Transcription
So, I want to show you something that's kind of insane happening right now. If you have a 401k or you like to buy index funds, you should probably know that a lot of your money is going into AI, whether you like it or not. That's because today about 40% of every dollar that you put into a basic S&P 500 fund, 40% of that dollar goes to just 10 companies.
Those companies are Nvidia, Microsoft, Apple, Alphabet, Amazon, Broadcom, Meta, Tesla, Berkshire Hathaway, and JP Morgan. In fact, right now, as of this week, Nvidia by itself gets almost 8% of every dollar. Now, that's gotten investors very excited about the future of how AI is going to, you know, change our lives. And it's also why their stock values have gone way up this year. And they've been able to spend a lot of money because of it.
In 2025, those AI tech companies are going to spend roughly $330 billion to build things like data centers, GPU farms, and all the stuff that they need for AI. But here's the part that's interesting. In order for AI companies to justify their valuations, in other words, what the price of their stock is today, those companies would need to make around $2 trillion a year in revenue. Two trillion. To put that into perspective, in 2024, Apple, Amazon, Microsoft, Meta, Nvidia, Google combined did not make 2 trillion. In other words, AI has already been priced as if it's going to become the biggest money-making engine in the history of capitalism, bigger than every major tech company today combined. That's kind of a major red flag, but it gets even better.
Sam Altman from OpenAI just said that his company is willing to commit $1.44 trillion in spending to make all of this a reality. And someone at his presentation was like, "I got a question. How are you going to pay that money when your company just made about $20 billion this year?" To which Sam Altman kind of snapped.
"How can the company with 13 billion in revenues make 1.4 trillion of spend commitments?"
"We're doing well more revenue than that. Second of all, Brad, if you want to sell your shares, I'll find you a buyer. So, I think we could sell, you know, your shares or anybody else's to some of the people who are making the most noise on Twitter, whatever about this very quickly."
Then he says, the amount of money needed to build AI and make it profitable might only be possible if the government steps in and gets involved. "Some level when something gets sufficiently huge whether or not they are on paper the federal government is kind of the insurer of last resort as we've seen in various financial crises and insurance companies screwing things up." So the market was like, "Wait, are you asking for a bailout?" And he's like, "No, I I was just kidding. We don't need to do that. We can do this by ourselves. We don't need the money."
So that's a red flag. And obviously, we are very far away from AI running our lives. But those are the expectations of the stock market. The reality is that they are not being paid for with profits, right? That's called free cash flow. Right now, those companies are all being funded with a ton of debt. And a huge part of that debt is not even showing up on their balance sheet. That debt is hidden. The spending is being run through things like private credit, structured vehicles called SPVs, joint ventures, and what's called circular financing.
So, what all of this does though is it makes the US economy look strong. It makes the stock market go up, but the risk is that it only looks strong because these companies are passing money around to each other in order to make it look bigger than it actually is. And for investors, that means for these companies to be as valuable as they are today, they have to be borrowing from a future that doesn't exist yet.
Now, when you add all this up and you look at what some of the big investors have been doing, you might be worried. Warren Buffett, for example, just sold billions of dollars of stock and he's now sitting on the biggest cash pile in the world. That doesn't look good. And Michael Burry, the guy who predicted the 2008 financial crisis, his fund Scion, filed what's called a 13F form where it shows he's putting 80% of his portfolio betting against Nvidia and Palantir.
So all of this leads to the question, are we in an AI bubble? Data from Deutsche Bank says, "If it wasn't for AI spending right now, we'd be in a recession." So, in today's video, I want to help explain everything that's happening to the market, what in the world is happening to Bitcoin, and what I'm doing with my money, and how I'm investing. This is super interesting. So, let's get into it.
Hi, my name is Andre Jick. Hope you're doing well. Come for the finance and stay for the AI bubble. Now, I know it sounds a little silly, but what is a bubble?
"It was the worst day on Wall Street since the crash of 1987."
Most people say it's when the price of something goes above a sustainable value because of hype and greed. But what a bubble really is is when the price of something goes up really fast with no relationship to its fundamentals. It's when nothing changes, but the price still goes up really fast. So, let me explain the mechanics of how this AI machine is actually working and then you can decide for yourself if it's a bubble.
