AI’s Black Friday
Some thoughts on what just happened
I doubt Friday was as bad as it will get, so the title of this essay (“AI’s Black Friday”) is a bit tongue in cheek. But Friday was bad; across the tech industry something on the order of half a trillion dollars of market value disappeared overnight.
The Dow was down, but only 1.35%. Chip companies (NVidia, Broadcom, Micron) GPU leasers (CoreWeave and Nebius) and some other major AI related companies (Oracle, Microsoft, Meta, etc) all took larger hits:
The S. Korean market, heavy on semiconductors, was also down.
And that wasn’t even the worst of it. Maybe this revelation was:
Remember this tweet?
The game is on. “Investment” is just another word for bailout.
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I had this to say about that:
In short, it stinks.
Bailing out OpenAI is crony socialism and corruption (remember those $25M donations from Greg Brockman and his wife?), preventing capitalism from taking its natural course.
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But it’s not just OpenAI:
As an important aside that is more about geopolitics than economics per se, the ramifications of this may be huge. As I noted on X, nobody is going to trust an American AI company that is partly owned by the US Government. Just the way the US doesn’t trust Huawei, Europe and Asia are not going to trust companies like OpenAI and maybe even Google. The new cold war will be about AI. (And Google might perhaps be wise not to accept Trump’s proffered investment, given how much of their income is global; OpenAI may be so desperate they have no choice.)
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But back to economics. Who can forget the hapless Meta, which may ultimately win the prize for most money burned vs least results?
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Meanwhile, it also came out yesterday that Musk is leasing another 110,000 GPUs to Google, on top of the 220,000 it is leasing to Anthropic.
Last year, people had to steal GPU’s from armored trucks.This year, SpaceX’s AI division is leasing GPUs left, right, and center, because they can’t figure out what to do with them.
If scale was “all you need”, or if AGI was actually nigh, Elon would be hoarding LLMs, not leasing them.
Some people might ask whether Elon is making money on the deal (I don’t know), but the real question is why he is leasing the very chips that he hoarded last year in the first place.
Whether SpaceX is making money on the deals with Google and Anthropic or losing money, they are waving the towel on winning the frontier model race— by arming their competitors rather than themselves.
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Also, per a friend who read a draft of this, “If Space X is leasing capacity back to Google and Anthropic, this is now servers and chips those guys do not need to buy themselves. Elon clearly bought a lot of hardware he did not have demand for. He is probably not the only one that bought substantial capacity long before there was demand or a use case for it.”
None of that is particularly great for Nvidia, CoreWeave, Oracle, Nebius, Micron, and a variety of other hardware and semiconductor providers
And my friend adds, “Then of course the fact that even Google and Meta, who are [historically] very cash flow positive companies, need to sell equity to continue to fund their AI investments. Just shows you this whole thing is a black hole.”
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I’ll leave you with these predictions, written a few days ago, before the shit started hitting the fan:
I have no idea whether Monday’s market will continue the downward trends we saw Friday. But it should.
Coming soon: more on why AI has had less impact on real-world productivity so far than many people had anticipated.
Eighteen months from the most valuable startup in history to government bailout candidate. That's the speed record nobody wanted to set.
The SpaceX GPU story is the detail that tells you where this is heading. last year the chips were too valuable to sell. this year they're inventory you can't find enough tenants for. when the hoarder becomes the landlord, the thesis has changed and nobody sent the memo to the market cap.
The government stake framing is doing the quiet work here. "Investment" is the word you use when the numbers don't support "commercial return" but the politics don't allow "bailout." the playbook is identical to 2008 bank rescues, just wearing a hoodie instead of a suit. privatise the gains in the $150 billion valuation round, socialise the losses when the revenue doesn't show up. if OpenAI had a path to profitability it wouldn't need the government in the cap table. the cap table is the confession.
Privatize the gains, socialize the losses, externalize the effects ('ESG' investing) :/