AI Is Worse Than The Dot Com Bubble: Part Two

believe the AI Bubble could be much, much worse. While the dot com bubble was a mixture of dodgy venture capital deals and websites that could never turn a profit, combined with a global mania around the interconnectivity of high speed Internet companies, the AI bubble is one company selling expensive aigpus, a bunch of companies building data sentence to put them in, and a bunch of companies building shit that runs on GPUs that only loses money and that

customers kind of fucking hate. I should also note that a very important part of the story is venture capital's lack of returns in the last few years, something I covered in the Hitter financial Crisis last week, specifically in

parts two and three. In simple terms, AI startups now make up more than half a venture investment, and I believe that most of these stops will die because of their horrible margins, no part to profitability, and products that people really don't want to pay for its scale, and when they die, they will leave venture capitalists stranded with tons of dead equity at a time when they already have trouble generating returns and thus raising money from their

limited partners. The result, I worry, will be gruesome. Venture capitalists make their money through the fees they generate, which are based on the value of their investments and the returns they give their investors, which don't seem to be happening. What do you think happens when they can't generate any returns and their investments aren't worth anything. The answer is simple, they won't have any way of raising more capital as

their limited partners won't fucking trust them. And to be clear, these arswapes have cocked it up many years at a time. Look at crypto, look at NFTs, look at ar VR, metaverse, all of that, and all of this ridiculousness has happened because of the ridiculous, ridiculous myths of AI, like just the insatiable demand for AI compute and the made up decline in the price of intelligence, which, by the way, that last one I've talked about it, I swear to god,

I mentioned it in the Guardia, mentioned it everywhere. It may be cheaper to pay for the tokens, but you use more of them, so it's more expensive in the aggregate. On top of that, it doesn't mean that the price of intelligence for the model providers is going down. Jesus Christ,

I'm so tired of making this points. But in both cases, these assumptions are convincing investors that it's time to invest in data centers that only lose money because you assume that the demand will be there, or in AI startups to only lose money because you'll assume they magically stop losing money somehow. And it turns out we do actually

have a historical comparison. The mania of the dot com bubble was based on a misunderstanding of the scale of the Internet at the time, rather than its actual potential. Hundreds of billions of dollars were invested based on flimsy logic. To quote researcher Justin Kohler. This continental rewiring was also justified by another powerful myth that Internet traffic was doubling every ninety days. This claim spread through analyst reports, burning

course and investor presentations like a particularly virulent meme. If true, it meant the demand was growing exponentially, far out pacing any conceivable supply, and that every new trench of fiber would soon pay for itself many times over. And I pause here to go, oh god, they're doing it again.

Back to the quote. But the mathematics were fiction. Network researchers like Andrew Adlisco at AT and T, looking at actual traffic data, found that US backbone traffic was doubling roughly once a year, rapid growth, certainly, but nowhere near the purported ninety day cycle. Meanwhile, advances in fiber technology

were making each strand exponentially more powerful. Dense wavelength division multiplexing allowed dozens of signals to travel simultaneously down the same line a different wavelengths of light, like multiple conversations happening in different colours. While demand doubled annually, supply expanded tenfold or more. Carriers buried the discrepancy under layers of creative accounting that would have impressed medieval alchemists. First of all, justin if you hear this, I fucking love that. That

was very fun. Second of all, to quote twin peaks, it's happening again. Mania had taken hold based on very flimsy logic. Economically speaking, this meant the telecoms companies, serve a hardware companies, ISPs, construction firms, optical cable providers, wireless technology companies, and basically anybody related to the business of providing Internet access in any way saw a massive influx of business to build capacity that didn't need to be

built yet. If you're in the business of selling services to get people online, you were high on the hug, you know, kind of like selling high bandwidth rem Similarly, one could get a startup funded if you had a website, or even take in public. One could raise debt to build a nascent ISSP or a fiber network. The money was flowing because people people weren't really really being thoughtful

