Everyone's talking about the AI bubble. 54% of global fund
managers think we're in one. The International Monetary Fund is warning about
it. And Michael Burry, the guy who shorted the housing market in 2008, just
shorted a bunch of AI companies in the last few weeks. And yet everyone's
still piling money into this space like it's a sure thing. But here's
what nobody's telling you. The AI bubble isn't coming. It's
already here. And the only question left is how bad
the crash is going to be and whether you're going to protect yourself before
it happens. And if you're an Australian investor, if
you have superannuation in international funds, you're more exposed to
this than you think. And in this video, I'm going
to show you exactly why the AI bubble is
unsustainable. I'm going to show you the circular deals that are propping up
the entire industry. And most importantly, I'm going to show you
what this means for you as an Australian investor. I'm Lloyd James
Ross, seven-figure investor and entrepreneur, and I've helped thousands of
business owners and professionals turn financial stress into
success. If you're stuck in old money habits, overwhelmed by investing,
or unsure where to start, this is for you. I'll give you the mindset
and strategies to take control, grow your wealth, and achieve
financial freedom. It's time to make your money work for you. Let's
start with this, the scale of the bubble. We'll start with
the numbers. Because once you see the scale of what's actually happening, you'll
understand why it can't last. So OpenAI, the company
behind ChatGPT, was recently valued at about $500 billion.
People are saying when it lists it's gonna be a trillion, but $500 billion. Now for
context, that's more than Coca-Cola, more than McDonald's, more
than even Pfizer. And how much revenue does it currently produce?
Well, it's generating about $10 billion a year. How
much are they losing? More than that. They're burning through like eight
and a half billion dollars in losses, just in losses annually. So
we have a company valued at 500 billion that's losing money.
And not just losing a little bit of money, it's losing billions of
dollars every single year. But don't worry, it
gets worse. OpenAI has committed to 1.5 trillion
in AI deals. That's trillion with a T. They've signed $500 billion
deals with Project Stargate. That's to build all the data centers in the US. A
$300 billion deal with Oracle, specifically to buy all the compute power. And
another $500 billion with NVIDIA to buy the
chips. And then another $300 billion with AMD. That's
1.5 trillion in commitments for a company that generates 10 billion in revenue. So
let me put that in perspective. If open AI used a
hundred percent of its revenue, every single dollar it
makes to pay for the deals, it would take 150 years to
fulfill those commitments. It's
not a business model, it's almost like a Ponzi scheme, right? And
OpenAI is not alone in this. McKinsey did a
recent study and they estimate that the AI industry will
need to spend, check this out, will need to spend $7 trillion in
capital expenditures over the next five years just to meet the demand. $7 trillion!
So to put that in context, America's total capital expenditure across all
industries in 2024, last year, was 8.3 trillion. So
the AI industry, just one industry, is planning to spend nearly as
much as the entire US economy spends on
everything. And here's the thing, most of
these companies aren't making money. So
there's a circular monetary problem happening here. You
might be thinking, okay, well, aren't these people smart who
are running these companies? They wouldn't be investing in
this stuff if it didn't work, right? And I understand that, but here's where
the circular money problem arises. You've seen
this chart floating around probably, it's floating around the internet, and
it shows the financial relationships between all the major AI companies. And
when you look at it, you realize something very disturbing. They're all just paying
each other. So here's how it works. NVIDIA
invests $100 billion in open AI because NVIDIA is
one of the largest chip providers, right? In fact, it's the largest
and it's a $4 trillion company, a $5 trillion company now. And
it's the largest company in the world. And here's the thing, it's
got what's called vendor financing. And vendor financing is
where they actually allow their biggest customers, and OpenAI is one of their largest customers,
$100 billion, to actually buy the chips off
them with borrowed money from them. So
this happened in the dot-com bubble too, and it's now
starting to happen again. So in return to that, OpenAI
agrees to buy NVIDIA's chips. And so they're kind of incestuous, they're
in bed together, right? And so NVIDIA also
invests in the CoreWeave, which is an AI data center, and they agreed to backstop
all their services if they can't find customers. So CoreWeave then
sells computing power to OpenAI. And AMD gives
OpenAI warrants for shares in return for OpenAI's
You know commitment to buying the AMD chips so that
announcement alone sends the AM stock ticker higher Which
then helps pay open AI for the deal that makes sense because they're
using warrants So open AI announces a
300 billion dollar deal with Oracle for data
center capacity Oracle turns around and
buys chips from media Who's invested in
open AI see the problem? It's a circle. It's
circular and NVIDIA is investing in
its own customers so they can then buy NVIDIA chips. And
then NVIDIA is reporting those chips as sales as revenue, even though
they're effectively funding the purchase themselves. And
that is the vendor financing conundrum. And
it's exactly what happened right at the end of the dot-com bubble incidentally.
