Latest / Money Grows on Trees / #299 - The $1.5 Trillion AI Lie That's Holding Up The Global Economy

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#299 - The $1.5 Trillion AI Lie That's Holding Up The Global Economy · Money Grows on Trees

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What if I told you the biggest threat to your superannuation, your property portfolio, and
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the entire Australian economy wasn't interest rates or recession,
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but a lie? A colossal $1.5 trillion
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lie being peddled by the biggest companies in
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the world. It's the AI bubble. And
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in this episode, I'm not just gonna show you the proof that it's about
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to pop, I'm gonna give you my take on whether
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it's a full blown collapse and exactly what you need to do to
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protect your wealth when it does. I'm Lloyd James Ross, seven
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figure investor and entrepreneur, and I've helped thousands of business owners and
0:37
professionals turn financial stress into success. If
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you're stuck in old money habits, overwhelmed by investing or unsure where
0:43
to start, This is for you. I'll give you the mindset and
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strategies to take control, grow your wealth, and achieve financial
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freedom. It's time to make your money work for you. You've
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seen the headlines. AI is changing the world. It's creating new industries, curing
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diseases, making us all way more productive. And the
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stock market has rewarded it massively. Your super fund's probably
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done the best it's ever done in recent memory. Companies with
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dot AI in their name are soaring NVIDIA the company making
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you know the most powerful chips And the power
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revolution that's happening with building out data centers has become one of
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the most Valuable companies on earth with a market cap that rolls
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in you know entire countries is over four trillion dollars But what
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if the foundations of this entire boom are built on sand?
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What if the revenue that's driving these incredible valuations isn't actually real?
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This isn't just my opinion, this is what some of the smartest investors in
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the world are actually saying. And what I'm going to show you is exactly
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why they're terrified. The first
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one is Michael Burry. He's famous for being on the story
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by Michael Lewis called The Big Short. He's also in the movie The Big Short. He
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famously shorted the housing market in 2008. He
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actually invented credit
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default swaps. He's the guy that invented that. Very clever guy. He
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called the financial crisis in 2008. He shorted the market, made 700 million
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for his fund. Basically, he's a big shorter
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and a clever guy. He's been sounding
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the alarm on the AI sector. Instead
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of property, this time he's shorting AI. If
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you look at this from what he says, he says that if
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you were to draw a true chart of all the give and take deals
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happening in the AI world, it's unreadable. because
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of the circular dependencies happening with each one of these companies.
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He's saying the money is just going in circles effectively, right?
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Robbing Peter to pay Paul. And he's saying that what looks like a flywheel
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of growth is actually a fraud. Similar to what happened
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in 2008. He's asking a simple question that nobody can answer. Can
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anyone name OpenAI's auditor? It's
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a very simple question. Think about that. The most valuable private AI
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company in the world and nobody knows who's checking their books.
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That should terrify you. It certainly terrifies him because what
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he's really saying is that the revenues the companies are reporting, particularly OpenAI,
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it's not real. It's coming from actual customers. It's coming from their
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own investors, their own suppliers, their own partners. It's vendor financing
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dressed up as revenue effectively. He's right. Let me
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show you. Here's the circular revenue loop, and you can see
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what's really happening here in the AI world. Once you see it, you can't unsee it,
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right? Let me explain this. NVIDIA invest
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$2 billion into XAI, Elon Musk's AI company.
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Then XAI borrows $12.5 billion to
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buy NVIDIA chips. NVIDIA gets their money back, plus interest,
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plus they get to book in the revenue. It's
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a circle, right? Microsoft invests $13 billion in OpenAI. OpenAI
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then commits to spending $50 billion on Microsoft Cloud Services, who
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powers these services and
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video chips, right? So Microsoft orders $100 billion
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in video chips. It's all the same money going around in circles. Oracle
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gives OpenAI $300 billion in cloud credits. OpenAI
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then uses those credits to buy video chips that run on
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Oracle data centers. And again, it's a circle. AMD provides
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OpenAI with options to buy 160 million shares
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after committing six gigawatts of GPUs to them, and it's all
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connected. It's all circular. The same dollars are being
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counted multiple times as revenue, right? And very little cash
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is actually moving, and it's a bit of an accounting illusion. It's
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a bit of a shell game, and the music will ultimately stop.