about it. And as far as the dot com part of the dot com bubble, the unsustainable websites, the problem wasn't so much the industry but the businesses themselves, which were hyped and dumped onto the public markets with little regard for their long term health. The problem here is relatively simple. These were bad companies that people ignored the issues with because of and they quote the power of the Internet and how it would somehow save them, which

which it didn't obviously had they been kept private. And died in the dark. I don't think these companies would have had the same reputation. I don't think we give a fuck about pets dot com. I also don't think they were really in accurate comparison to anything happening today. While the valuations were ridiculous, the Globe's market cap was at one point eight hundred and forty million dollars, the scale of destruction caused by dot com startups was significantly smaller,

even in today's money. The economics were bad, but not anywhere near as bad. For the first nine months of nineteen ninety eight, the Globe made two point seven million dollars in revenue and lost eleven point five million dollars, largely due to trying to move into multiple different business lines at once like voice over IP. And to be clear, this company made money selling ads and also buying random companies. Buying random companies was the thing that happened during the

dot com boom. Everybody fucking loved buying companies. You just bought random. There was I think like Excite, bought at Home, like there was the AT and T sort, the Aol time Warner merger. So many stupid mergers, so little time. Nevertheless,

the economics of this shit show were quite complex. You had companies raising money to do any website they could think of, companies raising money to lay fiber, companies raising money to found ISPs, all of which had multifaested layers of physical and digital infrastructure that were quite ugh unbuilt. I think is the term. It's tempting yet incorrect to say the thing about AI. The similarity everybody points to is that people doubted the Internet at the time, and

people really need to remember their fucking history. In two thousand and only fifty two percent of Americans who were using the Internet. By two thousand and three, the number had only increased the sixty one percent per the World Bank. In two thousand and five, only sixteen percent of the world used the Internet, and in twenty twenty four the number had increased to seventy one percent. Yet the real

difference is the access to high speed Internet. When the Internet was connected via a fifth to six K modem, access was at times charged by the minute, and even if it was unlimited, it was always much much slower. While we're used to connecting its speeds that make using web based app near indistinguishable from using one on a computer.

Back in two thousand, two thousand and one or two thousand and two, the average US Internet speed was at best four hundred kilobits per second, or roughly fifty killer bytes per second, compared to the average US Internet speed today of other two hundred megabits per second or twenty

five megabytes per second. In simpler terms than the younger members of the audience won't understand this, A website took time to load in a way that feels almost impossible to conceive if you didn't experience it at the time, you had to make a commitment to God all website. It was like you've browsed multiple tabs and fuck around the different windows. You sat there and you waited a little bit. Sometimes it came up quick and then another.

In fact, websites like Google were quite popular because they were very clean, and the reason that them being clean wasn't usability. It was the fact it loaded quickly, which I guess would be usability either way. We've also had

dramatic improvements in web design and accessibility. The advent of mobile browsing and the proliferation of widespread mobile and desktop Internet access in the two thousands, we were at the very early days of e commerce, and the weird irony of the dot com bubble is that it was actually pretty useful to lay millions of miles of fiber optic cable. This is in no way, shape or form remotely comparable to large language models GPUs or any nebulous VC spunk

around Generative AI. Global Internet access has never been higher or cheaper, and for the most part, billions of people can access the connection fast enough to use Generative AI. There is very little stopping anyone from using an LM, Chat GBT is free, chat GPT's cheaper ghost subscription has now spread to the entire world. When I originally wrote this section, it was originally just in the global South, but now it's everywhere. Gemini is free, Perplexit is three,

and metas LM is free. Whether dot com bubble was made up of stupid businesses and the lack of fundamental infrastructure to give most people the opportunity to access a reliable Internet experience, Basically anybody can get reliable access to Generative AI. Anyone claiming this is just like the early days of the Internet is a fucking liar or a fucking moron. Llms have now spread to every nook and cranny of the Internet. Anybody can use one, anybody can

