What is the catalyst that actually causes (financial) bubbles to burst?
What is the catalyst that actually causes (financial) bubbles to burst?
What's the pin to bust the AI bubble?
26 comments
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Not making a couple of loan payments. As soon as a big player does this, everyone else will be on edge.
A layer higher? Expose Palantir's role in Israeli targeting and manipulation that includes global espionage with Epstein and others.
An easier way would be to restore democracy by making the right to digital slavery – ownership and trade of the digital presence of a person for exploitation and manipulation – illegal. That is the profitable and massive political capital driving the machine.
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A) "the market can remain irrational longer than you can remain solvent"
B) The big players in AI aren't highly leveraged. If MSFT or Nvidia have their valuations drop overnight, the consequences to them are minimal
How Money Works released a good video on this recently
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The big players in AI aren't highly leveraged
It's not traditional leverage but the recent deals being announced where the AI companies are raising money from Microsoft, Nvidia, Amazon, Google, AMD, Oracle, etc. and paying it back in stock or purchase commitments have a certain circular bootstrappy notion to them. The formulas for the valuations rely on feedback loops that are less stable and might create runaway feedback conditions at the slightest hiccup.
In any highly capital intensive business, you always run the risk that the thing you build is worth less than the cost it took to build it. And when that happens, collapses can happen pretty quickly, as everyone invested in these companies rushes towards the offramp.
I can think of a few catalysts that could trigger that initial realization that the thing made isn't actually worth the cost to build it:
- A new model comes out from a competitor that was cheaper to build and almost as good. (Deepseek reminded everyone that this might happen.)
- New money stops coming in and the companies building things have to tighten their belts. This could be driven by a failure to monetize as much as previously modeled, so that the value of the company itself is questioned.
- Some kind of legal flaw threatens the entire foundation of some expensive models.
- Some kind of technical flaw causes one company's flagship model to lose the race against other companies.
- Some key personnel are incapacitated in a way that robs the company of its momentum (this almost happened with the board of directors revolt at OpenAI).
- Something else I haven't thought of.
But once a hiccup happens, something built on so many self-reinforcing loops is less resilient against the unknown, the chaos of the real world.
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The How Money Works video was decent, but I was annoyed he showed the Apple cash on hand chart without mentioning they peaked at ~100B, and the contracts we're talking about are in hundreds of billions
Microsoft, for example, has about 100B in cash on hand. Their total liabilities have gone from about 2x their cash to 3x, which is effectively doubling the leverage
When you think about that additional debt in absolute terms, it's huge. Historically companies wouldn't be able to get to that level of debt simply because they lacked the cash to do so
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Truly, it could be anything that unsettles the market. A bubble popping is essentially a cascading failure, where the dominos fall, when the house of cards collapses, when fear turns into panic, even when everyone is of sound mind.
The Great Depression is said to have started because of a colossally bad "short squeeze", where investors tried to corner the market on copper futures, I think. That caused some investment firms to go broke, which then meant trust overall was shaken. And then things spiraled out of control thereafter, irrespective of whether the underlying industries were impacted or not.
So too did the Great Financial Crisis in 2008, where the USA housing market collapsed, and the extra leverage that mortgagees had against their home value worked against them, plunging both individuals and mortgage companies into financial ruin. In that situation, the fact that some people lost their homes, coupled with them losing their jobs due to receding market, was an unvirtuous cycle that fed itself.
I can't speculate as to what will pop the current bubble, but more likely than not, it will be as equally messy as bubbles of yore. But much like the Big One -- which here in California refers to another devastating earthquake to come -- it's not a question of if but when.
Until it (and the AI bubble popping) happens though, it is not within my power to do much about it, and so I'll spend my time preparing. That doesn't mean I'm off to move my retirement funds into S&P500 ex-AI though, since even the Dot Com bubble produced gains before it went belly up. I must reiterate that no one knows when the bubble will pop, so getting on or getting off now is a financial risk.
Preparation means to build resilience, to decouple my home from my job, to keep my family and community safe even when the shaking starts. For some, this means stocking food and water. For others, it means building mutual aid networks. And for some still, it means downsizing and making their lives more financially sustainable, before the choice is made for them.
This is a rollercoaster and we're all strapped in, whether we like it or not.
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Fundamentally it all comes down to unemployment. There is a certain point in a thermodynamic way that even the most brainwashed slaves stop becoming productive. If you don't have a safe and private place to sleep, it's enormously taxing on your motivation, if you can't afford nutrients, you will be physically tired and your body will scream at you to avoid any type of damage to itself, greatly lowerering your productivity that even a mostly post scarcity and automated economy can't even support you, even if you work 60 hours a week for meager wages.
For bubbles, they exist mostly to make rich people richer, but come at the cost of workers getting more inflation and weaker purchasing power for their wages. Every so often bubbles have to pop, so the rich can buy up all the property they sold back, at a discount and start the process over. One of the many scams of international capitalism.
So the bubble really pops when people are unable to work for the dropping wages. It's really just a physics question in a way. Not really a choice they make, because people who work often tie their entire identity into working and being a "good working citizen" as the media conditions them to think. It's just physics. The bubble popping is the reality of things like markets correcting themselves.