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And it's not just Michael Burry who sees it. I mean, he openly explains it
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and sees it. He's posted on his Twitter account or his X account that he sees this.
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He incidentally shorted, he put a short position on,
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I believe it was NVIDIA and another company, might
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have been AMD, and then he closed the fund famously and he's actually created a sub-stack now
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on X. And so that's very compelling, right? But it's not just him
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who sees it. The smart money, the people who
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already have access to the information that you and I don't see, they're also getting out.
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So let's look at Bill Gates' recent portfolio disclosures. Here,
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Bill Gates, the founder of Microsoft, he sold nearly 65% of
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his Microsoft stock. Let me repeat that, the men who built the company. The
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company that's at the heart of the AI boom with their investment in open AI, the company
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is invested probably more in open AI than anyone else. Why
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would he do that if he believed the hype? Why would he, the founder
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of the company, Microsoft, sell two-thirds, two-thirds of his stake
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in the company that's supposed to dominate the AI era? Because
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I believe he knows something. He knows that the valuations are extended.
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He knows that the AI capex boom is unsustainable. He knows that
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when things unwind, it's going to get ugly. In terms of his portfolio, he's
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reduced positions in waste management, Canadian Railway, Caterpillar,
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all these traditional businesses as well. These are bellwether stocks
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for the real economy too and he's getting out of all of them. That
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tells you something that he's not just worried about AI, he's probably worried about the
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entire stock market itself and the economy itself. And he's not
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alone, right? Peter Thiel, famous for his early investment in Facebook and
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building the PayPal mafia. He's the legendary tech
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visionary, right? He sold his entire stake in NVIDIA. And SoftBank, the
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world's biggest, probably the world's biggest tech investor, it
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unwound its AI exposure as well, right? So
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Burry, I believe it was $1.1 billion
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in put options against NVIDIA. So that's his position in NVIDIA. That's
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a short position. And that's a bent that the stocks didn't crash, right? So it's
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not retail selling. It's actually the elite capital
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allocators who are de-risking. And when the smart money runs, you've
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got to pay attention. It's a bit of a signal. And the
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same can be said for other value investors, too, like Warren Buffett. His cash
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position is $380 billion. So let's dive
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a bit deeper. So we've got more
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numbers, right? We've got this, what's called effectively a
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$4 trillion web. And the numbers don't lie. The BBC reported a
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$1.4 trillion web of deals surrounding OpenAI. 1.4 trillion,
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that's more than the GDP of most countries. But here's the thing, OpenAI's
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Revenue estimates is less than 0.1% of that, right?
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So less than a percent. That's a massive, massive mismatch between
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money going out and money coming in. That's the definition
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of a bubble, right? The analysts, you know, people are warning about it,
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they're saying it looks like a dot-com boom and bust all over again, surging valuations,
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new tech optimism, companies rising without
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There might be some profits, but they're beginning to become unsustainable and
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a lot of the companies are selling for 50 and 60 times earnings. And so there's a
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lot of this stuff already priced in. Alphabet, which is Google's
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parent company, the holding company, it's doubled its value in the
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last, I mean effectively doubled that in value this year. It's now approaching
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to become, it's a $3.5 trillion company now. It
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is developing revenues. It is developing profits. But there's
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also a lot of future hype built into the price point at this stage as
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well. It's now 31 times earnings. And now all these tech companies
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are very, very riskly priced. And they're
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priced to perfection. Eventually
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we have to see the actual revenue catch up to the spend on data centers.
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So all the capital being allocated by these companies, it
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has to produce a return on investment. And the question is out there saying,
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will there be enough return from this? Because the
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valuations are built already to suggest that there will be. Now
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the trick is, are LLMs the actual future of AI, or
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have we capped out? have we capped out? Have we actually seen
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the best of what AI can deliver so far? Will they get a return on this capital
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is the question. A lot of money being put into data centers. The
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chairman of Alibaba, Joe Tsai,
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he said that He doesn't think, because Alibaba is
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spending $52 billion on data center rollout, and
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they're a big leader in AI. They're the only other tech
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fully integrated stack other than Google in
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the AI world. And he said that there's not a bubble. So
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they are suggesting they can get a return on this capital. But
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not every company can. But all of them are putting money into it. And
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even Jeff Bezos says, we are in an industrial bubble.
