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Michael Barry, the star of The Big Short who became a living legend for betting on the mortgage bubble, is back to rain on the parade. This time, his eyes are not on subprime debt, but on Silicon Valley, and specifically on the AI bubble, which he believes is about to burst.
This week, Barry’s hedge fund revealed it raised a whopping $1.1 billion in put options on AI giants Nvidia and Palantir. For those not familiar with Wall Street lingo, this means Bally is betting that stocks will… well, crash.
Why is this important? Because when Michael Burley thinks there’s a bubble, people listen (if not for investment advice, then at least for entertainment). After all, for every Cassandra in the housing market, there are 100 Chicken Littles. But Burley is used to shouting about the market’s absurd booms (and making big bucks doing it).
“Bat Madness” vs. Billion Dollar Bet: A Palantir Perspective
Enter Palantir CEO Alex Karp, brandishing a verbal flamethrower. What is Karp’s reaction to Bally’s big bet? The idea that anyone would short an AI company is completely ridiculous. he retorted:
“The two companies he’s shorting are making all the money, which is very strange.”
He didn’t stop there, he stepped up.
“The idea that Chip and Ontology are things he wants to short is bats*** crazy…he’s actually shorting AI.”
Palantir’s numbers support a certain bravado. The company raised its full-year revenue forecast after a record third quarter, posting a 173% year-over-year increase.
But Wall Street’s obsession with AI is a double-edged sword, and even if Palantir beats expectations, its stock could fall 8% to 10% in one fell swoop. This is all thanks to valuation swings and the swirling specter of the “AI bubble problem.”
Nvidia’s Cycle: Opportunity or Viscosity?
As for Nvidia, CEO Jensen Huang offered his own opinion and downplayed investors’ concerns.
“I don’t think we’re in an AI bubble,” Hwang declared in an interview on Bloomberg TV shortly after announcing a slew of new partnerships and the company’s forecast to generate $5 trillion in revenue.
Mr. Huang is unfazed by talk of a bubble. He’s busy selling the world’s hottest chips and planning a multi-trillion dollar industry. On the contrary, NVIDIA’s CEO believes that the United States is not doing enough to develop AI, and that the United States’ restrictive policies towards China will ultimately harm the world’s number one superpower. He spoke ruefully to reporters at the Financial Times’ Future of AI Summit on Wednesday.
“China will win the AI race…You need to be in China to get developers. Policies that cause America to lose half of the world’s AI developers are not beneficial in the long run. It hurts us more.”
Still, looking under the hood, Nvidia’s stock price (which had soared more than 50% this year) fell 3% to 4% during the day on Nov. 4 on the news of Berry’s short sale.
And some investors remain anxious, especially with looming U.S. chip export restrictions to China and the multitrillion-dollar question of whether momentum is fueling huge valuations or real demand.
AI bubble mania meets reality: trillions of dollars on the table, triggers everywhere
Let’s zoom out. Nvidia just became the world’s first technology company to be worth $5 trillion. That’s more than all banks in the United States and Canada combined. The “Magnificent Seven” of tech stocks (including Nvidia) currently account for 35% of the S&P 500’s total market capitalization.
Investment in AI has soared to more than $1 trillion a year, while consumer stocks like Kraft Heinz have been under pressure. As global capital markets expert The Kobeissi Letter points out:
“There are two parts of the U.S. economy: rich and poor, and AI is the lifeblood of them all.”
Car repossessions are on the rise. Wage growth is slowing. And Americans are carrying record levels of credit card debt, with interest rates hovering near historic highs. According to Jason Furman, an economist at Harvard University, real economic growth in the U.S. is barely increasing, at just 0.01%, without taking into account the impact of AI and data centers.
Meanwhile, Wall Street’s top performers are still orbiting Main Street, which is struggling to catch its breath. The gap between winner-take-all tech stocks and ordinary households highlights the rather dire situation in today’s economy. If the AI bubble were to burst, it would be a hit like Tyson’s left hook.
Macro analyst and Goldbug Peter Schiff, who never misses an opportunity to jump on Bitcoin, remains completely pessimistic. Not only does he believe that cryptocurrencies are about to explode, he shares Burry’s position when it comes to AI.
“The losses suffered by Bitcoin HODLers and crypto investors will be staggering. More money will be lost in this bubble than was lost when the dot-com bubble burst. But if this is a sign of general risk aversion, beware of an even bigger AI bubble bursting.”
But the most scathing critic right now is Barry himself, who has bet 80% of his portfolio on the AI bubble. he tweeted to the audience.
“Sometimes you see a bubble. Sometimes there’s a strategy against it. Sometimes the only winning strategy is not to play.”
Difficulties with technique, tension, and timing
If the scene looks familiar, that’s because it is. In the dot-com era, unprofitable pet food websites became well-known, only to crash harder than a piano through a fourth-story window.
Today, dogs.com has been replaced by chips and data lakes. “Chip and Ontology,” Karp jokes, the RSI measures over 70, Palantir’s price-to-earnings ratio is over 200, and the price-to-book multiple is over 69. NVIDIA and Palantir are riding a wave of profitability, but they also carry expectations that would make any seasoned gambler sweat.
The decline after Barry’s disclosure was real. Palantir shares fell nearly 9%, Nvidia fell more than 3%, and the S&P 500 fell along with tech sector peers Oracle and Tesla. The decline also spread to cryptocurrencies, with Bitcoin briefly falling below $100,000 per coin for the first time since June.
CNBC reported Karp’s outrage and suggested that Berry’s actions were as much akin to market manipulation as macro-pessimism. He was outraged:
“I think what’s going on here is market manipulation. We’ve had the best results that anyone has ever seen…I mean, these guys, they claim to be ethical, but you know, they’re actually shorting one of the great businesses in the world.”
Is it a bubble or a decade of domination for big tech companies?
Meanwhile, OpenAI CEO Sam Altman has openly acknowledged that the AI market is likely in a bubble. He told reporters:
“Are we at a stage where investors as a whole are overly excited about AI? My opinion is yes. Is AI the most important thing that will happen in a very long time? My opinion is also yes… When a bubble occurs, smart people get overly excited about the kernel of truth.”
Still, he argued that bubbles do not kill revolutions, and that sometimes they create the next economy. Wall Street is wondering whether to applaud or cringe. And Berry’s short made them nervous.
Palantir must achieve 40-50% annual revenue growth and 50% gross margins to justify its price tag, despite its “otherworldly growth.” The sector-wide rally has been monumental, but a single tweet or revenue mistake can wipe out tens of billions of dollars in minutes.
Punch line: It’s all absurd. Until it’s not
Barry’s weakness, Carp’s arrogance, and fans’ anxiety. The AI bubble debate is a masterpiece of financial melodrama. Are we witnessing history resonating, or is technology simply straining as the world seeks new growth drivers?
If Burley’s instincts are to be believed, there will be pain ahead. If you prefer technology piled high with chips (of the silicon variety), this is probably just the beginning. Karp argued:
“I think this behavior is terrible. If he’s proven wrong, I’m going to dance around.”
In any case, the bubble will become clear only when it bursts. Until then, thanks to Michael Varley for keeping the Punchbowl lively (and keeping the market stories from getting boring).
(Tag translation) Bitcoin
