements than this article implies.
This sort of reporting is a clear indication of where sentiment is.
Well, it can trigger the next financial crisis either way. Because now that spending is on the books of two companies: xAI, as a projected income, and Anthropic, as an external investment[1] that justifies their overblown valuation. Now, if Anthropic decides to get out of that deal, then the stocks of both Anthropic and xAI will crash, possibly triggering a wider market crash.
[1] it is an investment because I think xAI agreed to sell their compute infrastructure well below market price.
One thing the tech giants are worried about are being left behind on expanding their compute. So what do they do? Sign a contract to agree to purchase $XT in compute over the next X years. It’s like buying an option - it’s a right, not an obligation to purchase.
If I were an investor and spent $10,000 to buy options to purchase $1,000,000 in Google stock, it’s not “$1,000,000 in hidden debt”
The company budgets cannot sustain this. Behemoths like Google and Amazon with insane balance sheets are now on their knees begging for loans.
We (as a country) should contain our exposure to this insanity. If companies want to go bankrupt let them go, but we cannot strangle the liquidity of the entire market to feed the ambitions of these handful of companies.
The Fed decides this, it's the whole point of the Federal Reserve being independent from the political parties. They will do the right thing because a slow boil is better than a whole bunch of people starving and having a civil war.
Look at Russia. Nabullina was handed a complete shit sandwich deluxe with the war, but she did the economically right thing with the cards dealt, raised interests to 20%, forced businesses to trade in rubles, freeze equity/bond trading, cut regulation on banks, etc.
And the Russian economy which should have been in shambles like Irans because of sanctions is still kicking after soon 5 years of war.
Sure it's not really prospering and growing, but it's a graceful decay rather than a collapse and internal war like in Venezuela.
Well, good thing the tech giants have aggregate RPO (Remaining Performance Obligations, also known as "backlogs") -- that is, money committed to be spent by customers over the next 3 - 6 years -- of $2.33T.
Sure 2.33T is less than 3.2T but these RPOs were $0.5T in 2022, and have been growing YoY at rates of anything from 84% (Microsoft) to 390% (Google.) Microsoft and Google alone are expected to recognize about $0.5T of that revenue over the next 12 - 24 months.
Is the CapEx and debt ("hidden" or otherwise) growing faster than the RPOs? Eyeballing the numbers, maybe? But generally service providers try to stay ahead of the demand curve rather than behind, so...
Is there concentration risk in the customers? Yes, OpenAI and Anthropic seem to be like $1T of these RPO's? That still leaves $1.3T of other demand.
Is there demand? I mean, RPOs come with a commitment, and have you seen the cloud revenue growth numbers recently??
As another comment here points out, is it really wise to assume the tech giants are NOT financially savvy enough to know what they're doing? Some of these, especially Amazon and Microsoft and yes even Alphabet, are well-known for being highly fiscally disciplined. This is a huge bet for them, even an existential bet, but maybe it's because this is an existential kinda situation.
This is quite misleading. It includes numbers for commitments for leases of data centers and payments for power that are decades into the future.
Even if AI completely busts and all of these servers are worthless that doesn't mean the data centers are. There's still a need for data centers to host non-AI servers. The hyperscalers will close/sell other data centers and serve from places where they have long term commitments at.
3.2 trillion sounds like a lot until you spread it over 20 years and half a dozen trillion+ dollar companies. It's hard to tell how much a bag they're holding but it's almost certainly negligible compared to revenue and market cap. The only real systemic risk is the risk of for some reason not needing any data centers.
As I've been pointing out a little bit recently -- the 'downside' scenario -- somehow we conclude we have enough inference at our world's desired quality and therefore demand stabilizes below that of these datacenters -- would be GREAT for the world. Super cheap intelligence for all.
If some lenders go bankrupt on a datacenter note post-buildout and the capital structure is reworked, lowering the costs by removing capitalization costs from the cashflow of the inference provider, that is all to the good of people who did not do the initial lending.
I think that is extremely unlikely, but it's good for datacenter doomers to think through these scenarios IMO.
Your take seems a bit optimistic if we use the dot-com boom as an analogy. The dot-com boom sped up a massive infrastructure build-out, but also left damage that lasted for a very long time, with many organizations collapsing, and others taking a very long time to recover (e.g. cisco networks). It also seems that these 'data-centers' have a higher depreciation rate than 'dark-fiber' did post-dot-com, which means that there is likely to be greater capital waste.
I am not sure whether the dot-com boom was a net-positive, and the AI boom may be less productive.
It absolutely was a net positive. On the infrastructure side we got datacenters built and tons of dark fiber put down. At the start of the boom we had only 2G cellular for goodness sake. I think you could argue we wouldn't have necessarily had the rise in cloud compute without some of the 'overbuilding' of datacenters in web 1.
For reference this 'massive build-out' resulted in, according to a Berkeley study I found, 500MW of total datacenter power in the US across 320 locations at end of 2020. This wasn't too much for very long: as of 2005, according to Tier1 there were 511 datacenters. And it was likely only really a year or two: Dupont's VA3 utilization numbers published it at 50% utilization in 2003, 89.4% in 2004, then full thereafter.
Meanwhile, these infrastructure improvements allowed, for example, things like the iPhone to be built and deployable -- there was 3g, there were a LOT more web devs that could create the early (web only) apps the iPhone needed to compete. This in turn allowed another round of investment to be built on top of all of that.
On the capital side, investors were also able to buy Amazon at around $1 / share. AAPL at iPhone launch was $7/share. I haven't split adjusted either of these, this is just from memory.
I don't think a bust was necessarily good but the boom undeniably built out infrastructure, a small fraction of what the world is currently using, and did it pretty quickly, and then post bust that infra got bought out in a capital efficient manner. I think that's the bear case here.
Put another way, the Dotcom one boom was wrong about two things: timing was too fast, and the predicted scale of change was way, way, way too small. They undersold the future.
My point is that these hyperscalers need X traditional data centers and Y AI data centers. If Y goes to 0 that doesn't mean they eat everything they've spent on those data centers. They get converted to serve non-AI loads while other older ones get abandoned or leases not renewed and so on.
In that scenario the GPUs are a loss. But really at this point inference is so profitable it's hard to imagine these data centers not being able to at least cover operations & rent.
Ai datacenters are quite different from traditional datacenters. For example, a massive cost for ai DCs is power and the grid to support it. Regular DCs don’t need anything like the same power.
Not sure when you last were in SF but there is probably half a billion in Series A capital within 1 mile radius of me raised by very nebulous AI start ups.
This is something people miss when comparing things to dot com. It was a very thin layer on top of something new. 90% of the companies were speculative jokes with no basis in reality. Anthropic makes a profit. Google is a mature company that makes a profit and will continue to do so.
Cisco networks took a very long time to recover, but in the meantime, everyone else enjoyed massive growth in cheap connectivity.
Capital waste is only capital waste if the physical goods that were built are no longer useful for anyone. Otherwise, it's only a waste for the people who lent money.
The downside scenario isn't AI equity getting zeroed out and lenders getting crammed down. It's the federal government deciding that AI capabilities are of national strategic importance and throwing trillions of taxpayer dollars onto the bonfire.
It really depends on the "somehow". The most realistic downside scenario, it seems to me, is that most people don't care too much about super cheap intelligence for all because there ends up being another bottleneck for most of the things we value.
Like, trains are an incredible technology which transformed the world, but very few people go around counting their lucky stars that they live in a world that permits such wonders. It's a train, it gets things where they need to go, and by the way isn't it so annoying that sometimes it doesn't quite arrive when the schedule said it would?
> The only real systemic risk is the risk of for some reason not needing any data centers.
How is this not a systemic risk? Asserting that:
> There's still a need for data centers to host non-AI servers.
Isn't true because a NVL72 rack consumes 23x the power of a traditional server rack which is why there's new construction. You could retrofit such a datacenter with normal servers but then you're taking a loss on the GPUs which is the majority of the cost.
It's not a systemic risk because outside of society collapsing we are going to use lots of data centers regardless of what happens with AI.
At this point the question isn't really if we're going to use the GPUs they're building out. The question is how much profit they are going to make. I've seen people show margins as high as 80% on inference. That's a lot of headroom before we see data centers being shut down.
As of writing, the most dense server CPU is the AMD EPYC 9965, which has 192 cores. It is possible to build a 2x CPU 1U server, so that is 384 cores per 1U. I am unsure what is the limiting factor: heat or space on the die (probably lots is just L1/2/3 cache). When you look at the interior of a vanilla 1U server, I don't think there is any remaining space to add more sockets (CPUs). Final note: SuperMicro also offers an Ampere ARM chip with 192 cores.
It is, by definition, NOT debt. With debt, you are given a lump sum of money. These are spending contracts, but any contract has the ability to be gotten out of, unless your lawyers are very stupid.
debt means you owe money. There is no requirement you get anything in return for taking on that debt. The definition, since you wont look it up, is "Debt is an amount of money, goods, or services that one party (the debtor) owes to another party"
If I commit to buying some future goods, and sign that I will hand over that money, that's debt. It's money I legally owe someone else. Counting that as debt is totally fair, not counting it is shady as fuck.
If I rent a house, I receive no money, in fact I receive no tangible goods at all really. Just the right to occupy a space under some pre-agreed rules. Yet, I now have debt.
They mean you're obligated to the money. You can't back out. You're in debt to them. But, some of this does not include obligation, so fundamentally isn't the same as debt.
So the total US government debt is 40T. For all of the USA. And somehow the AI agents of the USA have 3.2T in debt?
Ray Dalio just found his next topic of conversation. The debt burden of the average AI agent. Those agents better get PRODUCING. GO WRITE ME SOME CODE CLAUDE!
This wouldn’t be a huge issue if they had the cash to pay for it. The problem is they don’t so these companies that once had great free cash flow are now down on their knees begging for cash.
In the higher interest rate environment we’re heading into this is a potential disaster. For the new players like Anthropic and their likely “junk” credit rating this is going to be incredibly painful. It’s basically like playing in a casino on margin. If it works, great. If not you are totally f!*ked.
Sure, smartest CFO's on the planet together with CEO's just collectively buying vaporware. Most of them have access to best metrics on the consumer side, and internals on where the industry will be in 1-2 years.
Maybe, just maybe, they can see how AI will eat the world, the same way software once did but much faster, hence they need these investments. what a crazy theory, right?
Just think about it for one second..
What if... AI that just change professions of people in Math, software dev, etc. Will keep changing any knowledge work and by doing that will accumulate a lot of cash. What if?
It's the totality of winning in that hypothetical that's forcing them to play. If they don't play and miss out they're done for. If they all play and get burned it'll be a sector-wide drawdown and some less financially stable entities might get wiped.
> Sure, smartest CFO's on the planet together with CEO's just collectively buying vaporware. Most of them have access to best metrics on the consumer side, and internals on where the industry will be in 1-2 years.
That's exactly what the zeitgeist was in 2007. The "smartest" guys were loading up on collateralized debt obligations. They were the sure thing. The music was never, ever going to stop.
Something you need to realize is that the "smartest" in our society aren't really the smartest. They are members of a group that exists on inertia and a desire to maintain an egotistical and social incumbency. They rarely suffer real consequences, least of all from their own decisions and actions.
These are the same kinds of people who looked at Elizabeth Holmes' business idea and were going to have your health decisions guided by someone who couldn't finish a bachelor's degree in biochemistry, or any other bachelor's degree. They were in tech, they were in academia (though apparently not at the University of Missouri [0]), they were in finance, they were in media. These phenomenons build upon themselves because it's a bunch of people in a club who can't admit to each other that the lemonade is really piss.
When there are questions being posed by people who are actually informed, who don't have a vested interest, those questions need to be answered. Even if the answer is "piss".
Huge bet on AGI in play right now. If (when) it happens, the winner will reap unimaginable wealth and power. I don’t think the underlying technology (is able to support it yet, but we’re getting closer (for better or worse).
