AI Just Had Its *Actual* "Big Short" Moment
The crash is imminent.
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.
Burry has a strong track record of spotting bubbles and successfully betting big against them. He also shorted the dot-com bubble and made a killing from that. So, when he makes a short, you pay attention. Some people have pointed to his failed short of the S&P 500 in 2023 as proof that he has lost his touch. But if the AI bubble hadn’t been propping up the US economy (the S&P 500 would have shrunk if not for a handful of AI companies growing), he would have won big from that position. He also correctly predicted the crash of meme stocks and crypto leverage markets before they plummeted.
So, when Burry announced he had shorted Nvidia and Palantir, two of the largest publicly traded companies involved in the AI bubble, everyone took notice. Particularly as this short is not small by any means, with a total short valuation of $1.2 billion. That makes it almost as large as his eventual position in 2007! What’s more, Burry has a habit of increasing his short position the longer it takes the bubble to burst. So this position is likely to increase significantly from here.
Can you blame him? Since 2023, Nvidia shares have increased 13-fold, while Palantir has increased 30-fold! These are the largest companies that grew the AI bubble. Yet, the businesses they are tied to, where this considerable extra value has come from, are widely unsustainable and valued on demonstrably false speculation. This bubble is huge, and these are the obvious picks to short.
And it isn’t just Burry trying to pit substantial shorts against the AI bubble. So too is the investment bank Deutsche Bank.
They have been one of the largest lenders for the expansion of AI data centres, lending billions upon billions of dollars over the past few years. However, AI data centres are even less profitable than AI (read more here), and this critical infrastructure is guaranteed to become worthless when the AI bubble pops, just as network infrastructure did after the dot-com bubble. To protect itself against the severe exposure, Deutsche Bank is actively considering shorting AI-related stocks, according to the credible Financial Times.
Let me spell that out. A major global investment bank is actively shorting its own gargantuan investments to protect itself from losses. That is insane! To take a short position large enough to stem this potential multi-billion-dollar hole would also mean that if the AI bubble didn’t pop, this short position would be so expensive it would almost certainly negate any gains from these investments. They are effectively putting themselves in a lose-lose situation. They would only ever consider doing that if the potential losses they have exposed themselves to are significantly greater than the consequences and almost certain to occur. In other words, Deutsche Bank knows the AI bubble is going to pop, and soon, and is bracing for impact.
Why does this matter? Why should you care that Burry is shorting the AI industry as heavily as he did the subprime mortgage market? Why do you need to know about a major investment bank moving to take an unprecedented short against its own colossal investments?
Because it proves this bubble is here and is going to pop sooner rather than later. And when it does, it will make 2008 seem like a breeze. The US is already functionally in a recession, with GDP stagnating once the AI boom is taken out of the picture (read more here). And the AI bubble is predicted to already be four times larger than the subprime mortgage crisis. When this bubble bursts, it will decimate the US and global financial systems to a level never before seen in human memory. This isn’t an upcoming storm but a Category 5 hurricane coming our way. And, I don’t know about you, but I definitely think we should all prepare, however we can, for when it makes landfall.
Thanks for reading! Don’t forget to check out my YouTube channel for more from me, or Subscribe. Oh, and don’t forget to hit the share button below to get the word out!
Sources: This Is Money, FutuBull, Motley Fool, News.au, FSG Journal, E2T, BI, TSR, Will Lockett, Will Lockett, Will Lockett, Will Lockett
It is not a matter of if, but when.
Bear in mind that the market might rally when the shutdown ends.