So the company that was doing that was say
Nortel for example. They started lending money to their customers so they could buy their products.
And it made their revenue look great. It made their
profits look great. And then the whole thing collapsed. Because
here's the truth. If you're investing in your customers to give them the cash
they need to buy your stuff, you're not actually making any profit. You're
just moving money in a circle. It's
a loop. And when the music stops, and
it will, when investors stop putting money into the space, the
whole thing falls apart. And then there's the demand
problem. And let's just say I'm
wrong. Let's say these circular deals aren't even a problem. Let's
say these companies can actually deliver on what they're promising. There's
still one massive issue, demand. Specifically,
when Bain and company did a study, they estimated that AI will need
like $2 trillion in annual revenue by 2030 to be profitable.
Think about that. In four years, they need 2 trillion in
annual revenue to be profitable, 2 trillion. That's more than the 2024 revenue
of Microsoft, Meta, Alphabet, Amazon, Apple,
and NVIDIA all combined. That's five times more
than the entire software as a service market. And
there's no path to that kind of revenue. Yeah, so 80% of
companies are using AI in some sort of capacity, right? So ChatGPT broke
the records and it's the fastest growing app ever. OpenAI
now has like 800 million active users, but only
6% of those users are actually paying for the service. And 61% of
the companies using AI say it hasn't had any real
impact on their earnings. So we have hundreds of millions of
people using AI for free effectively. And the companies that
are paying for it aren't seeing a return on the investment. And Citigroup
estimates that AI revenue will reach like $780 billion
by 2030. It's very impressive growth. That's like
80% a year. It's incredible, right? It's an industrial bubble. But
it's still less than half of what Bain said that they needed for
the industry just to break even. That's
assuming everything goes perfectly. That's assuming
AI companies deliver on their promises. That's assuming that demand keeps growing
at the same pace. But what if it doesn't? What
if we're in this Metaverse 2.0? Remember when
Zuck started spending all the cash flow from Meta on the Metaverse? And
remember everyone said it was the future, et cetera?
I can't remember that. And Meta stock just collapsed because it
was just wasted money. Because where is the Metaverse now? It's
like, remember when people were buying land in the Metaverse? What
happened to them? Anyway, AI is
certainly more promising than the metaverse, but the same principle applies.
Just because a technology is exciting doesn't mean
it's profitable, doesn't mean it's a good investment. We've seen this
before with railroads in the 1800s,
bubble, industrial bubble. We saw it then with cars, industrial
bubble. We saw it then with the internet, industrial
bubble. If you look at these industrial bubbles over the course of history, The
railroads, there was like tons of railroad companies. And
now there's only like a handful. There's only like a handful. There's only like eight big
class one railroads in the Western markets,
really. And so you think of all those railroads, there's only a handful. Then
you look at cars. In fact, in America, there was 200 car manufacturers
in the United States at the beginning of the car boom. Now
there's like Ford and GM, two, there's two, two.
The internet, remember all the internet companies weren't making money? They're gone, gone.
Pets.com, toys.com, you know, all gone. There's
only a handful, Google, Amazon, Microsoft. Like
there's just a handful now. So if you're looking at this as an industrial bubble,
of course, there's only gonna be a handful of AI companies left. So there's gonna
be a huge fallout, right? So here's the thing with,
if you're listening from Australia, cause that's where I'm based right now. Here's
what nobody's talking about here in our country. What does it mean for us? What
does it mean for people who are, you know, it's in America, right? Open AI doesn't
really matter. So what happens to Australian investors when the bubble pops? Let
me. Well, it's not good, particularly lately,
because a lot of superannuation funds are gonna start putting a lot of money into
international shares. But according to the ASX, the
Australian investors have poured billions into AI as well. NVIDIA, Microsoft, AMD,
these are some of the most heavily traded stocks, even on Australian exchanges, because we
can also, on our ASX, have index
funds like, you know, from Vanguard and
BlackRock, they're listed on our exchange. So you can actually
have huge exposure to these companies via those types of ETFs and
funds, and that is actually happening. So it's not just retail investors, it's
Australian super funds, it's your retirement savings, it's all that stuff.