What comes after is often a die off of workers causing their value to go up, since human sacrifice is the only way they can collectively bargain anymore. Then an eventual resettling with lower wages after prices are forced to not track inflation. This is why a house is 30% cheaper then it was in the 70s in gold price, but people need on average 10+ years wages to buy one. The prices of houses gradually came down over time as the workers made less money in real value(gold, silver, minerals, commodities), year after year for decades. The market is forced to lower the prices of houses just enough to get some suckers to buy them. Again, workers can't just make money magically appear like the rich can, so there is a physical limit to how much a worker can pay before they quite literally starve, or develop severe health issues from eating potatoes for decades.
So the two poles of American style economics is physical constraints of reality, like the workers bodies ability to survive on potatoes and bread and sugar, and not having a mental breakdown because they live on a couch, and the greed of the rich who are completely self centered and want boats and mansions and most importantly, to be seen as valuable via their status and access to wealth and resources. These two poles form the tension in which the economy operates. The really sad part is, that this is probably an improvement over most of human history. Technology has made the lives of the average worker much better, despite capitalism taking every opportunity it can to try to squeeze more out of them, or keep them too miserable to resist.
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when people hunt down liquidity and don't put it back in the casino
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Buffet did that months ago.
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Any bad news could trigger it. Noone knows exactly what or when.
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Stock prices are set by what people think stocks are worth. Buying a stock is a bet that it will become more valuable in the future (and/or pay dividends). Even with the rise of algorithmic trading, those algorithms are betting the stocks are will rise in value. In theory the cost should be related to the fundamentals of the stock like the company's revenue, but in practice they are also set by investor's opinions about the stock's future price.
So what causes stocks to go down is people thinking that stocks will go down, and selling before they lose any more money.
In the case of the AI stock bubble, it's hard to know what will cause investors to say "this stock is likely to drop on value, or at least not grow as quickly as other investments I could make." The fact that most AI companies are burning cash and not getting much revenue out of it hasn't dampened the excitement yet, so I guess investors still believe there's a way forward that will result in more revenue. Or at least they believe the hype cycle isn't coming to an end so they're holding on while the prices go up and hope to sell before their holdings lose too much value. It won't pop until something deflates the expectations of enough investors to start a sell-off. What's that going to be? Who knows. It might just be a herd mentality thing where a few people begin to sell and more people follow suit.
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What if there isn’t true price discovery anymore because market makers, hedge funds, and the GSIBs that bankroll all of them with their customers 401k money, have colluded to artificially manipulate stock prices using algorithmic trading, PFOF etc?
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I agree, I'm sure those kind of manipulations happen all the time. Some are intentionally inflating the price and sometimes investors/fund managers have just drank the Kool-aid and are investing in ways that don't make sense given the fundamentals. So yeah, stock prices can become completely unmoored from fundamentals because these days the money is in buying and selling, not dividends. In fact, I'd guess that stock prices are unmoored from fundamentals more often than not — when they're high they're too high and when they're low they're too low due to investor sentiment. But I remain somewhat confident that over the very long term (meaning decades) stock prices have some correlation to fundamentals, so they can't remain artificially inflated forever. Sooner or later someone will make a killing popping the bubble.
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2 (or more) of the companies in the AI trade circle have 2 very bad quarters in a row at the same time as the other(s).
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AI companies are more insulated from quarterly returns due to being private companies, and not being expected to have any profit, or even revenue growth
The only thing investors are looking for are user growth, and increase in AI capabilities. The second KPI being difficult to objectively measure
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It could be not paying back loans. Lots of market boubles pop when that happens.
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The actual trigger is when someone influential decides “this is far enough - I’m pulling my money out before it all vanishes.” This doesn’t have to be such a dire thing - investors are constantly saying “this is enough, I’ve done well in this, time to take the profits and move my money elsewhere.”
Others see the influential figure doing that and begin to get scared. Many follow. And this becomes a chain reaction when the market at large sees this trend. If it’s enough people, and there’s enough doubt looming out there, it will chain and take the entire market down. If there’s not, it will stabilize. Small corrections happen all the time.
It’s a very basic human thing. If you were in a room and everyone else in it suddenly screamed and ran away you would follow them and figure out why later.
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https://www.jameslavish.com/p/why-qt-is-dead-and-qe-is-coming
I found this article explained the situation well. They are saying by q1 2026 or earlier and explain why they think that.
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I was excited to read that, but the writing style is a little too chaotic for my taste.
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26 comments
Ultimately it will be when the credit dries up and circular nature of the “investments” breaks down.
A Couple things that come to mind:
One way could be a failure to deliver on a contractual obligation with regards to a payout (eg company X will receive $100 billion when Y is complete) will lead to the failure to make a debt payment (company X has borrowed money based on the money promised by company Y), which will precipitate a scramble as investors try to recoup the money they’ve put in the firms, which will crash them.
For example, and I don’t know what happened here, CoreWeave had a balloon payment to make on a loan in October; if they didn’t make that payment, it could lead to a panic. But it seems that didn’t happen.