So, in the AI economy, money or revenue is created through what's called circular financing. Now, this can get confusing, so let me just show you this graph, which as of right now is slightly outdated, but you'll get the idea of what's happening. So, at the center of this is the most valuable company in the world, Nvidia. It's worth trillions and trillions of dollars because it's a way for the world to bet on the future of AI. So Nvidia decides to invest into OpenAI, the people behind ChatGPT. So they're like, "Here's $100 billion. Go build stuff." OpenAI is like, "Cool, we got a hundred billion." So it then commits to huge cloud contracts with other companies like Oracle and Microsoft to run their models. Well, then Oracle and Microsoft are like, "Wow, look at all this demand that we have for our services. We're making money, right?" Oracle then takes that demand and buys tens of billions of dollars of Nvidia GPUs. Nvidia is like, "We're making money." And then Nvidia agrees to invest more of that money back into OpenAI. So, the money goes from Nvidia to OpenAI, from OpenAI to Oracle, and then from Oracle right back to Nvidia. It's the "I owe you" skit from the Three Stooges.
"And speaking of money, how about the 20 bucks you owe me?"
"Oh, yeah. Well, I only got 10, so here's 10. I owe you 10."
"Thanks."
"Hey, Mo, you owe me 20. Well, here's 10. I'll owe you 10."
"Uh-uh. You owe me 20. Here's 10. I owe you 10. Here's the 10 I owe you. Here's the 10 I owe you. Here's the 10 I owe you."
"Good, man. We're all even."
It's a feedback loop where everyone looks like they're growing, even if the money they're spending was borrowed. Now, you might be like, "Okay, I don't really care about this stuff because I'm not investing in this. Who cares if a bunch of rich tech investors lose their money? Doesn't really concern me." But it should actually concern everyone because these kind of feedback loops is what creates a situation of too big to fail. If companies are allowed to represent such a huge part of the US economy, they must not be allowed to fail because to let them fail would be like letting a competing nation win. And the CEOs of these companies know that the US government will do anything and everything to make sure that we win the race against China. Here's a clip of Sam Altman saying exactly that.
"So I guess given the magnitude of what I expect AI economic impact to look like sort of I do think the government ends up as like the insurer of last resort."
What he's saying makes total sense. Like if you were CEO and you knew how strategically important your industry was, wouldn't you do everything in your power to get as big as possible so that the government takes a strategic interest in you? Because if AI capex, as they call it, by the way, capex stands for capital expenditures. Anytime you hear capex, just remember spending. If AI capex slows down, the US economy slows down. If the US economy slows down, markets fall. If markets fall, there's going to be political pressure to save these companies at all costs. Because if not, it's going to hurt everyone, not just investors, but the jobs, the employees, and the country's interest as well. That's why Sam can say something like that out loud, because it's true. The US government cannot and will not allow this race of AI to just be lost.
Now, what all of this means is that the bigger AI gets, the more all of us are involved in it and the more likely taxpayers will have to eventually backstop it if something were to go wrong. Even if you're someone who doesn't really care about AI, you probably still have a huge financial interest in it. Why? Because of how an index works. It works because the S&P 500 index is what's called a market cap weighted index. Remember, the market cap is just the amount of shares multiplied by a company's price. That means the more expensive a stock becomes, the bigger the company gets and the more it moves up that index because the market cap grows bigger. That's why it's a market cap weighted index. And as it gets bigger, it attracts more and more money. And that is how just the top five companies out of 495 represent 30% of the whole index right now.
So when you combine the circular funding mechanism with how the index works, you start to see how it all comes together, right? Money gets passed around via the circular financing. So no real value is created. The price of a stock goes up really fast and those participating in this feedback loop get bigger and bigger. So more money is allocated to them through passive investing and now they've got more money to continue making these commitments which adds to their valuation and so on and so forth.