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He says an industrial bubble is where there's a specific sector. It's not
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a financial bubble, which are very, very catastrophic. We're in an industrial
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bubble. a little bit like the railroads when they came, a little bit like the motor car,
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a little bit like airlines, a little bit like sector-specific bubbles
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or industrial bubbles are captured to a sector. And he said, we're
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in one, because he knows people putting $5, $6, $7, $8 billion into
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a team of two people and saying, build something. He goes, there's no way
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they can get a return on that capital. And that's what's happening at a bigger scale here
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between all these companies. So it will come home to roost. So
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the answer is simple. When the bubble pops, The valuations that
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are built on dreams evaporate, and the investors who are chasing the
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hype get left holding back. That's what happens. It's
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not just the money, it's the technology itself. It might be a dead end, as
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I just mentioned. Yan Li Kun, who's one of
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the godfathers of AI, he won the Turing Award,
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which is like the Nobel Prize of Computer Science. And
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he was the chief AI scientist at Meta. And he says
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that the current approach to AI, which is effectively larger
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language models, LLM, so you would see it in Chachapiti and Gemini and so forth, it's
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not the path to true artificial general intelligence, which is what they're all chasing. I
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mean, Sergey Brin from Google said, I don't care if we go bankrupt, we're going to
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win the AGI race. AGI is artificial general intelligence, where
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the actual intelligence is thinking for itself. Whereas LLMs, they're kind
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of capped patent recognition, so it's kind of like, built-in
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AI. So it's very capped. And that's
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what this chap's talking about. He says that they're pattern-matching machines.
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They're not actually intelligent. So to reach true
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AI, artificial general intelligence, we need to... He says we
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need to abandon LLMs and adopt world model architecture, different
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architecture. So if he's right, and there's a very good chance that
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he might be, because he's a very clever guy, that means the billions and
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trillions of dollars being poured into this technology specifically are wasted.
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And it's a massive misallocation of capital on a scale that
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we've never really ever seen before. So it's like the early
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2000 internet infrastructure overbuilt, basically, right? Or the oil, shale
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oil overbuild. It's where there's too much capital going into this
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thing and there's not enough return coming back. Billions of dollars poured into the
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wrong technology at the wrong time for the wrong reasons, effectively. And I believe that's
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what's happening. And when the market realizes that, which may
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happen fairly soon, I mean, It's going to be a bloodbath and
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we're going to be able to watch that unfold in real time. So
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even the mainstream media is starting to catch on, which probably means
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the market's starting to realize it very thoroughly now. It hasn't quite worked it out yet,
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but CNBC, who's usually a massive cheerleader
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for the stock market, they've been running segments on warning of
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an AI bubble. They're pointing to rapid market value spikes
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fueled by speculative bets. I
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think there's over 1,300 AI startups with valuations over $100 million. 490 unicorns
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worth over a billion dollars. This is a lot going on. There's massive tech spending
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by Amazon, Meta, Microsoft, Alphabet, huge
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CapEx. It's kind
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of reminiscent of the late 1990s, leading up
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to the dot-com bubble. We all know how it ends. The dot-com crash wiped
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out trillions of wealth quickly. It took 14 years
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to build that back in the market. This could be even bigger. Not
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everyone agrees with this, though. There's some very smart people who think this is
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all fine, that the spending is justified, that
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the AI revolution is real. So like, for example, Larry
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Fink, the CEO of BlackRock, the biggest asset manager in the world, says that the
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spending isn't just AI. It's cloud, it's infrastructure, it's power grids.
