AI Just Had Its *Actual* "Big Short" Moment

The crash is imminent.

Photo by Cassi Josh on Unsplash

In a previous article, I pointed out the stark similarity between the AI bubble and the subprime mortgage crisis of 2007/2008. It isn’t just that a bubble exists, but that it is being powered by what is arguably more than $1.2 trillion in mis-sold debt. I even called this revelation the AI bubble’s “Big Short” moment. Well, the actual “Big Short” guy, Michael Burry himself, has just revealed he is heavily shorting the very core of the AI bubble. This isn’t just vindication of my analysis; it has spurred others to do the same and strongly suggests a crash is imminent. In fact, this could be the very thing to pop the bubble. Let me explain.

Let’s start with the obvious: why is the AI industry in a bubble?

Well, the reason the AI industry is so valuable and has attracted so much investment is because it will supposedly augment or automate jobs and dramatically increase productivity. However, as it stands, AI is so unreliable that it can’t be used to augment jobs, given that it gets things horrifically wrong constantly and actually decreases productivity in most cases (read more here). We also know that AI training has hit a point of diminishing returns, meaning piling exponentially more money into development won’t yield significantly better results (read more here). Similarly, we know that AI “hallucinations” (which is just another word for errors) are here to stay, as more training and more data can’t reduce them, let alone get rid of them (read more here). As such, generative AI is about as good as it is going to get. This is a significant problem, as generative AI companies need substantially better models that don’t hallucinate at all to meet their promises and dramatically increase income. This is something these companies desperately need, as none of them are even close to profitability, and their vast investment in development is actually pushing them further away from it (read more here). And, to add insult to injury, these AI companies have found that raising funds through equity financing isn’t enough, so they have turned to debt financing, and in a few short years, these wildly unsustainable AI businesses have accrued $1.2 trillion in debt. This debt has now been sold as AAA-rated investment-grade debt, despite only false hope and hype propping it up (read more here). For context, the subprime mortgage crisis of 2008 was caused by $1.9 trillion of bad debt being missold as AAA-rated investment-grade debt.

Okay, so we are all caught up with the AI bubble, but what about Michael Burry?

Well, Burry was one of the few hedge fund managers who noticed the $1.9 trillion in mis-sold debt and the effects it would have on the financial system. He took his own money and his small fund into a bold short position against the market by buying over a billion dollars in credit default swaps, a move that, if it had backfired, would have bankrupted him and many of his investors. But it didn’t — it paid off. Massively. Burry himself walked away with $100 million in profit, and his investors over $700 million, which was a gargantuan and unprecedented amount from a single short.