That's exactly why some people think that Warren Buffett and Michael Burry might be doing what they're doing. Remember, these are two people who don't agree on almost anything. They don't invest in the same way. They don't even think the same way. Warren Buffett is a value investor and Michael Burry is a macro contrarian, right? He does the opposite of whatever everyone else is doing. But both of them at the exact same time in their own way are short the market. Warren Buffett's been selling today. He's got the biggest cash pile of any investor in the world. It's not because he doesn't know what to buy. It's because he doesn't like the value of the market. That's a red flag. Michael Burry, the guy who's predicted 20 of the last two recessions, but to his credit, also called the 2008 financial crisis, filed a 13F, showed that about 80% of his entire fund is betting against Nvidia and Palantir. So, they're both kind of saying the market is priced in a future that they don't want to be a part of right now.
So, that's what's fueling the growth of the stock market and the entire US economy. But hold on, what about Bitcoin? Because it usually follows tech stocks. Now, before we get into that, I want to tell you about today's sponsor, Public, an investing platform built for those who take it seriously. On Public, you can build a multi-asset portfolio of stocks, bonds, options, crypto, and more. You can also earn an industry-leading 3.6% APY on your cash with no fees or minimums. Their bond account is offering 5.12% or higher yield by letting you invest in a diversified portfolio of corporate bonds with just a $1,000 minimum to get started. Normally, you'd need $10,000 or more for something like this, but Public makes it more accessible to start investing in bonds. And one of my favorite things about Public is how they weave AI throughout the entire experience. For example, the app doesn't just tell you that a stock in your portfolio is moving. It tells you why the stock in your portfolio is moving. You get the key news, analyst insights, and market data you need to make smarter decisions. If you're ready for an investing platform that gives you the full picture, visit the link in the description down below or go to public.com/andre to learn more. And they'll even give you an uncapped 1% match when you transfer your investments from another platform. The full disclosure is in the description down below. And now, let's get back to it.
So, if you've been watching Bitcoin, you know that it's been going down. It's been doing the opposite of what tech stocks have been doing, which is weird cuz the macro picture, the big picture stuff looks good. ETFs are buying. Corporate treasury buyers are here. Gold is at record highs. All of that is true, but Bitcoin is selling off, which is a little confusing. So, here's what's going on here in the world of economics, right? There's two big forces that compete with each other for our understanding. The first force is the technical force or technical analysis as some people call it. It's the people that look at the chart of an investment. They draw a bunch of lines, right? And then they use their superpowers to predict what's going to happen to the market. Okay, that's force number one. The other force is called the macro force. This one looks at the big picture stuff of the world. Like for example, what's happening geopolitically speaking? Is there a threat of war? Is there a change in politics? It looks at the central bank levels at the Fed, interest rates, monetary policy, things like that. Big picture stuff. And I like to think of these two forces as sort of like the chicken or the egg problem. Which one comes first? Which one explains our economic reality? So I hope that makes sense.
But using this framework, let's look at Bitcoin. And by the way, full credit to Benjamin Cowan for sharing this on his YouTube channel. He discovered one of the most important concepts in Bitcoin, which is something called the 50-week moving average. It sounds complicated, but it's really simple. If you take the average closing price, meaning the price at the end of the week for the last 50 weeks, you get a certain trend line. And what Ben noticed is that when Bitcoin is in a bull cycle, it's always stayed above that line. But when Bitcoin's price goes below that 50-week moving average level, that marked the end of the bull cycle and the beginning of the long cool-off period. That's what people call the bare market. Now, I know this sounds kind of like astrology, but this is backed by data going back more than a decade. And this week, we broke below that price point. That's not good, right? Because when investors all start to see that same pattern, they think, "Okay, that's it, right? The that's the end of the bull cycle. So, I'm going to sell and I'm going to come back in a year from now." If price breaks trend, when that happens, their rules tell them to sell. And when you have enough people following that same pattern or same signal, that's when it becomes the reality. So, that's the technical explanation behind what's happening.