They're heavily exposed to AI. If you look at some ETFs, That
a lot of Aussies are exposed to like I would say 30 to
40 percent of the holdings are all exposed to AI It's crazy, you know
it's wild and so most
people are going to be exposed to this crash, right? Or
this adjustment in the bubble. Just quickly, if you're ready to take control of your finances but
feel stuck on where to start, I have a solution. My
book, Money Bias Happiness, simplifies investing and
wealth building with practical steps to help you achieve financial peace.
Get your copy via the link in the show notes and let's get your money working for
you. Now back to the episode. So when it pops, it
will definitely hit retirement savings. But there's an
even bigger risk if you're in Australia too, because you've got currency risk. So most of these investments
are in US dollars. So when the bubble pops, you're not just losing money on the stocks, you
may also have some sort of currency conversion too. So
yeah, just be careful of that. Because when the US market crashes, typically the
Aussie dollar strengthens. And so that
amplifies your losses as well. With
any hope, people run to the US dollar and that doesn't happen. So you could
potentially get hit twice, right? One with the stock price, and
then one on the currency. And there's the economic impact of
that. And people will often say, well, how does that impact our economy? Well, remember when
housing collapsed in America? Boom, a couple of years later, we got smashed. Because
the old saying goes, when America catches a cold, when America sneezes, Australia
catches a cold. You've probably heard that before. So Australia's economy is
definitely dependent on resources, right? We've got iron ore, coal, natural gas.
These are our biggest exports. And guess who buys them? China. And
guess who else buys them? USA. And they
buy them for manufacturing, infrastructure, technology, and development. And so when the
AI bubble pops, the global thirst for these commodities will
actually dry up too. Now, I don't think that's going to happen in the
short term. But long term, at some point, there will be
an adjustment to these revenue projections, the amount of capital being
put into these things, and the ROI that's not coming back. and
that's gonna definitely have a knock-on impact to us as
a country, to our resource sector, et cetera, and
then it'll start to then have a knock-on effect in jobs, right? So it
means the Australian economy then will start to contract as well. So it wouldn't surprise me
to see a recession after a
global AI bubble pop. So everybody's pretty much exposed to
the risk, okay? So it's not just gonna hurt tech investors, I think it's gonna hurt everyone.
Now, to what extent, we don't know, but there's definitely concentration
risk because Everyone's talking about
AI. It's just like the thing. Yeah And I
think it's like 35 to there about companies account for like 90 Yeah,
almost a hundred percent of the AI token spending In
fact, there's two companies that are actually accounting
for almost 50% of it, right? NVIDIA's chips, of course, and
then other companies involved in the AI itself. They
account for like, I think it's 36% of the S&P 500's growth.
This is wild, okay? I would say the most concentrated
S&P 500 in recent memory. So when you're buying
the S&P 500 as an example, you're buying 500 companies, but by the way, most
of the gains are from The AI companies
which account for 40% of the fund. Okay, so it's just something to
understand, right? So if one of these companies fails, then it sends a bit of a shockwave
through the entire market, right? And then OpenAI is basically
at the center of it all. Because OpenAI's deal announcements
alone, right? They've added hundreds of
billions of dollars to the market values of Broadcom and Video and AMD. So
if OpenAI pulls back, if they can't deliver on their promises,
and right now Alphabet is cranking. It's
taken so much market share from OpenAI. Look at the chart. It's dominating
because Google has a distribution across its powerful
businesses to implement AI faster than OpenAI. OpenAI is pure.
It's very much its own business, and it can get absolutely crushed by people like Alphabet,
who have just got these wide modes and distribution channels that they don't access.
