Nvidia's $750B in Deals Reignite Circular AI Fears

Displacing a vast amount of labor is what makes the numbers make sense. We don't know if they'll succeed or not, but it's obviously what they're chasing.

In addition to actual lost jobs, replacing a skilled white collar worker with a fungible operator of AI lowers the salary for that role significantly.

Right. The risk isn't accounting fraud, its the equity-to-debt loop that relies on all these companies making "enough money to pay it back someday."

Nvidia invests, that equity check gets used to secure 10x it in debt with the GPUs as collateral, and then they buy the chips.

Nvidia gets paid, so they don't hold the debt liability. But, if AI revenue doesn't cover those debt payments before the GPUs depreciate, the loop starts to unravel, and fast. CoreWeave, Oracle, all the "neoclouds" etc. will blow up, and there could potentially be a ton of PE debt that is now under-collateralized due to depreciation, causing a pretty big haircut to basically all of private credit.

Yeah, the "circular" language is obviously intended to imply unsustainability, as a system without external inputs must eventually run down. But this system is intended to have external inputs, revenue from customers that buy the services of the data centers. So the fundamental issue is just whether there will be enough such demand to justify the scale of the build-out.

These deals give Nvidia more exposure to that, in both directions. Certainly Nvidia shareholders should be cognizant of this. But nothing structurally problematic is occurring here.

It's circular in the same way you'd describe the whirlpool created by an emptying bathtub. Round and round it spins, sucking in external cash to sustain it.

Without continued external investment, the cycle stops, and we all learn what "too big to fail" looks like this time.

Its only a problem if you think about it, just don't think about it and no problem!

They're selling GPUs in exchange for scrip which may or may not be able to pay Nvidia's operating expenses depending on whether AI has a profitable business model. This isn't hard to understand.

Looks like you discovered an infinite money glitch! As long as you’re selling things at a profit, all you need to do is take those profits and give them to your customers to buy more things, repeat the loop a few times and you can become a billionaire food vlogger just like Jensen

are you just heavily invested in Nvidia to not see this as problematic?

Nope. The simplest rebuttal to all of this is: why dont they pay cash?

First, don't park it in actual cash or you'll lose value to inflation which is currently running high. At a minimum put it in treasuries.

Second, trying to time the market is almost always a suboptimal strategy. The question is when will you likely need the money? If you won't need it for 10 years or more, keep it in index funds. Otherwise, treasuries.

> there is no way the market keeps going up.

There is no way the US’s leaders let the prices of publicly traded securities go down or even stagnate relative to the US dollar. These publicly traded securities make up a significant portion of the US leaders’ and most active voters’ assets, plus almost all state and local US governments depend on the securities’ price growth to meet their deferred compensation obligations.

The alternative to risk in US securities isn’t the USD, it’s a stake in other stable countries with resources.

Historically even if you invest into index at the worst possible time (prior to a crash) and keep holding you still outperform inflation long term. Timing the market is impossible. Just keep an emergency fund in a money market or savings account and hold the rest.

Just need a larger emergency fund to mitigate the risk, especially if you work in tech and you feel the crash would heavily impact your labor earnings (including possibly extended unemployment)

Others have given practical replies, so here's a philosophical one: Sometimes it's just not practical to make much money from being right.

I want to acknowledge and empathize how much it sucks, while also putting it out there so that nobody suffers blaming themselves for something that might not be achievable.

Disclosure: I've been waiting-and-seeing too long myself, and I should probaby stop trying to time/strategize.

There is no law that prices must revert to a mean.

The market can keep going up in dollar terms while losing real value if we enter a phase of high inflation.

Park it in BRK?

Market goes up when the dollar crashes you're fine

already did mate, after Trumps first pump and dump with Iran

what's your risk tolerance?

It’s such an obvious Ponzi scheme the companies should get delisted.

Apple is a $5t company that has $45b cash-on-hand.

Your post is "cute", but 3 or 4 months of operating cash isn't a great example of "sitting on piles of gold".

The problem is that when a vendor finances their customers, they can create the illusion of 'real' demand for their product, when most of the the end-users are only actually using something because it's cheap. When the vendor runs low on cash and starts requiring payment, the customer may not be able to afford it, taking both vendor and customer down, and leaving the end-users who have a real need, and were willing to pay sustainable prices without any options.

Its bad if the expected demand is an illusion. For example, when a company builds out a data center they don't build it for demand today, they build it for the demand they expect when the data center is running and for how much they expect demand to grow over the lifetime of the data center (this is a simplification, they build a financial model of how they can grow capacity as demand increases over the lifetime of the data center). If the demand is lower than expected then the counterparty cannot spend that Y amount back. In other words, Nvidia now holds bad debt (really worthless equity since these aren't loans on paper). Furthermore, Nvidia has been making the same bet with multiple companies. That Y amount the counterparty can't pay back is probably correlated with all of the counterparties Nvidia lent X amount to. Suddenly this circular flywheel begins operating in reverse. Now Nvidia has no X amounts to lend to AI companies which makes their ability to pay back Nvidia worse which means Nvidia has less money to lend out and on and on.

There's other problems too, why do we think AI demand is ferocious right now? Nvidia's revenue is one of the biggest signals we use to determine that. Why is Nvidia's revenue so large? They're spending their revenue on more revenue. This process overinflates what AI demand might actually be.

The issue really boils down to that this is a risk that gets reported in a way that makes it look less risky than it really is and therefore actors make investment decisions that they might not otherwise make. Sure, it might work out. But if it doesn't, the pain could be way more painful than it looks on paper.

its not so bad if the funds arent used to borrow 10x, and then spent entirely on nvidia chips.

It has to get bigger. As soon as it starts shrinking, the next round of debt will no longer be able to cover the prior round of commitments. What is happening in AI is essentially a gigantic version of what is happening in consumer auto loans, they just keep refinancing for more and more money. Eventually there will be no one willing to lend them more, and then they'll go to the government to bail them out.