But then there's the second force, the macro force. And this theory says this had nothing to do with the charts at all. This sell-off is because investors think we are going into what's called a liquidity transition. And here's what I mean. Let's look at the Federal Reserve's balance sheet. This chart right here. We've been in what's called quantitative tightening or QT. Meaning the Fed has been slowly removing the liquidity or money out of the financial system. The way they do this is over time by letting bonds roll off the balance sheet and just not replacing them. That slowly drains the financial system. But recently, the Fed told us it's going to end quantitative tightening sooner than expected. They're going to end it on December 1st. Now, on paper, that sounds like it should be a really good thing, right? The market should go up. Ending QT means we stop draining liquidity, right? But psychologically, investors don't interpret it that way. Investors look at an early end to the QT as if something somewhere in the financial system might be struggling. Right now, the Fed tells us, "Guys, don't worry. Nothing's wrong. There's no cracks in the system. We're just doing this earlier because we want to make sure we're ahead of the curve and we don't cause a recession." But investors are like, "Yeah, I don't believe you. It looks like a sign that maybe somewhere we are hitting a stress point. Like have you seen the jobs report lately? Not looking good. Have you seen the AI valuations? Not looking good. So every time in history when liquidity stress shows up, risk assets don't like it. So this theory says that Bitcoin didn't go down because some magic line that's drawn on charts somewhere. It went down because Bitcoin happens to be what people say is the canary in the coal mine. It's the first one to be affected because it is the easiest thing to sell. So, it reacts first. So, there's a possibility that the stress signal shows up in Bitcoin before it shows up in the rest of the market, which means the rest of the market could eventually follow. So, that is one of the macro theories. I'll probably put you to sleep if I told you about the other ones, but just briefly mentioning them. Other theories for why Bitcoin is going down is Bitcoin is having its IPO moment, right? Early investors are selling it because it's the first time they can sell without crashing the market. There's people among us that have billions of dollars in Bitcoin alone. They're finally exiting those positions. There's even a theory about Bitcoin's core dev team changing something called the OP_RETURN limit, thus changing the entire meaning of Bitcoin's existence from being money to being a data transfer protocol. But I'm not going to bore you with that unless you want me to. Let me know down in the comments.
All right. So, if you made it this far into the video, not that it should matter, but here's what I'm personally doing. If I was the trading type who's trying to time the market, I'd be paying very close attention to what's happening. But I'm not the trading type. So luckily for me, hopefully I still have at least another 20 to 30 years before I retire. So regardless of what ends up happening in the next few months or the next few years, hopefully it's not going to make that much of a difference. But that's just me. So I'm still reinvesting all of my dividend income back into the market, even knowing what I know. I don't want to grow a brain, as they say. I just want to keep it simple. But I'm also saving cash, and it's becoming a slightly bigger part of my portfolio. I'll do an update on all my investments at the end of the year. If you're interested, let me know down in the comments. But I did move some of my money over from real estate into cash. Not because I necessarily think real estate's going to crash, but I feel more comfortable with cash right now, but I'm also not borrowing money to invest. That means zero margin, no yoloing. If this turns into a sideways market, however long it lasts, I think my dividend income will do really well. That's when it pays off to be a dividend investor. I'd rather be slow and steady instead of worrying about whether AI is overvalued or not because I don't know. So, while the prices are just arguing with each other, my dividends will continue to pay me regardless of what the share price is.
Now, on Bitcoin specifically, I'm not selling, but I'm not necessarily buying more either. Not until I start to get really scared and question every one of my decisions. That's when I start buying. I don't know how to quantify that. I don't know what that number looks like. It's just a feeling that I get.
Now, as far as AI goes, the question is, is it a bubble? Your guess is as good as mine. It certainly looks like one. I think we could be in the beginning of the next industrial revolution, if you will. And the first thing that investors do is they get overly excited about that narrative. They get overly hyped. So eventually everything corrects just like it did in the dot-com bubble when the internet was going to be the future. And what happened back then? It all crashed. The bubble popped. But the internet did become the future. So it was good to stay invested. But in the long term, if you have 20 to 30 years to wait while you continue investing, I think we'll be just fine. But in the short term, I think it's anybody's guess. In the meantime, if you want to see all of my stocks, I'll leave the link down in the description below. But as always, I hope you have a wonderful rest of your day. Smash the like button. Subscribe if you haven't already. I'd love to see you back here next week. I'll see you soon.