All these special purpose off balance sheet things always smelled bad to me. Here’s hoping it blows up and takes all of it down 50 percent or more. Heck go 99% down. I’ll buy everything I can get my hands on.
I do wonder why HN thinks it understands risk better than the people hired at multi trillion dollar companies whose whole sole job it is to understand and minimize these risks - people who also understand the company way better than anyone on HN.
Is it possible that these companies feel they have more to lose by missing out on AI than by taking on debt? Or that they genuinely are in a race to superintelligence, which easily justifies this debt and far more?
When I worked at Apple, I remember seeing the commentariat insisting that <project> was bound to fail, that we didn't know what we were doing. When in fact extremely competent people knew precisely what they were doing. Of course, the commentariat were wrong and I'd wager most of them use what I had a part in building. The same story tended to repeat across my subsequent jobs in big tech. All this seems quite similar to me.
The FOMO argument is exactly what was used by banks in GFC: as long as the music is playing need to dance.
But current era also has echoes of capex financing (eg cisco lending to its buyers) and Enron (eg use of SPVs).
I don’t think that most people who are concerned about a bubble think people and orgs fueling it are stupid, but they’re operating with local incentive structures that can result is systematic problems.
And for folks who have lived through multiple of these (and maybe lost paper wealth, retirement savings, or homes), I think being concerned is reasonable.
But why be concerned about this? If people are really so confident in their takes, they can exclude these companies from their investments, or bet against them. If you truly believe these bets are going to fail, it's not hard to get rich off of it.
That people don't do this, makes me think that it is more posturing and venting than an actual belief. People are uncertain about what will happen, but are angry and feel a lack of agency, and perhaps some FOMO as well. This becomes reflexive denialism.
I get the anger. These people are gambling with my (and all the other plebs) life and are likely going to get rich in the process.
I think AI is huge and it’s going to make a lot of money. So I’m keeping my investments in. But I’m also sure there is going to be a massive amount of turbulence to get there. Unfortunately I don’t know enough (or care to know enough) about finance to really capitalize on it.
"But why be concerned about this? If people are really so confident in their takes, they can exclude these companies from their investments, or bet against them. If you truly believe these bets are going to fail, it's not hard to get rich off of it."
Is this comment satire? Do you just sit in that weird ass Apple donut building, drifting further and further out of touch with real humans? Or do you leave it some times and interact with your average citizen now and then?
Go watch "The Big Short." Why should we trust the people that analyze risk? I was working during the dot com boom. I remember the 2008 housing crash and the fallout. Then combine that with Enron style fraud.
Also many of us are working in these AI / data center companies.
Obviously some bets will fail, but by and large most bets have succeeded spectacularly. Yet the commentariat often vehemently denied even the successful bets.
They might have a conflict of interest so that they shouldn't be trusted implicitly even if they can theoretically do a better job. Also, we live in a democracy, and these are public companies. With that much money on the line, they become quasi-governmental in shaping the economy and such. If they don't like public scrutiny, probably best not to be a public company. The workings of a public company should probably be a public interest, so the public can support laws and regulations appropriate for them
The world is run by completely average people making series of mundane decisions. There is no super genius who’s job it is to understanding the risk of investing in AI.
It’s just some nameless regular guy crunching some numbers and feeding to another regular guy who interprets the numbers. And so on
But the regular guy working at the place has more information about the place than some random HN commenter.
If it's just regular guys, then it would be arrogant for the HN regular guy to assume they can make better decisions with less information.
In reality it's not regular guys, these companies are very selective and have a very high talent bar compared to the median member of the commentariat. They also hire within domain expertise, whereas most of the commentariat is not of the same domain.
So in addition to an inside information disadvantage, the HN guy is also often at a talent and domain-knowledge disadvantage (as hard as it may be for the ego to accept this). This makes the confident contrarianism even more confusing, not even considering all the times it's been wrong.
Since when did any employee ever do that? "It is difficult to get a man to understand something when his salary depends on his not understanding it". The higher up the food chain often relates in great part to accepting anything thrown at you with a nod and a smile. 6-7 figure incomes don't arise from sounding the alarm and creating problems for everyone within range
HN has devolved considerably. It is practically general Reddit-tier kneejerk contrarianism now. I'm getting literal "Cool story bud" replies to me within the last day.
Year after year of the advent of LLM's has repeatedly shown HN overall consensus gettings things wrong again and again. AI lab employees aren't here they're on Twitter/lesswrong. 6 months ago Mythos was announced and it has been an absolute deluge of "it's just marketing stunts." Practically 75% of many threads had that take. Strange, we don't hear much about that anymore, now that the plethora of hacks has taken place and increasing. There will be no mea culpa, just moving on to the next kneejerk dismissal as peoples' subconscious fearfully grapples with our immediate future. They want the AI boom to fail, because the implications of what happens next when it doesn't fail is unknown and vaguely frightening to them, for now.
It's been that way forever here, don't worry. Signal to noise is lower today, but it's the same vibes, trust me. That said, earlier this year I got really frustrated, and put out https://github.com/vessenes/hn1k/, which lets you build a local hn restricted to 1k / 10k / 100k commenters (and threads they engage in) which will massively de-ragebait you.
I don't know why you've been flagged, I've noticed this trend and the Mythos thing as well.
Lots of people here called Mythos a marketing stunt, yet continue on in HN today having totally forgotten their original takes. I would bet some of them are reading this very post.
They don't even acknowledge that they were wrong, yet continue with the same behavior (reflexive contrarianism and denial) without updating. This confuses me greatly: why would anyone choose to be this stubborn, when it results in worse correctness? What do these people gain out of it?
(If anyone reading this fits the description - I'm genuinely curious.)
OR they think it is a no lose situation. (aka the US Govt will step in and buy their debt if they falter, aka privatize the profits, socialize the losses)
I very much hope this, and other threads on the financially insane behaviour of the tech sector get more surface. I don't think having this die in "new" is helpful because this stuff, the norms of how business looks at the balance sheet and decides what is, and is not rational business investment, this stuff is -> important <-
This is a significant proportion of the market. Having this amount of money not understood is harmful.
