Image Source: Unsplash

AI financing is becoming a big concern for investors big and small. We have read the negative articles on the AI sector recently, questioning how these firms’ vast investments can ever be financed.

Many deals between the leading big firms are in the trillions of dollars, but the income of these firms is far below that. The average investor doesn’t question this, but it is a valid question.

One notable hedge fund manager, Michael Burry, famous for profiting huge on the housing crisis in 2007-2008, recently posted about this concern on X. His posts got tons of attention in the financial media recently.

Burry reportedly had 80% of his fund’s money short the AI stocks. Palantir and Nivida are among them, according to a recent filing. However, on November 10, Burry filed with the SEC to close his hedge fund. Perhaps he doesn’t want his positions to be known. Smart!

Other smart analysts seem to also fear a shortage of income among the AI firms, including Brad Gerstner, founder of a big VC firm (Altimeter Capital). On his podcast, Gerstner recently questioned Sam Altman, CEO of OpenAI, “how can a company with $13 billion in revenues make $1.4 trillion of spend commitments?”

Altman became defensive, saying the company does way more revenue than $13 billion. OpenAI’s CFO suggested, around the same time as Altman’s interview, that there is likely a potential federal government “backstop” for AI financing. Of course, that will happen!

Some leading AI CEOs are hinting that the government will be required to finance AI. The CEO’s have made their fortunes in AI. Now it is up to the taxpayers to come up with the money. It is always the same game: certain wealthy and even corrupt people get the loot, and the hard working Americans get the bill.

Therefore, when AI firms run out of money, Washington will invest in them, and the problem is handled.

We foresee an environment where firms not using AI will be shunned. They will be like horse carriages at the start of the 20^th century, compared to motorized vehicles that eventually conquered the world.

ECONOMIC IMPACT: Listening to financial TV, it is hard to hear all the short-minded economic forecasts. We just shake our heads in disbelief.

The tremendous gains in “productivity” due to AI, which we forecasted, are already emerging now. Even the president’s economic advisor Hassett talked about rising productivity and the many benefits that AI will have on the economy earlier this month.

Productivity will continue to soar with AI, which means that each worker that still has a job will be able to produce much more.

However, millions of other workers will lose their jobs. The loss of jobs is a negative, so UBI, Universal Basic Income, will surface and send unemployed people a weekly check.

The big layoffs at Amazon, Microsoft, and other big tech firms are already having. And they are not just low level, but high income middle level people. That income will be missing in the economy.

With the announcement of large layoffs such as 30,000 from Amazon and 15,000 from Microsoft, we can see that this is just the start. We wrote in February of this year that perhaps “tens of thousands of jobs” will be eliminated by AI.

McKinsey estimates that 375 million workers globally (14% of workforce) may need to change careers; with up to 30% of U.S. jobs (45–50 million) now being automated.

We’re hearing from many business owners that their business has dropped off meaningfully. Wait till the hundreds of thousands of people who have lost their jobs stop spending.

One indicator we’re looking at now that shows a big decrease in spending is business in Las Vegas, the “discretionary capital of the USA.”

Currently there is stagnation in Las Vegas: Caesars Entertainment reported Q3 profits were down 40%, along with flat $2.9B revenue amid weak demand. Overall sales in Vegas are down $91 million so far this year compared to the same period last year.

CONCLUSION: Consumers are feeling more and more stressed, squeezed, and they’re losing jobs. But the small rate cuts from the Fed can’t change the trends of job losses. Diminishing jobs results in diminishing spending by consumers, which means lower profits for corporations, especially the retailers. Therefore, it is likely that rate cuts will accelerate.

We expect some major policy actions out of Washington to counter recessionary forces. Perhaps Gold will be revalued to $20,000 per oz (the current “official” book value of gold is $42.22 per fine troy ounce set by the government in 1973).

Over the past few weeks we’ve seen a number of stocks nosedive from their recent highs. As of last Thursday (November 20), the S&P 500 was down only 5.5% and the NASDAQ 100 was down 8.3% from their October 29 peaks.

Yet 42% of stocks in the S&P 500 and 54% of the NASDAQ 100 were in “official” bear markets (i.e. down 20% from their 52 week highs) last Thursday (November 20).

Does anyone mention this or even recognize it?

More By This Author: