Tag: ai bubble
Money Still Not There For Big AI Companies, But Crisis-Style Finance Is Coming

Money Still Not There For Big AI Companies, But Crisis-Style Finance Is Coming

When I saw this note from Torsten Slok, the chief economist for Apollo Capital, I knew I had my topic for the week. The point is that the big money in AI is far removed from the end product. The chipmakers are making money hand over fist, the energy providers are doing okay, the hyperscalers have less to show, and the AI companies are losing bucks big time.

This matters, because at the end of the day, if the AI companies are not making money, the whole thing breaks down. To use a common analogy, suppose that steel companies are making huge bucks producing steel for rails, and construction companies are making money laying the rail, but the companies that run the railroads are all going broke. That doesn’t look like a story of long-term prosperity. In the great minds think alike category, Ed Zitron jumped on the same point in his excellent newsletter.

Anyhow, I take a somewhat different tack than Ed and focus on the Chinese competition. I realize that even if there was no competition from China, it is unlikely that AI would ever have the massive payoffs the hyperscalers are banking on, but the existence of that competition makes the story considerably less likely. And developments in the last couple of weeks seem to make the case for American AI even weaker.

Chinese AI Is Cheap and Getting Cheaper, U.S. AI Less So

As I have frequently noted here in the past, Chinese AI costs far less per input or output token than U.S. AI. For the cutting-edge models, the Chinese AI sells for one-fifth or even one-tenth of the price of U.S. AI. One response I have seen is that, even though the Chinese AI costs less per token, it can still end up being more costly because the systems are less efficient and require more tokens per task.

I am not sure that the measure of cost per task is a sufficiently standardized metric to allow it to be compared in a meaningful way, but insofar as it can be, it looks like the U.S. advantage has gone away. According to the Korean electronics industry publication, The Elec, the leading Chinese AI model is now cheaper on cost per task than the leading U.S. model, and performance gaps continue to narrow.

In the same vein, both Google and DeepSeek released new flash models last week. The DeepSeek model scored better on several benchmarks. And it sells for less than one-tenth the price.

If that makes the picture look bleak for U.S. AI producers, don’t worry, it will likely get worse. Alibaba reports having developed a modular design that will allow it to build data centers in 100 days. Compare to 12-18 months in the United States. This should mean lower costs and greater capacity for Chinese AI producers. That means the flood of low-cost, high-quality Chinese AI is likely to get even larger in the months ahead.

Chinese AI Is Finding New Customers

Given its huge cost advantage, it’s not surprising that Chinese AI models are gaining ground rapidly at the expense of U.S. models. I’ve noted before that Chinese AI seems to be winning out by large margins in most regions of the developing world. However, it also seems to be gaining ground in Europe. There are political considerations that could make European companies reluctant to rely on Chinese AI; however, given the erratic behavior of Donald Trump, it’s not clear that going with U.S. provides greater security.

And it looks like Chinese AI is continuing to gain ground in the U.S. market. It seems that Apple is looking to Chinese AI as a cheaper alternative to the Silicon Valley producers. Apple by itself is potentially a huge market, but perhaps more importantly, it is a company that has been at the cutting-edge of innovative technology for more than a quarter century. Its decision to go with Chinese AI is sending a serious message.

And remember, the question for those expecting really big bucks for the AI makers is not just whether Anthropic, OpenAI, and the rest can hang onto a large share of the market. It’s whether they can do so while selling at prices that give them the huge profits the stock market is banking on.

Can Creative Financing Overcome the Problems?

As mortgage issuers sold ever more dubious mortgages to further inflate the housing bubble, the wizards of Wall Street assured us that their financial magic would make it all work. This attitude was best conveyed by former Treasury Secretary Larry Summers at an academic conference in 2005, where he dubbed a critic of the growing house of cards a “financial Luddite.” Somehow, Summers thought innovative finance would make the millions of underwater mortgages issued to people with weak employment prospects and no reserve assets all work out fine.

We might be getting the same story with the AI bubble. Getting back to Torsten Slok’s point about the chipmakers making big bucks, while AI producers are making big losses, it seems Nvidia is looking to address the problem. It has just arranged $500 billion in financing from major banks for the hyperscalers that buy its chips. Fans of markets everywhere are asking the obvious question: if there is so much money to be made in building the data centers, why does Nvidia have to arrange the financing?

The details are not clear at this point, like whether Nvidia will in any way be on the hook for the financing, but there is a suggestion that it could involve securitization with tranches carrying different levels of risk, sort of like mortgage-backed securities or collateralized debt obligations. It could be lots of fun!

Dean Baker is a senior economist at the Center for Economic and Policy Research and the author of the 2016 book Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer. Please consider subscribing to his Substack.

Worse Coming? Musk Loses Tens Of Billions As Spacex Shares Plunge

Worse Coming? Musk Loses Tens Of Billions As Spacex Shares Plunge

SpaceX’s shares took a big hit last week, ending the week at 124 at the NASDAQ close on Friday. This is more than eight percent below the 135 price at its initial public offering last month, and a drop of almost 15 percent for the week. That corresponds to a loss of more than $200 billion in market capitalization. The Friday close was more than 40 percent below the peak price of 211 hit in the week after the IPO.

SpaceX was hit with some bad news last week, notably a rocket launch on Thursday that had to be aborted. But the company’s troubles may go beyond one failed rocket launch. The company’s stock had been falling for the last three weeks. It’s possible that investors have less confidence that Musk will be turning around a massive money loser into one of the most profitable companies in the history of the world.

Also, the lock-in period for insiders will likely be ending soon. This means that a lot of shares will be dumped by people looking to cash out big gains.

SpaceX wasn’t the only high-flyer seeing some rocky waters. The price of Tesla, Musk’s other big company, fell by 6.6% last week, reducing its market capitalization by $100 billion from the week before.

And it wasn’t just Musk’s companies that had troubles. The big chipmakers all had bad weeks. Nvidia’s stock price dropped 3.9 percent last week, shedding $200 billion in market value. Broadcom’s valuation fell by $140 billion, 7.3 percent of its market value, and shares of both Micron and AMD fell by more than 10 percent.

It’s always hard to say what information moves markets, but there is a clear candidate this week. The Chinese AI company Moonshot unveiled a new model that scores right alongside the top models from OpenAi and Anthropic. The problem for the U.S. AI companies, and the hyperscalers providing the computing power, as well as the chip manufacturers, is not just that China’s leading AI companies can match the power of the U.S. leaders, but also that they sell their product at a fraction of the price.

As noted before, the story of a huge payoff to AI firms rests on three big assumptions, all of which look increasingly questionable. The first and most important is that there will be a massive payoff from AI in the form of an increased rate of productivity growth. To date, we see no evidence of this. Productivity growth has been very weak in the last three quarters. (I’m including the second quarter of 2026 based on estimates of GDP growth and the data we have on hours worked.)

The second is that competition will not push down prices, allowing the benefits of the AI productivity boost to be widely shared by society rather than being locked in as extraordinary profits for the AI makers. The third assumption is that the U.S. AI companies will be the ones getting the big profits.

The latest developments in Chinese AI make both the second and third assumptions very questionable. The Chinese companies are prepared to compete on price, offering a far lower cost product that will be fine for the needs of almost all users. This means both that the profits of AI companies are likely to be limited even if there prove to be massive productivity gains.

Remember, this is the story of Internet providers. Verizon and Comcast are big profitable companies, but they are not earthshaking giants. If Anthropic and OpenAI end up being the Verizons and Comcasts of the next decade, their shareholders will be looking at huge losses. And given the progress of the Chinese AI companies, they may prove fortunate even to achieve the status of the big Internet providers, as Chinese companies are dominating not just third markets, but increasingly the U.S. market as well.

If this story proves to be right, and there is no pot of gold at the end of the AI rainbow, it’s hard to say how long it will take markets to catch up. The Internet bubble took two and a half years to deflate. The financial problems associated with the collapse of the housing bubble also took a long time to percolate through the system.

Nationwide house prices peaked in the summer of 2006, but the stock market continued to rise at a healthy pace through most of 2007. Even the stocks of the soon-to-be-bankrupt companies fared well until near the end. AIG still had a market capitalization of almost $180 billion at the end of 2007, and even in the summer of 2008, just months before its collapse, its market capitalization was over $70 billion.

While markets may be forward-looking, they don’t always see things with clear eyes. There might be some way that the big bets on the AI companies, the hyperscalers, and the chip makers make sense, but it is difficult to see what it is at this point.

Dean Baker is a senior economist at the Center for Economic and Policy Research and the author of the 2016 book Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer. Please consider subscribing to his Substack.

Boom? If AI Sales In The US Go South, Let's Not Bail Out Big Money Bettors

Boom? If AI Sales In The US Go South, Let's Not Bail Out Big Money Bettors

I was struck by a graph showing OpenRouter’s measure of AI usage this year. (It appears in a newsletter published by Deutsche Bank’s chief economist, Jim Reid.)

There are two striking features to the graph. The first is that usage of Chinese AI passed the usage of U.S. AI in the last week in May. This had also happened for the last week in March, but the U.S. went back into the lead in April. However, this time around, the Chinese models extended the lead through June so that for the first week in July, they look to be about 40% higher. That might be great news for Chinese AI, but not so good for U.S. makers.

The other feature to the graph that is even more striking is that usage of U.S. models actually fell in the most recent week. The story of a huge AI boom is usage increasing at an extremely rapid, and maybe even increasing, pace. A decline in usage is not supposed to be in the cards.

To be clear, this is just one week, and perhaps there were unusual factors that depressed AI usage in the first week in July, like the holiday. But even if the one-week fall can be dismissed, total usage was roughly back to where it was four weeks ago, as there was very little growth in the prior two weeks. That is clearly not a story of an AI boom, or at least a boom in U.S. AI. We have to wonder how many weeks of weak sales will it take before some of the big AI investors get worried?

If there is any possibility that the massive investments the AI companies will pay off, usage has to increase hugely from current levels. The fact that it levels off for even a short period should be concerning, as should the rapid growth in the usage of Chinese AI. The U.S. companies have to both be able to sell a huge amount of their AI, and they also have to be able to sell it at a high price. Chinese AI that is comparable in quality for most uses and sells for a fifth or even a tenth the price will pose a serious obstacle.

Can the Big Money Folks Really Be That Clueless?

It may seem hard to imagine that people who manage tens, or even hundreds, of billions of dollars in pension funds or hedge funds can be totally clueless about the market prospects for the companies on which they are placing big bets. But the housing bubble wasn’t that long ago.

Back then, huge funds were prepared to believe that securities that were backed by subprime mortgages, often made with no money down, were a safe bet. And AIG, the largest insurer in the world, was prepared to back up these bets with hundreds of billions of dollars in credit default swaps. When the bubble burst, its bankruptcy was a certainty had it not been for a massive government bailout.

And it was only four years ago that the geniuses who ran Silicon Valley Bank had to be taught that the value of bonds falls when interest rates rise. Of course, they also got a government bailout, so maybe that is the lesson the big money folks learned.

Anyhow, it would be good if we could get the rich to show a little respect for the market. If the AI bubble bursts, there should be some real career consequences for the folks who lost tens of billions for their clients, no “who could have known?” amnesties. And no government bailouts for the swashbuckling AI barons. Let them eat their losses.

Dean Baker is a senior economist at the Center for Economic and Policy Research and the author of the 2016 book Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer. Please consider subscribing to his Substack.

Why We Don't Need (Or Want) Bernie Sanders' AI Sovereign Wealth Fund

Why We Don't Need (Or Want) Bernie Sanders' AI Sovereign Wealth Fund

I’m a big fan of Sen. Bernie Sanders (I-VT). He has done an enormous amount to move American politics and especially the Democratic Party to the left. He constantly stands up to the rich in the name of ordinary working people.

But I have to disagree with him on the idea of an AI sovereign wealth fund. This strikes me as wrong-headed from every angle.First and foremost, Donald Trump is doing his best to show us why it is often a bad idea to have the federal government directly involved in running private businesses. He is using the power of the government to stuff his and his family’s pockets in every way imaginable.

He also is using the government to force private businesses to suppress criticism as you’ll see on the Colbert show tonight. Why on earth would any progressive want to give this demented jerk more power?

We can say that Trump is an aberration, which we should all hope he is. But we elected this aberration twice. Does anyone want to say it can’t happen again?

The economics on this look even worse. The job-killing effect of AI exists much more in the minds of our political elite than in the data. Productivity growth, the measure of job killing, has been extremely weak the last two quarters. Quarterly data are erratic and perhaps the future will be different, but if AI is killing off large numbers of jobs, it is doing a great job concealing the evidence.

Most likely the AI sector is in a massive bubble. At its peak value, Nvidia’s market capitalization was roughly 20% of U.S. GDP. In the late 1990s tech bubble, Microsoft’s market cap peaked at less than 6% of GDP.

An AI sovereign wealth fund is likely to end up being a mechanism to shovel yet more money to Elon Musk, Mark Zuckerberg, and the rest of the right-wing billionaire gang. We have already given this crew enough money.

I doubt that we will see massive AI-related job displacement, but if we do, we have old remedies that should work just fine.

1) a workable corporate income tax at a higher rate, for all companies. The best way to do this is to require companies to turn over non-voting shares equal to the targeted tax rate (e.g. 25% of shares for a 25% tax rate).

2) serious anti-trust enforcement. It is likely that Chinese AI will be very competitive, and probably much cheaper, than the domestic stuff. We let in Chinese-manufactured goods to screw large segments of the blue-collar workforce. We should not have protectionism to keep Elon Musk and Mark Zuckerberg ridiculously rich.

3) Stronger labor standards. We set the 40-hour workweek 90 years ago and have not changed it since. Other countries have shortened the work week/work year. If AI is going to give us the promised boom in productivity, let’s lower the threshold to 32 hours, or possibly even lower. We can also double the overtime premium to 100% rather the 50%.

We have all the tools needed deal with an AI productivity boom; we just lack the political will to use them. The sovereign wealth fund idea is a massive leap in the wrong direction.

Dean Baker is a senior economist at the Center for Economic and Policy Research and the author of the 2016 book Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer. Please consider subscribing to his Substack.

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