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This is what Joe Tsai from Alibaba was saying, too. He doesn't believe it's a bubble. He
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thinks that the money is well spent, and it's necessary for global US
13:15
leadership. And China's moving towards that as well, right? And also
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the CEO of Intel. He's talking about that
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the efficiency improvements justified large investments in the area Howard
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Marx like one of the most well-respected investors and super conservative
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He says the valuations aren't crazy high yet. He doesn't see
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the mania He's very well known for like talking about manias and
13:36
bubbles in his books And he said it's not mania level typical
13:40
of a bubble yet And then you've got the skeptics, you know, like Richard Bernstein. He
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says that AI bubble is likely he says that the huge gap
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between the spending and the future earnings is is
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disconnected. He highlights like open AI, which
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has like a trillion dollars in deals, but only 13 billion in
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revenue. So he's like, hey, there's a mismatch. Who
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else? There's Ben Inker from GMO. He says that the AI market shows
14:04
circular revenue, aggressive price behavior, over-reliance on
14:08
debt. And he says that firms investing in AI
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don't really have the cash flow to support it. And I would say the same thing for open
14:15
AI. They said the other day that open AI might become like just
14:18
this forgotten thing. Actually, they referred it
14:21
to Netscape. They said it would become like Netscape. Because companies
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like Google and Alibaba, who have got real businesses, underlying
14:28
businesses in subscription, in e-commerce, etc., they're
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the ones that are going to apply their LLMs and actually just dominate. Whereas
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those that depend on the LLM itself as the business model
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will fall away. Who's right? The
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optimists or the skeptics? Well, if
14:46
you look at history, it tells us that when you have this much money chasing this
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few customers, it typically ends badly. They get
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caught up and the market figures it out. So, nowhere
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is this more obvious, I would say, than NVIDIA's accounting. I mean, NVIDIA is
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the poster child of AI, right? So their chips that come typically
15:05
from TSM, their chips power everything. Their stock has gone
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up tenfold in just a few years. They're one of the most valuable, in
15:11
fact, they're the most valuable company on earth. I think they're $4 trillion now. But if you look under the hood,
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there's a few red flags. The accounts received,
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so if you look at the accounts receivable, the money that they're owed, the money that
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customers owe them effectively has exploded, like $33.4 billion.
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That's up 89% year over year. And in that same time, it's
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taken to collect the payments, it's stretched to 46 to
15:34
50 debt. So the receivables has stretched, and
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that means that there's, you know, sales that
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and revenue that may never be paid and That's a huge amount of money
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right to kind of like not realize and it suggests that
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NVIDIA is booking revenue Before they actually get the cash And
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their inventory is also spiked like if you look at their financials Inventory
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has gone way up. And so if they're making the sales and getting their product
15:59
out there. Why is your machine increasing? That's what people are asking, right? so this
16:03
contradicts the narrative of you know, the
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suppliers mean demand. If demand was really that high, there
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wouldn't be inventory sitting on the balance sheet. And so, you
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know, their profit to cash flow conversion is like 75%. You know,
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healthy Typically, healthy
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semiconductor companies usually have like 95% or higher. So that means
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that NVIDIA's revenue is increasingly relying on unrealized sales, extended
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payment terms, vendor financing loops, and like a
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circular money flows. So, house of cards. And
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when it collapses, it's going to take a lot of people down with it. And I believe that's
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really what Michael Burry sees in this whole thing. And that's why he's
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placed those puts on NVIDIA. If you're worried about this fallout, don't
16:45
worry too much because the reality is it all comes down to a bulletproof investment
16:49
strategy that protects you from these kinds of bubbles popping and
16:53
lets you capture the upside when the real opportunities do appear. It's
16:56
not about timing the markets, it's about having a system and a plan and
16:59
actually break down how to build that system with eight simple questions
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on page 131 of my book, Money Buys Happiness. It's the framework
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I use myself. And I'll put the link in the description and go check it
17:09
out. And the scariest part about all this is it's all connected. The
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AI bubble is intertwined with the crypto market, and
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it's got a direct line to the Australian economy as well. People think we're protected here from
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all that, but we're not. So your Superfund is almost certainly heavily
17:24
invested in some of these tech stocks, and certainly some
17:28
of the ASX companies are to some extent. But the
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old saying goes, when America sneezes, Australia catches a cold. And this isn't
17:35
a sneeze. This could be pneumonia. And many
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of the AI startups, they're using Bitcoin and
17:42
certain collateral for loans that also may be worthless. So
17:45
if the AI bubble pops, they might be forced to sell their crypto positions
17:49
and cover their debts. That'll trigger a crypto crash, which will trigger
17:52
more margin calls, which will trigger more selling, which will be a bit of a death spiral. It
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would put a huge dent in
17:59
all asset classes. And no one is protected from that. I
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would say that it's gonna have an impact on all countries. A
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little bit like what happened when the dot-com bubble collapsed and also when the
18:10
GFC happened. So here's the final nail in the coffin. MIT
18:14
did a study on AI projects, right? And they found that 95% of
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AI projects will never become profitable. 95%, think
18:21
about that. Most AI businesses rely on subsidies. And
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they've got like high compute costs. They've got no clear monetization
18:28
path. They burn capital fast and revenue grows. It's a bit of a
18:31
Ponzi scheme, like new capital paying for old obligations, revenues
18:35
are booked before cash arrives, circular funding loops, inflate the
18:39
top line, heavy vendor financing, lack of real user
18:42
demand, rising inventory, like I said before, and the receivables. It's like
18:46
the dot-com bubble number two. It's 2008 pre-crisis
18:50
leverage kind of structured all over again. Not
18:54
as bad as the GFC, but certainly up there with the dot-com bubble, which could
18:57
see a huge drop in asset prices across the board. A
19:00
lot of capital disappearing overnight, vanishing, vaporized. So
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when does it all come crashing down? Well, some analysts are predicting that
19:08
it could start as early as February, which is like two months
19:12
away. from when I'm recording this. And that's when NVIDIA might
19:15
start to reveal some of the overdue receivables. I believe that's what Michael Burry is waiting for.
19:19
Then in March, we might get a credit downgrade. In April, we might get earnings
19:23
restated, and then the hour bubble narrative starts to accelerate, and
19:28
a possible systematic correction starts to follow. And
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I believe what may happen is that companies like
19:35
Alibaba, Google, to some extent Amazon,
19:40
and Meta, the way it's identifying AI and how it's going to
19:43
enhance their core offer, I think those companies stand
19:47
to do the best with LLMs and what's called general AI,
19:50
not general artificial intelligence, but just LLM models, they
19:54
seem to be best placed. I was even reading the other day
19:57
that even the railroad companies can implement parts of AI. Like
20:01
UNH, who's the biggest health company in the world, it'll start
20:04
to use AI to move through its data more effectively. So there's going
20:07
to be real world application of this, but companies that are pure AI
20:11
dependent, I think they're going to disappear. So
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what does all this mean for you? Well, it means you need to be careful. It means you need to
20:18
be aware of the risks. It means you need to understand that
20:21
the story you're being told about AI might not be the whole story. I'm not
20:24
a huge believer in that the current AI will accelerate
20:29
to age on, all of a sudden we're overtaken by this central brain. Technology
20:34
has this It's innovating and disrupting already,
20:38
but it will find its feet again. And so it'll catch up.
20:42
So it will change the world, but it's not going to displace. human
20:48
consciousness any time soon, right? So what's the play here? The
20:51
play is to make sure you protect your wealth, right? So you need to understand the game. You need to
20:54
see that there's a circle of revenue happening, and it's a few accounting tricks by
20:58
all accounts that are happening here. And the smart money is
21:01
exiting certain parts, and we have to understand what's a house of cards and what's not. And
21:05
then you want to make sure you're diversified, right? So you don't want to put all your eggs into a Nvidia
21:08
basket, as an example. You would want to invest in
21:11
very obvious value creators in
21:15
any market, in any season. For
21:18
example, perhaps you would invest in companies that are railroads. Perhaps you
21:21
would invest in companies that are like the Coca-Cola's, consumer
21:25
discretionary. Perhaps you want to invest in with little debt into real
21:29
estate. Things that are going to produce value for people
21:32
and produce cash flow without a ton of leverage, that's how you get
21:35
through every season. There's a reason why Warren Buffett has been one of the richest men
21:38
in the world for many, many, many seasons and many markets and many ups and
21:42
downs. In fact, he's the one that's stood the test of
21:45
time. It's because he invests in companies that don't
21:48
just depend on AI hype. The idea of
21:51
this is for you to understand the difference. The biggest opportunities beyond
21:56
that will come after any industrial bubble
21:59
crash. It'll find its feet, but when the bubble
22:02
pops, there will be an incredible level
22:06
of bargains to be had. There will be companies with real revenue, real
22:09
profits, real businesses that will be on sale. That's when
22:12
you want to be ready to buy. That's where the fortunes are made. I
22:15
believe that's why Warren Buffett is sitting on $380 billion worth of cash right now
22:19
and T-bills because he's waiting for that. It's not about necessarily being
22:22
a pessimist about where it's going. It's about being a realist, about understanding the
22:25
cycles of the market. It's about protecting yourself and your family from
22:29
massive fallout by putting your capital into things that may vanish. And
22:33
that's how you play this, right? And you have to have patience because it's going to take some
22:36
time for that to roll out. It may not even be next year. It may be the year after. And
22:39
here's the thing. It isn't just about the numbers. It's
22:43
not just about accounting shenanigans or what Michael Burry
22:46
thinks or what he's doing and so forth. It's also about human behavior, about us.
