AI BUBBLE OR NOT… IS IT TIME TO GO SHORT THIS NOW?

Good day fellow investors. Is it a bubble? Is it different this time? We all have the data, the numbers. But the key is what can we do about it? Should we go long or short? If we look at the situation, we are only just seeing the higher part of this pyramid on the financial statements. This pushes earnings higher, growth, everything looks great because the below part of the pyramid, the future commitsments that are five times the current spending, the current financial exposure have not yet trickled down to financials. And therefore, Nvidia forecasts 70% growth next fiscal year. And that is completely right. If these companies stick up to those commitments, Nvidia simply doubles. On top of it all, the projected spending ahead is for trillions. A trillion per year at least indefinitely. Those trillions of spending simply increase earnings for now at huge growth, huge margins. Everything looks great because practically there is no depreciation and amortization yet coming into the system. when that comes and we are going to calculate how big of an impact that depreciation and amortization will have when everything comes on balance sheet then all these great earnings that are expanded now because this is Microsoft's [snorts] gain from the valuation of open AI that then recursively purchases from Microsoft creating circular revenues and the profits are there. But that 3 trillion of spending in 3 years, general value creation of data centers or expected life, let's say 6 years at best, even if some argue that the chips bought last year are already old. That 3 trillion spent should just cost depreciation and mortization and everything half a trillion on the balance sheets. That means that the hypers scalers need to triple that current profits just to justify the spend to cover the depreciation amortization and then to make some money on it. Top 10 of the S&P 500 we are at 600 billion in net income. everything great minus 500 billion in depreciation that leaves a hundred billion in net income which is nothing compared to the market capitalization. Therefore, to justify the trillion dollar spend, they need to make an extra $1 trillion in profits minus half a trillion to add here half a trillion in profits to justify the spend. They need to add 1 trillion in operating profits by 2029. That is what the market is pricing in now at the moment. the total gains because all the customers need to spend more money and they will spend if they make more money. S&P 500 earnings not adjusted valuation centropic open AAI earnings need to grow at least a trillion to justify what we have by 2029. So in the next three years those are the projections. We have seen the growth projections in the S&P 500. But that assumes no competition, assumes no price wars, assumes China doesn't exist, assumes monopolistic pricing growth and everything. And we are already seeing issues with that with the amo days of the world screaming about safety to create a monopolistic situation, not safety. And even Elon Musk has recently discussed there is a good chance China will be the world leader in AI. If there is a good chance China will be the world leader then it will be very hard to make a profit like anything when you compete with China anyway that's a risk. Further internet changed the world. What's the price you're paying now for watching me now? Nothing. Practically nothing. It's a fraction of what it used to cost 25 years ago when this would be absolutely impossible given the cost. Now it's completely different. And the same will be for a commodity like AI. And yes, I agree. AI is changing the world. I'm using it on a daily basis. But it's so cheap. It's great. It's cheap. which means return on investment will be different and it's very possible that we have the same end as last bubble 80% down and therefore I would not bet a scent on AI so going long is a nogo for me and there is so much smoke now one side is screaming about growth one side wants protection to keep the monopoly to have some glimpse of hope about profits The chips are being bought not installed, thus not yet hitting that accounting cost. There is so much smoke currently going on and Yansen Huang is so loud in just telling the whole world how great his company will be next year and next year. And I feel it's the marketing has become a little bit more into the desperation to keep the circle going because they all know as soon as the situation stops. As soon as the first hyperscaler calls Yensen squank bluff, if they say no thank you, everything the whole upside becomes quickly the downside. And I've read this really take the time. It's just screaming for regulation so that they that already have a position eliminate all other competition and can try to do these things profitably. If there is illegal actions have liability for those companies providing those tools. Very simple. actually the law is already there. Then the key question is if it's not long, is it a short or even better, when is this a short? I recently received this email from Michael Bur. Great discussion on what's going on. There should be an email coming in today. Maybe we'll discuss it in some future video. But he starts with Lululemon and whether Lululemon is a buy. He has made it his biggest position. But this is a great chart just discussing where is investing in general when it comes to Wall Street prices, risk, and reward. Lululemon just a few years ago was the darling of Wall Street. As the price was going up, as revenues were going up, as everything you can see here, 80% of the ratings were buy. Now that everything has reverted, so 80% here at the peak, everyone was say screaming it is a great buy. Now that the stock is down 80%, nobody calls it a buy any more. That is Wall Street. Similarly, now that the stock of Nvidia is up 20x, of course, everybody has it as a buy to have it as a hold sell and only one has it as a strong sell. Only one that dares. And you can see here Nvidia the price target was 24 years ago. And just as the stock kept going up, so they have increased the price target to now above 300 because they need the stock to go higher. Could everybody on Wall Street be wrong? Well, here is the answer. It can happen. We need to keep that option open. Okay, if they're all wrong, what can we do about it? A great comment in Michael Bur's letter was that stock market booms tend to peak at halfway through the capital cycle spending already before Yansen Kuang Nvidia demand will keep on growing when the market senses that Nvidia will not grow anymore that the cycle is reverting that there are plenty of data centers or that the chips are not worth the money then everything starts to revert. And I have the feeling now that they are all going all in on this simply because they feel they have to do so except Apple. H I don't know whether I snipped the right book, but capital account and money manager reports on a turbulent decade 1993 2002 discussing the capital spending in the dotcom bubble. The summary there, high capex leads to its own destruction, high demand for the infrastructure, revenue growth, profits, everything looks great, high returns while the cost of equity, the costs are very low. Everybody is investing, growing demand, everything. But the cost of that spending is not yet reflected in the financial statements. It will be later. And therefore now everything looks great. But as that cost starts piling in, the same with US government debt. The last 20 years interest rates are very low and they were just borrowing, borrowing, borrowing. The economy was just growing, growing, growing and the costs were irrelevant. Now with higher interest rates, the costs, interest costs start to be hugely relevant. Same with AI. Same with all these spending cycles. Overinvestment leads to over capacity and from extrapolating infinite growth that Wall Street is doing now everything reverts on the opposite side of things which leads to supply glass price wars competition bankruptcies name chat GPT perhaps the first one costs hit back and AI is great I asked it to show me what's going on in line with that book to summarize it in a picture and this is a wonderful situation. Where are we? We are Q3 [snorts] here. The buildout is accelerating. The AI infrastructure is in a bull run. The stock market is still in a bull run. Explosive capex growth. Infrastructure providers squeeze. Simply they cannot keep up with demand. there is supply demand imbalance. Then halfway point the capex boom this is what also Michael Bur discusses then we start to see that the data centers are there new technologies make it faster new technologies make it easier things like that then you see you don't need so much open-source China competition there is over capacity there is a collapse on return on investment especially When depreciation and mortization things hit all the gains on entropic open AI valuation revert it looks very ugly and the stock market is down 80% like the NASDAQ from that perspective also I think what Michael Bur is sensing 2027 should be a very very interesting year because those costs will be hitting and if the revenue growth growth doesn't reflect not the circular revenue growth. the true revenue growth doesn't show up in earnings in other companies in everyone because that is what we are looking for then it might be over perhaps it's too early still if we look at Nvidia it's still booming but the stock is a 20x and then we have to see okay what is the price of going short how much money can we make by going short so is it now the time perhaps before the cycle peaks to hedge our portfolios in a way because a reversal in the AI situation might be catastrophic. There is a huge range in the stock price 164 246 we are on the higher side there and then I went to look a little bit at the option put options that's what we are interested we want to buy something if we lose we lose everything but the upside should be much higher if I look at the put options there at the current strike price we have to pay more than 10% of the stock price to bit protected that. So to make some money there, you need to go 20% lower on the stock price. Option guys will explain that in the comments. I'm sure about that. Then I look a little bit out of the money and this is perhaps interesting. If I can buy an option for $1 or something to protect me at 100, if Nvidia in the next 12 months goes to 50, I can make, let's say, 40 times my money. If you put one, you get 40. That's 40% of your portfolio if you put 1% of your portfolio. Can Nvidia stock price in the next 12 months return to where it was in 2023? That seems extremely far-fetched, but that's why the price is around $1 for that. But if you want to be hedged for crazy disastrous situations, this is that out of the money hedging situation, you can put it in 10 various 0.1% of your portfolio. Those put options you decide to put every year 1 2%. If the brown thing hits the fan, you are hedged in a way and you can get a lot of returns if you nail the absolute crisis. However, it's very hard that Nvidia loses 80% of its market cap. It is possible but hard because fullear net income 120 billion is it going to trade at a P ratio of 10 and they are still going to double in the next year already on revenues that have been committed. So net income will be a quarter of a trillion. But if there is no growth, if the cycle reverts, if prices crash, revenues, income, demand, everything, then we might be looking at this. Looked a little bit further. This is I think 2028 or December 2028. I already have to pay free 380 for that put option. So if it goes to 50 in the next two years, I make 10 times my money. Still good, but not great. However, with options, we have to keep in mind that this is from two years ago. The option for Nvidia to go below 100 was priced at 760. Now, it is priced at 1 in the next 12 months. So, you must keep into account that if nothing happens, you will likely lose 80% to 100% of your money. Michael Bur is exposed to this option put strategies he constantly changes that but Palentin Oracle he has them all he has taken some risk off the table but that's simply a different strategy I'm looking forward for your comments if this bubble continues into 2027 and the options are priced equally for 2029 it might get interesting we'll See now we first have the midterms. There might be volatility, interest rates, costs, debt issues, private equity. A lot of things will happen this year and next year will be very very fun. Just consideration. I'm starting to think about these put options to add to my diversified portfolio. One 2% of the portfolio just for fun. But I'm looking forward to your feedback. I'm thinking perhaps when it will be so obvious that the cycle is over but the market doesn't want to believe it. We are not yet there. Perhaps it will be a great time to buy. Looking forward to your comments and I'll see you in the next