Not that I don’t agree with you in many ways, but if I was going to push back a little bit I’d ask you this:
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.
> 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.
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.
> 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.
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.
Gold doesn’t provide a dividend.
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.
I think the way many of these companies see it is that the downside risk to not investing is that some of their verticals move into irrelevancy.
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.
> invest in AI then AI will kill their search engine business.
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 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.
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.
I think it's important to remember that we are biased in ways that aren't obvious to us, but will be obvious in retrospect.
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.
Sure but that’s besides the point. I’m not suggesting one can’t make bad decisions. I’m suggesting that framing the investments in a negative light has no meaning precisely because of this hindsight. Is everyone who said Tesla would crash (I have no direct ownership) happy they sold their shares? Don’t invest in what you want to happen. That’s a fool’s game and that’s the one that is being played here by suggesting the outcome of these investments will be bad instead of good. Nobody knows.
One possible explanation for this is that it’s basically a systemic failure of the market. Shareholders are pricing companies as if being a winner in the AI boom is the most important thing. Company leadership then must position themselves as a winner, or the market responds by devaluing their share price and they lose their jobs and probably their incentives. The most legible way for leaders to show they’re in the AI race is to spend money on AI infra, even if it means taking on debt to do so.
So if this is in fact a bubble, nobody can really act differently until the market stops treating AI spending as a winning strategy.
I don't think the root is shareholders. These numbers are getting absurdly high, and so it's predictably being driven by commercial banks and debt. And lo and behold, the US monetary supply is skyrocketing out of control - up ~6% in a year, more than a trillion dollars, driven primarily by commercial lending. [1] As the bubble starts to shake all we need is for them to start packing the debt in asset backed packages and we're good to go, or at least as good to go as 2008 was.
[1] - https://fred.stlouisfed.org/series/M2SL
This graph looks pretty normal if you enable log scale.
It’s the same in every bubble, there is a term for it that I can’t remember.
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
As much as I dislike it, is there really any alternative?
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…
> Shareholders are pricing companies as if being a winner in the AI boom is the most important thing
Well yeah, that's the most obvious way this plays out
Microsoft is on its way to losing they have been trying desperately to find or hook on to the next great thing. And they have been failing market inertia is keeping them afloat. But they’re on their way to taking a hit like Intel, I don’t think the current CEO at Microsoft is gonna survive Copilot and the collapse of Xbox.
> Is this money not understood by the tech giants taking on the debt? I imagine they understand exactly what’s going on.
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.
> Tech giants before the AI boom made a heck of a lot of cash that they had nothing they could do with it
Dividends.
But then they wouldn't be infinite growth tech giants. They'd be value investing.
A company with over a trillion dollar in market cap is extremely unlikely to be a high growth business. Big tech are (or at least were, before their recent splurge on AI) very profitable businesses, often trading at reasonable P/E. Not quite the value stocks, but regular, good investments. There is nothing wrong with staying in this model.
Microsoft is the odd man out the bag holder, it won’t be Apple, and it won’t be Google.
> 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'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.
> 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
Or hand out money to investors as dividends was they way public companies used to handle profits.
I think the that they feel the need to do these off balance sheet shenanigans is the issue. They're obviously extremely worried that their credit rating is going to be downgraded otherwise, why bother?
They understand fully. They don’t care, because it’s not their money.
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.
I cynically suspect there's an expectation of a bailout, and that it may have even been engineered.
> I imagine they understand exactly what’s going on.
Maybe they are counting on taxpayers to bail them out if they crater in a 2008-scale failure.
That bailout was unpopular in 2008.
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.
> 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.
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.
Job stability and housing affordability matter far more than fancy electronics.
"Take a look at your 401(ks). And when you're 68% up or whatever you may be, you are up a lot... under Sleepy Joe you were 25% down."
[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.
"I imagine they understand exactly what’s going on."
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.
Althlough one might argue they are sitting on a lot of cash.
They're sitting on non-cancellable commitments from Anthropic and OpenAI, which once public will become the markets problem while employees and private equity walk home paid.
Not cash, but expectations of future revenues from AI.
This will obviously end in tears, just like every other bubble.
Many things change in the world but not human nature, we are doomed to repeat this forever
What do you want? Some oversight board voting on what companies are allowed to do with their own money?
Wtf are the downvotes. It's a question.
Your perspective made sense until 2007.
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
I didn't want the bailouts.
THIS IS NOT DEBT. With debt you are given money that you can spend, and then you have to pay interest for a while and then return all the money you spent.
These are signed contracts for future spending. However, we don't know what the terms are for those contracts and how easy it is to get out of them. For example, with Anthropic and Google's contracts with xAI's compute, they signed a long term contract, but they can get out of the contract with 3 months notice. That isn't a good indication of future spend. The same goes for all of these $3.2T, so these numbers are sus at best.
That is why it is "hidden".
This is very much like the 2008 disaster. You effectively have debt laundering happening whereby speculative income / debt is manufactured into higher grade than it is by passing through multiple parties / steps / debt-like vehicles that look independent but in fact incorporate cumulative risk built on highly correlated factors. Downstream party D has no visibility that the specific uncertainty emanating from party A upstream is 100% correlated with their own risks, along with parties B and C through which the liability passed on the way to them. What looks like independent risks are actually all the same risk and completely fragile to a single event that has quite a high probability of occurring.
I think you are describing quite accurately what happened in 2008, but I don't think the parallel is as strong as you claim it is.
I'm not aware of anything like that happening right now. Do you have any examples?I have an example. Greater than 90% of knowledge workers in tech now are required and expected to use AI. If they aren't, their job prospects are at high risk.
That's an exposure in the Party A-Party D frame is it not?
I don't think so. If AI gets really expensive and/or proves to be useless, those requirements will go away. And it's not the knowledge workers paying for those tokens either.
yeah it's approaching the point where all risk is that AI is a bubble, and everyone is exposed to it. It's not exactly hidden, and it's not easy to escape either.
"Hidden"
A few "hidden" tricks : https://latentstate.net/the-hidden-ledger/
I think your 2008 comparison breaks down here
- Many underlying obligations are backed by insanely profitable companies.