22:50
Because we're wired to chase shiny objects. We're wired to follow the crowd. We're wired
22:53
to believe that this time is different. But it never is.
22:57
Every bubble in history has the same characteristics. Rapid price increases,
23:00
widespread speculation, and a belief that all rules don't apply. The
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same thing's happening in the real estate market right now. The old rules don't apply. Same
23:07
as the AI bubble. The old rules don't apply, right? It's a lack of sustainability.
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And Tulip Mania proved that in the 1600s. And it's kind of this, you
23:16
know, the dot-com bubble, the South Sea bubble, the railway mania in the 1800s,
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the different real estate bubbles that have abounded
23:23
in Japan and so forth. It's the same thing.
23:27
Yeah, it's just the name changes, the technology changes,
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but the pattern is always the same. And the people who survive are the people who
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thrive and the ones who can see the pattern and the ones that can resist
23:37
the temptation to chase it, right? The ones who can be patient and disciplined.
23:41
And that's what separates the wealthy from the broke. Not intelligence, not luck, it's just
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discipline. I know you want to go and run after these AI-hyped stocks.
23:48
I know you want to run after the next AI-hypey thing. But the reality is,
23:51
what's grounded in value exchange? Where is the cash flow coming from? What do you
23:54
spend your money on specifically you know you can't do without? They're the places where
23:58
your capital needs to be deployed, not in shiny objects. But
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if you are someone who finds themselves falling into these behavior traps, It's
24:05
not your fault, it's how we're wired. That's why I dedicated a whole section of
24:08
my book, Money Buys Happiness, to the six limiting beliefs that destroy your wealth, but
24:12
also break down the eight actions you can take to rewire your money
24:15
mindset, and it's just nine bucks. The link's in the show notes if you
24:18
want to take a look and take your first step. But here's the good news. Bubbles create
24:22
incredible opportunities, not during the bubble. But after, right?
24:25
So when the dot-com bubble burst, Amazon stock fell from
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like $100 to $6. And if you'd bought
24:32
Amazon at $6, you'd be up over 30,000% today. I
24:37
mean, again, you've got to understand what you're about to buy before you do it.
24:40
But when the housing bubble collapsed, it was the same
24:44
thing. You can buy properties on the pennies. I've seen
24:47
that happen before. After the GFC, I was offered inner
24:50
city apartments in Gold Coast for $50,000. I was also
24:54
selling at the time US property for $20,000 on
24:57
credit cards. People who had the cash, who
25:01
had been patient, who had been waiting, made fortunes. The same thing
25:04
is going to happen with AI. When this bubble pops, there will be incredible companies,
25:08
real companies with real technology and real revenue that will be
25:11
on sale. That's what you want to be a buyer of. You
25:15
can only be a buyer of that stuff
25:18
if you have cash, if you have liquidity, if you haven't blown your
25:21
portfolio chasing this bubble. So you want to play it simple, you
25:25
want to protect your capital now, wait for the crash and then effectively buy
25:28
the dip. It's not sexy, it's not exciting but
25:31
it works and it's worked every single time in history and it'll work for
25:34
this one as well. Just have some liquidity. Look
25:38
at Warren. He's got about 38% of
25:41
the capital of the company in cash. It is a big number. You
25:46
don't have to have it the same, but it's a very clear signal. And
25:50
we're due for a correction. I think this could be it. The Japanese carry trade
25:53
could unwind, could burst the AI bubble, could burst the Bitcoin bubble,
25:57
and ultimately burst the property bubble. It could be all connected. I know this
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is a lot to take on, and I know it's heavy. I know it's not fun and
26:04
exciting story to be talking about. We all want the world to do better, but
26:08
better that you know what's potentially coming. It's
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highly likely, I would say. Based on the signals we've discussed in the episode, it's
26:18
likely, right? But for now, remember, this
26:22
AI bubble is real. The smart money is getting out of it, though, and you