In fact, right now, Google is one of the only ones. In fact,
Google and Alibaba are the only full-tech stack AI, which means this. They
own the chips, they own the data centers, and
they own the distribution. the actual AI models. So
they're the only full stack. And in fact, too, they've got contracts
on nuclear power. So if you go right upstream, nuclear
power contracts for getting power, then you've got the
actual chips themselves, then you've got the data centers,
then you've got the models. And that's a full stack AI for
vertically integrated business model. Those who've got a fully vertically
integrated business model not only control the model themselves, they
make better margins, but they also can squeeze
out these other ones at a higher cost. It's very much like the oil industry in
that sense. You get companies like that
versus an open AI and they're already crushing open AI. This is what's happening
in real time. What's happening too is in
the prices out there, the P ratios, the price
that you're paying for these companies in relation to their earnings, they're getting
quite high, which means there's no room for error. So
there's no room for disappointing results. If they don't stack up, it doesn't happen, they don't
deliver, there's gonna be massive price adjustments. You're gonna see a huge, there could be
a big bear market, 20, 30% collapse in the stock market for sure, as
these prices start to adjust based on the earnings that they can actually deliver on. So
you look at the peer ratio of the S&P 500 now, it's actually at 30 times earnings,
which historically is very high, very high. It's
not quite as high as the dot-com bubble. In the dot-com bubble, it was 46 times
earnings. Flipping very high, right? So we're not quite at dot-com
bubble levels yet, but we're getting close. And here's the difference. During
the dot-com bubble, 36% of the tech companies were actually losing
money. They're just like URLs, it was wild. I
was only 17, I still remember. Today, it's only 18%, right?
So on the surface, things look a lot better. The financials are definitely stronger. The
companies look more stable. They are more stable, but that doesn't account for the private companies like
OpenAI and Anthropic and so forth that are completely unprofitable. They're burning through
billions of dollars in cash. And it doesn't account for the circular money problem with
the vendor financing that's happening with Nvidia, or the demand problem, or
the infrastructure bottlenecks like power, right? Which is a huge constraint. So
why this bubble, this industrial bubble, which it is, is
different from the dot-com bubble, which is also an industrial bubble from the internet. It
is different. And I know you're probably thinking, Lloyd, why are you being so negative, right?
Why are you bullish on AI? I love AI, it's great, but there's definitely a bubble. The
internet was a bubble too, and it's changed the world, it's amazing. So
financial bubbles are really bad for people. Like the 2008 housing
bubble was a financial bubble. It was FOMO by the
consumer of buying things worth way more than what it costs, and it
was FOMO. That was very bad because they were selling bonds, anyway, long
story. Not ideal. Financial bubbles suck. 1929 was
a financial bubble, and so was the 2008 financial crash. So financial bubbles,
extremely systemically bad for us. They can cause
depressions. However, industrial bubbles
are really good for us as consumers. It advances our lifestyle
massively. But it's not so good for investors if they own pieces
of these companies that aren't making the money they say they are, right? That's the issue.
So, the internet changed the world, railroads changed the world, cars changed the world,
AI is changing the world. But it also, the internet, dot-com
bubble also led to an 80% collapse of the NASDAQ
If you look at the NASDAQ in 2000, 1999, 2000, 80% collapse.
In fact, it collapsed over a couple of years. But then it, listen to this, it took
14 years to recover. Be
aware of that. It can happen again. So thousands of .com startups obviously
went broke. Investors lost trillions. It took a long time
to recover. But again, a few companies did
survive. So yeah, AI is
changing the world, but it doesn't mean you're necessarily going to make money from
it. And this is why Warren Buffett doesn't invest heavily into fast-changing industries,
because it's not how you make money. It's how you definitely have a better life.
Okay, so there's a few differences between the dot-com bubble and the AI bubble back
then interest rates were rising The Federal Reserve was actually tightening monetary policy right
now. They're actually gonna bet to the opposite They're gonna probably
drop rates because inflation's come right down. Okay, so there's a huge difference. We're
gonna see rate cuts which means the bubble's got more room to
run. If rates are cut, oh my God,
we're gonna see this thing flip and boom, and I think rates are gonna get cut, because Trump right
now is like, he's hammering the Fed chairman to
start cutting rates, right? So the timing's a lot different. During
the dot-com bubble, Alan Greenspan was the Federal Reserve Chair
at the time, right? And he said, oh, there's a
lot of irrational exuberance, which there was in 1996, I think he said
that. And then four years later, bang, the bubble pops. So it takes a
while, right? So even if we are in a massive bubble, it
could take a few years. And especially if they drop rates, it definitely will. And
it could also pop tomorrow. I mean, we just don't really know. But we do
know for certain that right now there's way too much capital flowing
into AI based on the expected returns of
that capital. Now, if that happens, it's very capital intensive and
very return light, which means at some point it'll
adjust. And when it adjusts, the market will go through some sort of you
know, bear market, okay? So what do you do right now?
