Cracks in the AI Bubble, Even Nostradamus needs a Lifeline

Here we go again. But which is it 1999 or 2008? Writing for Bloomberg John Authers believes what once looked like ‘99 is becoming ‘08. “Simply put, current AI scalers believe that the dangers of falling behind are far greater than overinvestment and lower long-term returns,” Viktor Shvets of Macquarie told Authers. “This is as good a recipe for a bubble as any.”

For us financial news junkies, hyperscalers and data centers are all we hear about. Credit default swaps, remember those things (an indication of possible credit trouble), are making news again. Authers wrote,

As default risk rises, so lenders will demand higher interest rates before advancing more money. In 2008, this led to a vicious cycle and cut companies off from funding. Anyone burned by that experience would be alarmed by the current price of Oracle Corp.’s default swaps. The company is spending heavily to establish itself as an AI hyperscaler — and this has made it more expensive to insure against default than it ever was during the crisis 18 years ago:

Almost Daily Grant’s wrote of Wall Street darling CoreWeave’s debt pricing on August 31. “CoreWeave’s single-B-plus-rated, senior unsecured, 8.5% euro-pay bonds due 2032 settled south of 90 cents Friday after the option-adjusted spread reached 1,000 basis points – the level typically commensurate with distress – earlier this week.

Are CoreWeave’s woes indicative of a wider sentiment shift regarding today’s heroic outlays for AI infrastructure?  Investors certainly hope not.”

All bubbles rely on hope.

Other trouble has appeared with the peculiar name Situational Awareness, an AI-focused hedge fund that though May was up more than 1,000% after fees since it started in 2024.

Its founder is 24-year-old Leopold Aschenbrenner, known as the  “Nostradamus of AI.”

His heavy leverage led to heavy weather for the fund last week with the AI stock selloff. Understanding the situation Situation was in “With the value of his portfolio tumbling, he scrambled to raise cash to satisfy his lenders, appealing to some of the largest hedge funds and selling billions of dollars in holdings in a fire sale to Ken Griffin’s Citadel,” wrote the Wall Street Journal.

Aschenbrenner had turned a few hundred million dollars into $45 billion earning him a cult following in online circles, where his firm’s regulatory filings were pored over like scripture. Despite living in sunny California he dons sweaters and dark turtlenecks fueling his reputation as a reclusive oracle of AI.

His fund was down 67% on the month he told his investors last week. “These dynamics are essentially similar to a bank run: vulnerability begetting more vulnerability,” he wrote.

In 2024 Aschenbrenner appeared on a podcast where he said “Obviously, not blowing up is task No. 1 and 2.”

So that’s today’s new business strategy. Balls to the wall and try not to blow up. Even if you’re Nostradamus.