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After the boom

There are growing signs that the AI bubble is near to bursting.

Unsustainable levels of growth in the roll-out of expensive data-centres is something that requires ever-increasing levels of capital investment -- where will the money come from?

Although some companies such as Anthropic claim strong revenues and perhaps even a glimmer of profit (just $560 million on a $11 billion turnover), sustaining or growing these profits is contingent on even more capital investment.

The single most profitable application of AI right now, and the thing which has fueled most of Anthropic's revenues, is that of computer code generation.

However...

Code generation is also the most computationally intensive use of AI and this is causing issues, not only for Anthropic but for other companies competing in the "vibe coding" marketplace.

Those using these coding agents have already noticed that the price they're paying has increased significantly while the number of tokens consumed or allocated for a given subscription tier has fallen precipitously.

If you combine these dramatically rising costs with the increasing awareness of the risks associated with AI-generated code, it could be that we're headed for a significant halt in growth.

Unfortunately, the profit projections of most of these AI companies is highly dependent on sustained growth, which is why they continue to pour billions of dollars into these new datacentres.

One very direct threat to the inflow of capital and investment in the AI marketplace is the pending SpaceX IPO. This is estimated to soak up around US$75 billion of investment capital and although some of that will be going to fund the expansion of xAI's capabilities, other AI companies will likely feel the pinch.

Interestingly enough, xAI is leasing some of its capacity to Anthropic, something which, at least on the face of it, will benefit both companies. However, the deal offers a steeply discounted rate for the first few months, before those costs to Anthropic will hike significantly -- likely eating into their razor-thin profits.

It's also worth noting that a significant portion of the declared "revenues" from these AI companies is actually little more than paper transactions that are designed to inflate the value of those entities. The tangled web of these transactions is clearly designed to mask the real state of things but eventually, this kind of ponzi trading will crumble -- leaving all those involved highly exposed.

The much anticipated market for AI-based automation within small to medium sized enterprises may also never really eventuate. As I've mentioned in a previous column, few companies will want to spend a stiff monthly stipend for cloud-based AI when a one-time investment in their own locally hosted LLM may be every bit as good and far more cost-effective within a very short timeframe.

Even the general fall in the global economy we're witnessing right now may be enough to pop the AI bubble. Companies facing cashflow and liquidity issues as a result of a downturn in demand and a hike in costs are going to be far less likely to invest in potentially problematic technologies such as AI. This may further reduce demand or at least significantly stifle growth in that demand.

I believe we'll see some real changes in the AI sector over the next 12 months and many of those changes will be far from positive. The world only needs so much AI and right now there is so much being poured into this tech by multiple competing companies that some kind of rationalisation will have to take place -- quite soon.

Even if AI does grow strongly, it's likely to be at the cost of jobs and that means less consumer spend due to those job losses. That means lower revenues for companies, even those using AI and thus we see demand fall.

The world faces an uncertain future with difficult economic times ahead. With this in mind it's a brave (or perhaps foolish) man who invests all his eggs in the AI basket.

When the bubble finally does burst I expect to see a very significant contraction in the global economy. Perhaps far beyond recession, maybe even something that will meet the criteria for carrying the label "depression".

I wish my forecast was for brighter skies but...

Carpe Diem folks!

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