- Financing involves long-term leases rather than short-term funding.
- Rating agencies analyze these off-balance-sheet obligations.
This very much is debt. Is it your contention that debt can ONLY arise with an exchange of cash? Because as an accountant I find this preposterous. Under IFRS 16 we recognise, for example, long-term leases as debt, because they are obligations to the business. An obligation to pay in the future is almost the definition of debt. An interest rate is not part of that definition, necessarily.
This is inaccurate. A conditional commitment to spend is not necessarily debt.
The difference is whether it is an executory contract.
If I sign a contract committing me to spend $10m in the future, but the other party is obligated to deliver that $10m of services, that is an executory contract and it is not considered a liability under IFRS because the commitment is contingent on the other party performing.
You're mixing this up with property leases, which create a debt because the tenant has obtained a Right of Use (ROU) asset, which is offset by the debt (lease payments). Leasing a property for ten years gives you both an asset and an offset liability, but only once the lease has commenced.
An obligation to pay that is contingent on the other party's performance of a contract is absolutely not a "debt".
Now, once that data center is built and turned over to the client, that may create an ROU that would generate both an asset (the ROU) and the offsetting liability. But if it's some future data center that will be built, it does not.
Even then, once the data center is built, an ROU may not be created: if the commitment is for a million GPU hours, with the seller having some freedom on how to deliver those GPU hours, that does not create an ROU. If it's for 100 specific GPUs for 10,000 hours each, it does, because it's about the right of use for those specific pieces of property.
For lease accounting, the asset and debt are only created at the point the lease begins, not the signing of the contract, so your reference to IFRS isn't relevant here.
It is not the same thing. In long-term lease you get immediate control of the asset you are leasing and hence the lease becomes a liability in the books of accounts (you record both the asset acquired and lease liability in the books and it balances). A contract cannot be recorded in your books as a liability as neither work is performed yet nor any cash transaction has taken place. It is just a commitment. Once the contract starts being executed, only then can you record in the books.
A liability is not necessarily debt. You can have liabilities on your balance sheet for future obligations base on current circumstance. But the terms of those liabilities might allow exiting without fully realizing them.
You are an extremely bad accountant if you classify obligations as debt.
Naive question: are you conflating debt with liabilities? Are these two separate technical terms or are they the same?
To my lay understanding, debt means a loan you have to pay back, whereas liabilities are everything you're on the hook for.
A debt is a liability. But not all liabilities are debts.
> long-term leases as debt, because they are obligations to the business
I don’t think this is how your average reader of this would interpret debt.
When I and most people think of debt they think a negative equity account balance that you pay off to a bank or lender like a mortgage or credit card. Not a 24 month apt lease because no equity is being exchanged.
In part because of the reason OP said which was severability which isn’t something you can do with owed debt.
Graebers debt demonstrates that this is the most common way to think about it.
Call it what you want, but if the companies who received the orders are able to treat them as assets/income then the overall macro effect will be the same as with debt: leverage. If funding begins to dry up it may not be Anthropic or Google facing a liquidity crunch, but someone will be.
Part of the problem if I understand correctly is that many of these commitments are now used to value related companies. I.e. if the some of the contracts are cancelled, many companies will drastically have reframe their profits/stock prices etc.
Exactly. This is like calling an order debt. Orders can be canceled, and market is clearly starting to price that in based on significant derating in semis over the past few months.
If OpenAI does not buy compute from Azure will they go bankrupt? Probably not - and that should be a . There is very likely a lot more discretion in these agreements than this article implies.
This sort of reporting is a clear indication of where sentiment is.
Well, it can trigger the next financial crisis either way. Because now that spending is on the books of two companies: xAI, as a projected income, and Anthropic, as an external investment[1] that justifies their overblown valuation. Now, if Anthropic decides to get out of that deal, then the stocks of both Anthropic and xAI will crash, possibly triggering a wider market crash.
[1] it is an investment because I think xAI agreed to sell their compute infrastructure well below market price.
Yup. This is terrible financial reporting.
One thing the tech giants are worried about are being left behind on expanding their compute. So what do they do? Sign a contract to agree to purchase $XT in compute over the next X years. It’s like buying an option - it’s a right, not an obligation to purchase.
If I were an investor and spent $10,000 to buy options to purchase $1,000,000 in Google stock, it’s not “$1,000,000 in hidden debt”
The company budgets cannot sustain this. Behemoths like Google and Amazon with insane balance sheets are now on their knees begging for loans.
We (as a country) should contain our exposure to this insanity. If companies want to go bankrupt let them go, but we cannot strangle the liquidity of the entire market to feed the ambitions of these handful of companies.
I think it's fine just do a recession with like 15-30% interest for 15 years and let the population take the hit for the short-term gains
Neither political party would let this happen while they are in power because it would be a guaranteed loss during elections
Is it the administration or the reps or senators who socialise the losses, vs take the blame?
The Fed decides this, it's the whole point of the Federal Reserve being independent from the political parties. They will do the right thing because a slow boil is better than a whole bunch of people starving and having a civil war.
Look at Russia. Nabullina was handed a complete shit sandwich deluxe with the war, but she did the economically right thing with the cards dealt, raised interests to 20%, forced businesses to trade in rubles, freeze equity/bond trading, cut regulation on banks, etc.
And the Russian economy which should have been in shambles like Irans because of sanctions is still kicking after soon 5 years of war.
Sure it's not really prospering and growing, but it's a graceful decay rather than a collapse and internal war like in Venezuela.
dont worry rates, more debt or printing will do the trick. we either get ASI or high in. rates forever, nothing in between
Apparently we can? Anyway, y'all think it's too soon to pivot into precious metals?
Well, good thing the tech giants have aggregate RPO (Remaining Performance Obligations, also known as "backlogs") -- that is, money committed to be spent by customers over the next 3 - 6 years -- of $2.33T.
Sure 2.33T is less than 3.2T but these RPOs were $0.5T in 2022, and have been growing YoY at rates of anything from 84% (Microsoft) to 390% (Google.) Microsoft and Google alone are expected to recognize about $0.5T of that revenue over the next 12 - 24 months.