experience the so called power of AI. Users are not sitting frothing at the mouth unable to access chet GPT due to a lack of infrastructure. Nor is anybody saying, amen, I can't access CLAW because I don't have a local data center. They might be doing it because there's a fucking rate limit, because Anthropic can't afford to run their services, but that's not what this is about. Edward experiences are not worse because these companies have a lack of access

to infrastructure or capital. They're worse because the underlying technology of transformer based models is inherently limited, and in turn, any company connected to these models is limited along with them. Then we get to the economics of the AI bubble

and things begin to get more worrying. While the dot com bubble rested on the back of companies like luciend, Cisco, Nortel WorldCom Enron, and others, the AI bubble rests fundamentally on one company in Video, and to a lesser extent, the valuations of the remainder of the Magnificent seven Microsoft Amazon, Google, Meta, Apple, and Tesla. Four of those companies Amazon, Microsoft, Google, and Meta through to midiaries I'll get to in a future episode.

I think. Actually i'll explain in a second have spent hundreds of billions of dollars on GPUs and their associated infrastructure for reasons that none of them can seem to explain. As in a side by the way. I will get to this in an episode. I had to cut it from the script just for length. It's already quite long. There is a weird thing going on where Microsoft, Google, Meta, Amazon,

They don't buy their GPUs directly from Nvidia. They get them through various Taiwanese holding companies like Fox Cotton Holding companies is the wrong world. Manufacturers of server hardware and search called like Honhai, who is Fox con, Wistron, Quantum Computing, they order through Taiwan and then those sels are put

together and shipped to their data centers. This allows them to hide how many GPUs they're buying from their investors because guess what is quite a long anyway, when this all collapses, we're also going to see a market contagion that goes to Taiwan because all those Taiwanese companies are booking revenue from selling these fucking servers anyway. Lots of

fun there, but let's keep going now. In Vidious revenue is also predominantly eighty eight percent in its data center segment, and it's customers of those who can afford at the very least fifty to one hundred GPUs retailing at four hundred grand or more for a pot of eight of them, and you've require tens of thousands of dollars a networking gear to go with them to make them turn on.

The Customers of those renting those GPUs are either AI labs training or running inference for models, and their customers are AI startups. The problem isn't so much that nobody can afford a GPU, but that you can't get very far with just one. You have to buy so many of them. You need to build a big data center around them, You need to get power to that data center, and then you have the massive environmental concerns of well

running all that power. This naturally means that there are really only two customers who can afford these chips at scale, the Magnificent seven, who have all now begun to take on debt after previously financing their GPU purchases with cash flow and companies that raise them with companies meaning anybody who wants to build a data center, an oracle who had negative thirteen billion dollars in cash flow last quarter and is steeped in debt to the point that bondholders

are suing them. We also have no idea if the economics of renting GPUs actually makes sense, and based on everything I've found, I'm not sure anybody renting them can ever make a profit due to either or both the upfront cost and debt necessary to pay it, and the power intensive nature of providing AI compute. It is fundamentally insane that we don't know for sure. It's so crazy. How do we not know? How the fuck do we

not know that this is crazy? It's What we do know is that the only company making any kind of profit during the AI bubble appears to be in video or Companies selling RAM, Microsoft, Google, Meta, and Amazon refuse to share their actual AI revenues, and because people have the brains of dogs, they have conflated revenue growth from hyperscalis already existing segments like software and advertising, with growth

created by AI. In the dot com bubble, one could, at the very least point to where a company was making revenue, even if the answer was handing a dollar to somebody and getting handed at a dollar back. People bought and installed physical infrastructure, and that infrastructure was, albeit a much lewer scale than the build out anticipated paid for by the associated services. Companies got greedy, rushed to expand in the way that was unnecessary, took on ruinous debt,

and suffered the consequences. This isn't what's happening in the AI bubble. Consumers have no problem getting exposure to AI. In fact, AI is breaking into every single device and app that we have like an angry pervert with a knife. While WorldCom wannabes like open Ai and Anthropic are whining about not having enough compute, it's very clear they've got more than enough to burp out a new model every few months or drop copyright infringement machines on millions of

people at a moment's notice. The post bubble over build of fiber left thousands of miles of dark I e not connected to anything, cabling that took years to light. But doing so, I had an obvious business use case connecting people to the Internet and didn't require an entire fucking data center and masses of power to do so. To make matters worse, as I've hinted that the depreciation of these GPUs is utterly brutal purple Kudrowski and I quote,

we are in a historically anomalous moment. Regardless of what one thinks about the merits of AI or explosive data center expansion, the scale and pasive capital deployment into a rapidly depreciating technology is remarkable. These are not railroads. We aren't building century long infrastructure. AI data centers are short lived, aset intensive facilities, riding declining cost technology curves, requiring frequent hardware replacement to preserve margins. Let me put it a

little simpler. Imagine if all of that fiber was useless in five or six years at best. What if all of that fiber could only be used to access a small subset of websites. What if all of that fiber required such massive amounts of power that it threatened rolling blackouts of the East coast of America. That is the scale of the apocalypse I am talking about, and I

am worried that people are not taking the problem. More seriously, the demand for Invidio chips is fueled by hype, and that hype has caused this company, and to a lesser extent, the Magnificent Seven, to become a load bearing part of the American stock market. An analysis from portfolio manager Don Kee Jong from January twenty twenty five found that the Magnificent Seven stocks accounted for forty seven point eight seven percent of the Russell one thousand indexes returns in twenty

twenty four. And that's an index fund of the thousand highest ranked stocks and the foot Sea Russell's Index. In really simple terms, without the mostly vibes driven nature of the Magnificent Seven's growth as none, if this is based on anyone's actual revenues, the US stock market would be

in incredibly rough shape. Except unlike the dot com bubble, most of these companies have taken on incredibly large amounts of GPUs debt finance and operating leases and data centers full of GPUs that can't be used for really much

of anything else. And because GPU is a guaranteed to depreciate, each and every one of them will without fail have to write down the value of upwards of one hundred billion dollars of investments in the future, as these things are eventually facing the recoverability test, which is when there's a huge crash within any market sector and you have to look at your assets and say, shit, will these actually generate enough money? And this is going to happen

whether or not the AI bubble bursts. In Video is on a yearly cycle of upgrades on their GPUs. Every single year, every single GPU investment loses value, and to make matts worse, takes fucking years to install these things, so by the time they're there, your way in the past.

Even if the AI bubble doesn't burst, it's gonna The US stock market has an unhealthy relationship within video, which by this time next year will have to make over ninety billion dollars a quarter to keep up with its ridiculous fifty percent year every year growth, and by twenty twenty eight and video will to keep its ridiculous valuation, have to be making more than Apple, which makes about

foreign and sixteen billion dollars a year in revenue. In fact, from my calculations, in video will have to be making five hundred to six hundred billion dollars, which puts it in the realm of Walmart. It can't happen. It can't happen.

Can't it can't happen, And to do that in video's customers will continue having to be able to afford these GPUs, which, as have established, are being paid out of debt because AI services do not make a profim Even if AI services take off and are useful in a way they've never even remotely hinted it being, it is inevitable that the debt and cash necessary to keep buying in video GPUs runs out, and more than likely the revenues of the Magnificent seven will stumble in growth before then, as

it becomes obvious that those GPUs are not providing any meaningful revenue growth. The result, I fear, is that the American stock market takes as shit the size of Iowa, and due to the unique way that the tech industry functions, the contagion will be global. I'll catch you tomorrow for part three. I don't have a rosy or funny app Every time I think of this stuff, I feel very very sad. Well anyway, very optimistic.