What do you do? First, if you're invested in AI
stocks specifically, you need to take a hard look at your portfolio. I'm
not saying sell everything, I'm not saying don't buy AI stocks, but I'm
just saying you need to understand your own risks. So if you own NVIDIA, AMD,
Microsoft, one of these companies that are not only heavily exposed to AI, but
also at a very high price based on the capital expenditure, Then
you've got to be very careful. Now, there are companies out there like Google,
for example, got multiple verticals. It's got YouTube, cloud,
it's a cloud leader. It's got its own TPUs now. It's
a vast empire. People often joke, Google is the internet. And
so you've got these companies that are earning tons of profit, got a hundred billion in cash. There
are certainly opportunities out there where it makes a lot of sense, where companies
are really going to they're
gonna become even more powerful with the likes of AI. So
there are some great opportunities out there, as long as
the valuations are reasonable. And that just means are you getting,
are they gonna be able to generate
profits based on their spending? That's all that matters, okay? So
if they can't, they'll fall hard, right? Now
the other part that you can do is make sure you're diverse. So don't put all
your eggs in one AI basket, okay? You don't wanna chase the hype. I
see some portfolios in X and they're just all AI stocks. I'm like, these guys are gonna
get killed, right? So make sure you're diversified across sectors. Perhaps
you'll be in like, for example, I'm
in railroad, I'm in oil, I'm in healthcare,
I'm in certainly technology, but I'm in China tech, so it's
a little bit different to US tech, and I'm slightly a little bit in US tech, and
then a little bit of cash and some other things. So you have to be diversified. That's very
important, right? You don't need to just be all stacked in AI because you
have no sector diversification. Everybody knows to be a little bit diversified. And
then understanding that owning shares in companies that
survive the bubbles, that's a more astute way to
invest long term, right? And that's where I'm putting my money because the
companies that I'm investing in, I know that even through
a bubble burst, they'll come out stronger. And that's what
you want to do. You want to invest in companies that will do well either
which way, okay? And you've got to be very mindful of price. You
don't want to time the market. That's not a good, sensible strategy. What
I've done lately is I've got this thing called the 100-year portfolio
that I'm building, my own personal portfolio. And I've renamed it that
because I'm like, am I buying companies that have not
only withstood the last 100 years, that they can do it again, in
products and areas that are impossible to compete with? And
it's just changed my entire approach And I'm just so
much more excited about that because I don't have to worry about timing, disruption,
anything like that. And some companies in the AI race, they do tick a
lot of those boxes. So you don't wanna make emotional, hypey
decisions around AI, okay? Just protect yourself, diversify, focus on
the fundamentals, okay? If you don't know what fundamentals are, go
get my book, Money Buys Happiness, on the second page. There's a little cool little course that you
can do which will explain all that stuff, right? Moneybuyshappinessbook.com, go
check it out. Because the worst thing you can do is not
be educated and do nothing. That's the worst thing, right? Is not
understand what's happening, right? So I'm not here to tell you that it's all gonna
be bad and it's gonna, you know, it's a huge fallout and we're gonna go through a massive recession. I'm not saying
that. I'm saying that AI is changing the world. I'm excited about it.
Some insane things are coming, but it
may hurt you as an investor. When
Mark Zuckerberg gets on the news and he tells Trump, we're
going to throw 500 billion, they just throw these numbers around like nothing. they
have to generate a return from the capital. Otherwise, there's going to be capital destruction.
And that's what's going to lead to the AI bubble popping, right? Especially if
this circular money thing continues, which is why Michael Burry's put
a short bet on these companies, because he knows this too. It's just a matter of
time, right? So when it pops, a lot of people are going to lose a lot
of money. Don't be one of them. Protect your wealth, diversify,
focus on fundamentals. And if you found this video helpful, make
sure you hit the subscribe button because I'm going to keep tracking this
story. And when the bubble pops, you're going to want to know what to do afterwards.
There's going to be a fallout. Like, what do I do now? We're going to be doing lots of episodes on
this, right? So thanks for watching. Stay safe out there in the AI bubble
world, and I'll see you in the next episode. Thanks for listening to Money Grows
on Trees. If you enjoyed the episode, leave a five-star review on Apple
Podcasts and Spotify and subscribe to us on
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