Is the CapEx and debt ("hidden" or otherwise) growing faster than the RPOs? Eyeballing the numbers, maybe? But generally service providers try to stay ahead of the demand curve rather than behind, so...
Is there concentration risk in the customers? Yes, OpenAI and Anthropic seem to be like $1T of these RPO's? That still leaves $1.3T of other demand.
Is there demand? I mean, RPOs come with a commitment, and have you seen the cloud revenue growth numbers recently??
As another comment here points out, is it really wise to assume the tech giants are NOT financially savvy enough to know what they're doing? Some of these, especially Amazon and Microsoft and yes even Alphabet, are well-known for being highly fiscally disciplined. This is a huge bet for them, even an existential bet, but maybe it's because this is an existential kinda situation.
This is quite misleading. It includes numbers for commitments for leases of data centers and payments for power that are decades into the future.
Even if AI completely busts and all of these servers are worthless that doesn't mean the data centers are. There's still a need for data centers to host non-AI servers. The hyperscalers will close/sell other data centers and serve from places where they have long term commitments at.
3.2 trillion sounds like a lot until you spread it over 20 years and half a dozen trillion+ dollar companies. It's hard to tell how much a bag they're holding but it's almost certainly negligible compared to revenue and market cap. The only real systemic risk is the risk of for some reason not needing any data centers.
As I've been pointing out a little bit recently -- the 'downside' scenario -- somehow we conclude we have enough inference at our world's desired quality and therefore demand stabilizes below that of these datacenters -- would be GREAT for the world. Super cheap intelligence for all.
If some lenders go bankrupt on a datacenter note post-buildout and the capital structure is reworked, lowering the costs by removing capitalization costs from the cashflow of the inference provider, that is all to the good of people who did not do the initial lending.
I think that is extremely unlikely, but it's good for datacenter doomers to think through these scenarios IMO.
Your take seems a bit optimistic if we use the dot-com boom as an analogy. The dot-com boom sped up a massive infrastructure build-out, but also left damage that lasted for a very long time, with many organizations collapsing, and others taking a very long time to recover (e.g. cisco networks). It also seems that these 'data-centers' have a higher depreciation rate than 'dark-fiber' did post-dot-com, which means that there is likely to be greater capital waste.
I am not sure whether the dot-com boom was a net-positive, and the AI boom may be less productive.
It absolutely was a net positive. On the infrastructure side we got datacenters built and tons of dark fiber put down. At the start of the boom we had only 2G cellular for goodness sake. I think you could argue we wouldn't have necessarily had the rise in cloud compute without some of the 'overbuilding' of datacenters in web 1.
For reference this 'massive build-out' resulted in, according to a Berkeley study I found, 500MW of total datacenter power in the US across 320 locations at end of 2020. This wasn't too much for very long: as of 2005, according to Tier1 there were 511 datacenters. And it was likely only really a year or two: Dupont's VA3 utilization numbers published it at 50% utilization in 2003, 89.4% in 2004, then full thereafter.
Meanwhile, these infrastructure improvements allowed, for example, things like the iPhone to be built and deployable -- there was 3g, there were a LOT more web devs that could create the early (web only) apps the iPhone needed to compete. This in turn allowed another round of investment to be built on top of all of that.
On the capital side, investors were also able to buy Amazon at around $1 / share. AAPL at iPhone launch was $7/share. I haven't split adjusted either of these, this is just from memory.
I don't think a bust was necessarily good but the boom undeniably built out infrastructure, a small fraction of what the world is currently using, and did it pretty quickly, and then post bust that infra got bought out in a capital efficient manner. I think that's the bear case here.
Put another way, the Dotcom one boom was wrong about two things: timing was too fast, and the predicted scale of change was way, way, way too small. They undersold the future.
My point is that these hyperscalers need X traditional data centers and Y AI data centers. If Y goes to 0 that doesn't mean they eat everything they've spent on those data centers. They get converted to serve non-AI loads while other older ones get abandoned or leases not renewed and so on.
In that scenario the GPUs are a loss. But really at this point inference is so profitable it's hard to imagine these data centers not being able to at least cover operations & rent.
Ai datacenters are quite different from traditional datacenters. For example, a massive cost for ai DCs is power and the grid to support it. Regular DCs don’t need anything like the same power.
A lot of the dot com failures didn’t spend on massive infrastructure, they just burned through cash on salaries and expensive chairs.
They were underpants gnomes who had no realistic way of making money.
Not sure when you last were in SF but there is probably half a billion in Series A capital within 1 mile radius of me raised by very nebulous AI start ups.
This is something people miss when comparing things to dot com. It was a very thin layer on top of something new. 90% of the companies were speculative jokes with no basis in reality. Anthropic makes a profit. Google is a mature company that makes a profit and will continue to do so.
Cisco networks took a very long time to recover, but in the meantime, everyone else enjoyed massive growth in cheap connectivity.
Capital waste is only capital waste if the physical goods that were built are no longer useful for anyone. Otherwise, it's only a waste for the people who lent money.
The downside scenario isn't AI equity getting zeroed out and lenders getting crammed down. It's the federal government deciding that AI capabilities are of national strategic importance and throwing trillions of taxpayer dollars onto the bonfire.
It really depends on the "somehow". The most realistic downside scenario, it seems to me, is that most people don't care too much about super cheap intelligence for all because there ends up being another bottleneck for most of the things we value.
Like, trains are an incredible technology which transformed the world, but very few people go around counting their lucky stars that they live in a world that permits such wonders. It's a train, it gets things where they need to go, and by the way isn't it so annoying that sometimes it doesn't quite arrive when the schedule said it would?
Sounds like you live in Europe! Bring me more trains pls
> The only real systemic risk is the risk of for some reason not needing any data centers.
How is this not a systemic risk? Asserting that:
> There's still a need for data centers to host non-AI servers.
Isn't true because a NVL72 rack consumes 23x the power of a traditional server rack which is why there's new construction. You could retrofit such a datacenter with normal servers but then you're taking a loss on the GPUs which is the majority of the cost.
https://epoch.ai/data-insights/ai-datacenter-cost-breakdown
It's not a systemic risk because outside of society collapsing we are going to use lots of data centers regardless of what happens with AI.
At this point the question isn't really if we're going to use the GPUs they're building out. The question is how much profit they are going to make. I've seen people show margins as high as 80% on inference. That's a lot of headroom before we see data centers being shut down.
Wonder if we'll see ultra-dense CPU compute (1000s of cores in 1U) to take advantage of this power density whether the AI bubble pops or not.
As of writing, the most dense server CPU is the AMD EPYC 9965, which has 192 cores. It is possible to build a 2x CPU 1U server, so that is 384 cores per 1U. I am unsure what is the limiting factor: heat or space on the die (probably lots is just L1/2/3 cache). When you look at the interior of a vanilla 1U server, I don't think there is any remaining space to add more sockets (CPUs). Final note: SuperMicro also offers an Ampere ARM chip with 192 cores.
It depends. For Anthropic half of the $900b is going to be incurred by the end of 2030. There's definitely risk.
what do you think debt is? what you've described as misleading, is debt by definition.
It is, by definition, NOT debt. With debt, you are given a lump sum of money. These are spending contracts, but any contract has the ability to be gotten out of, unless your lawyers are very stupid.
debt means you owe money. There is no requirement you get anything in return for taking on that debt. The definition, since you wont look it up, is "Debt is an amount of money, goods, or services that one party (the debtor) owes to another party"
If I commit to buying some future goods, and sign that I will hand over that money, that's debt. It's money I legally owe someone else. Counting that as debt is totally fair, not counting it is shady as fuck.
If I rent a house, I receive no money, in fact I receive no tangible goods at all really. Just the right to occupy a space under some pre-agreed rules. Yet, I now have debt.
> With debt, you are given a lump sum of money
That would be called a loan, I think?
They mean you're obligated to the money. You can't back out. You're in debt to them. But, some of this does not include obligation, so fundamentally isn't the same as debt.
I didn't say it wasn't debt. I said it was 20 years worth of spend on something they need regardless of what happens with AI.
So the total US government debt is 40T. For all of the USA. And somehow the AI agents of the USA have 3.2T in debt?
Ray Dalio just found his next topic of conversation. The debt burden of the average AI agent. Those agents better get PRODUCING. GO WRITE ME SOME CODE CLAUDE!
This wouldn’t be a huge issue if they had the cash to pay for it. The problem is they don’t so these companies that once had great free cash flow are now down on their knees begging for cash.
In the higher interest rate environment we’re heading into this is a potential disaster. For the new players like Anthropic and their likely “junk” credit rating this is going to be incredibly painful. It’s basically like playing in a casino on margin. If it works, great. If not you are totally f!*ked.
it is hilarious to read....
Sure, smartest CFO's on the planet together with CEO's just collectively buying vaporware. Most of them have access to best metrics on the consumer side, and internals on where the industry will be in 1-2 years.
Maybe, just maybe, they can see how AI will eat the world, the same way software once did but much faster, hence they need these investments. what a crazy theory, right?
Just think about it for one second.. What if... AI that just change professions of people in Math, software dev, etc. Will keep changing any knowledge work and by doing that will accumulate a lot of cash. What if?
It's the totality of winning in that hypothetical that's forcing them to play. If they don't play and miss out they're done for. If they all play and get burned it'll be a sector-wide drawdown and some less financially stable entities might get wiped.
> Sure, smartest CFO's on the planet together with CEO's just collectively buying vaporware. Most of them have access to best metrics on the consumer side, and internals on where the industry will be in 1-2 years.
That's exactly what the zeitgeist was in 2007. The "smartest" guys were loading up on collateralized debt obligations. They were the sure thing. The music was never, ever going to stop.
Something you need to realize is that the "smartest" in our society aren't really the smartest. They are members of a group that exists on inertia and a desire to maintain an egotistical and social incumbency. They rarely suffer real consequences, least of all from their own decisions and actions.
These are the same kinds of people who looked at Elizabeth Holmes' business idea and were going to have your health decisions guided by someone who couldn't finish a bachelor's degree in biochemistry, or any other bachelor's degree. They were in tech, they were in academia (though apparently not at the University of Missouri [0]), they were in finance, they were in media. These phenomenons build upon themselves because it's a bunch of people in a club who can't admit to each other that the lemonade is really piss.
When there are questions being posed by people who are actually informed, who don't have a vested interest, those questions need to be answered. Even if the answer is "piss".
[0]https://www.darkdaily.com/2019/07/15/skeptical-missouri-path...
So does Apple and they're not buying into this nonsense. They'll probably acquire the tech for pennies on the dollar when the whole thing implodes.
I'm with you.
But I don't think they see it in ideological terms.
For them, the bottom line is that it's basically going to double cloud revenue over time.
How many times in history do you get to literally increase an existing revenue stream by 100%?
Haha "What if!" this moron says while historically laughing. Another trillion for all the smart CEO's!
Here's the question, if the big labs go bust some how, can all of the excess capacity be deployed for full on inference profitably?
https://archive.is/wQPQ5
Hmmm. By comparison The total 2025 US income-tax revenue was ~ $5.3T.
Apple will end up owning Google or Microsoft. In a real crash, the others may not be worth buying.
Huge bet on AGI in play right now. If (when) it happens, the winner will reap unimaginable wealth and power. I don’t think the underlying technology (is able to support it yet, but we’re getting closer (for better or worse).
All these special purpose off balance sheet things always smelled bad to me. Here’s hoping it blows up and takes all of it down 50 percent or more. Heck go 99% down. I’ll buy everything I can get my hands on.
I do wonder why HN thinks it understands risk better than the people hired at multi trillion dollar companies whose whole sole job it is to understand and minimize these risks - people who also understand the company way better than anyone on HN.
Is it possible that these companies feel they have more to lose by missing out on AI than by taking on debt? Or that they genuinely are in a race to superintelligence, which easily justifies this debt and far more?
When I worked at Apple, I remember seeing the commentariat insisting that <project> was bound to fail, that we didn't know what we were doing. When in fact extremely competent people knew precisely what they were doing. Of course, the commentariat were wrong and I'd wager most of them use what I had a part in building. The same story tended to repeat across my subsequent jobs in big tech. All this seems quite similar to me.
The FOMO argument is exactly what was used by banks in GFC: as long as the music is playing need to dance.
But current era also has echoes of capex financing (eg cisco lending to its buyers) and Enron (eg use of SPVs).
I don’t think that most people who are concerned about a bubble think people and orgs fueling it are stupid, but they’re operating with local incentive structures that can result is systematic problems.
And for folks who have lived through multiple of these (and maybe lost paper wealth, retirement savings, or homes), I think being concerned is reasonable.
Hard won lessons and all that.
But why be concerned about this? If people are really so confident in their takes, they can exclude these companies from their investments, or bet against them. If you truly believe these bets are going to fail, it's not hard to get rich off of it.
That people don't do this, makes me think that it is more posturing and venting than an actual belief. People are uncertain about what will happen, but are angry and feel a lack of agency, and perhaps some FOMO as well. This becomes reflexive denialism.
>If people are really so confident in their takes, they can exclude these companies from their investments, or bet against them.
* Previous wealth required.
I get the anger. These people are gambling with my (and all the other plebs) life and are likely going to get rich in the process.
I think AI is huge and it’s going to make a lot of money. So I’m keeping my investments in. But I’m also sure there is going to be a massive amount of turbulence to get there. Unfortunately I don’t know enough (or care to know enough) about finance to really capitalize on it.
"But why be concerned about this? If people are really so confident in their takes, they can exclude these companies from their investments, or bet against them. If you truly believe these bets are going to fail, it's not hard to get rich off of it."
Is this comment satire? Do you just sit in that weird ass Apple donut building, drifting further and further out of touch with real humans? Or do you leave it some times and interact with your average citizen now and then?
Go watch "The Big Short." Why should we trust the people that analyze risk? I was working during the dot com boom. I remember the 2008 housing crash and the fallout. Then combine that with Enron style fraud.
Also many of us are working in these AI / data center companies.
But are you going to list all the times they did a good job, for comparison?
I can make any field of experts look like clowns by cherry picking their biggest fumbles.
Fraud is not a fumble
Ok, I can point out their fraud too
Does this thinking apply to tech's VR bet, for example?
Obviously some bets will fail, but by and large most bets have succeeded spectacularly. Yet the commentariat often vehemently denied even the successful bets.
too soon! T_T
They might have a conflict of interest so that they shouldn't be trusted implicitly even if they can theoretically do a better job. Also, we live in a democracy, and these are public companies. With that much money on the line, they become quasi-governmental in shaping the economy and such. If they don't like public scrutiny, probably best not to be a public company. The workings of a public company should probably be a public interest, so the public can support laws and regulations appropriate for them
The world is run by completely average people making series of mundane decisions. There is no super genius who’s job it is to understanding the risk of investing in AI.
It’s just some nameless regular guy crunching some numbers and feeding to another regular guy who interprets the numbers. And so on
But the regular guy working at the place has more information about the place than some random HN commenter.
If it's just regular guys, then it would be arrogant for the HN regular guy to assume they can make better decisions with less information.
In reality it's not regular guys, these companies are very selective and have a very high talent bar compared to the median member of the commentariat. They also hire within domain expertise, whereas most of the commentariat is not of the same domain.
So in addition to an inside information disadvantage, the HN guy is also often at a talent and domain-knowledge disadvantage (as hard as it may be for the ego to accept this). This makes the confident contrarianism even more confusing, not even considering all the times it's been wrong.
Because history shows time and time again that these folks you speak of who’s job it is to manage risk are actually pretty shit at managing risk.
I think the word you’re probably looking for is “crooked”.
Smartest guys in the room
How's Project Titan doing? Was that a good use of corporate funds and energy?
> understand and minimize these risks
Since when did any employee ever do that? "It is difficult to get a man to understand something when his salary depends on his not understanding it". The higher up the food chain often relates in great part to accepting anything thrown at you with a nod and a smile. 6-7 figure incomes don't arise from sounding the alarm and creating problems for everyone within range
HN? Are you talking about KOHEI YAMADA at Nikkei?
HN has devolved considerably. It is practically general Reddit-tier kneejerk contrarianism now. I'm getting literal "Cool story bud" replies to me within the last day.
Year after year of the advent of LLM's has repeatedly shown HN overall consensus gettings things wrong again and again. AI lab employees aren't here they're on Twitter/lesswrong. 6 months ago Mythos was announced and it has been an absolute deluge of "it's just marketing stunts." Practically 75% of many threads had that take. Strange, we don't hear much about that anymore, now that the plethora of hacks has taken place and increasing. There will be no mea culpa, just moving on to the next kneejerk dismissal as peoples' subconscious fearfully grapples with our immediate future. They want the AI boom to fail, because the implications of what happens next when it doesn't fail is unknown and vaguely frightening to them, for now.
It's been that way forever here, don't worry. Signal to noise is lower today, but it's the same vibes, trust me. That said, earlier this year I got really frustrated, and put out https://github.com/vessenes/hn1k/, which lets you build a local hn restricted to 1k / 10k / 100k commenters (and threads they engage in) which will massively de-ragebait you.
I don't know why you've been flagged, I've noticed this trend and the Mythos thing as well.
Lots of people here called Mythos a marketing stunt, yet continue on in HN today having totally forgotten their original takes. I would bet some of them are reading this very post.
They don't even acknowledge that they were wrong, yet continue with the same behavior (reflexive contrarianism and denial) without updating. This confuses me greatly: why would anyone choose to be this stubborn, when it results in worse correctness? What do these people gain out of it?
(If anyone reading this fits the description - I'm genuinely curious.)
OR they think it is a no lose situation. (aka the US Govt will step in and buy their debt if they falter, aka privatize the profits, socialize the losses)
bailouts have entered the chat