The Second Derivative: Why No One Understands the AI Boom
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Re: The Second Derivative: Why No One Understands the AI Boom
#2It's hard to read this because it's AI written, and at least three times as long as it needs to be.
TL;DR: A lot of credit crises happen because of a decrease in acceleration (the second derivative) rather than a decrease in point in time slope (first derivative), or absolute value. The author (or at least the person who prompted AI for the article) says they think AI capex has to continue to accelerate in order for the frontier model companies (and associated) to continue to pay their debts.
I think the theory is sound, but I'm also bullish on LLM/LBM market size being very undervalued today.
Re: The Second Derivative: Why No One Understands the AI Boom
#3It's hard to read this because it's AI written, and at least three times as long as it needs to be. TL;DR: A lot of credit crises happen because of a decrease in acceleration (the second derivative) rather than a decrease in point in time slope (first derivative), or absolute value. The author (or at least the person who prompted AI for the article) says they think AI capex has to continue to accelerate in order for…
Agreed. The article is very sloppy, but that doesn’t mean the central thesis is wrong. I’m not conversant enough with financial theory to say one way or another. Anybody care to critique this?
Re: The Second Derivative: Why No One Understands the AI Boom
#4It's hard to read this because it's AI written, and at least three times as long as it needs to be. TL;DR: A lot of credit crises happen because of a decrease in acceleration (the second derivative) rather than a decrease in point in time slope (first derivative), or absolute value. The author (or at least the person who prompted AI for the article) says they think AI capex has to continue to accelerate in order for…
Agreed. The article is very sloppy, but that doesn’t mean the central thesis is wrong. I’m not conversant enough with financial theory to say one way or another. Anybody care to critique this?
I don't agree it's going to break these companies; they are all capable of paying their debt service. The reason this was an issue in mortgages was that the mortgages were adjustable rate - the borrowers were defaulting when the rates adjusted because they weren't able to pay the new rates. I'm not aware of any financial instruments for these AI companies that would balloon like this.
Re: The Second Derivative: Why No One Understands the AI Boom
#5It's hard to read this because it's AI written, and at least three times as long as it needs to be. TL;DR: A lot of credit crises happen because of a decrease in acceleration (the second derivative) rather than a decrease in point in time slope (first derivative), or absolute value. The author (or at least the person who prompted AI for the article) says they think AI capex has to continue to accelerate in order for…
In light of the article, why are you bullish?
Re: The Second Derivative: Why No One Understands the AI Boom
#6Earlier quoted context omitted.
Agreed. The article is very sloppy, but that doesn’t mean the central thesis is wrong. I’m not conversant enough with financial theory to say one way or another. Anybody care to critique this?
I don't agree it's going to break these companies; they are all capable of paying their debt service. The reason this was an issue in mortgages was that the mortgages were adjustable rate - the borrowers were defaulting when the rates adjusted because they weren't able to pay the new rates. I'm not aware of any financial instruments for these AI companies that would balloon like this.
The article addresses the mechanism in the "How It Breaks" section. The problem lies in the interconnected contracts, not debt financing. If OpenAI cannot get new financing, it will have to cut costs, and one of its big costs are forward compute commitments it will have to break. Those commitments are a significant share of revenue for other companies like CoreWeave and Oracle, so if OpenAI has to cut significantly, it will be crippling to those companies. They in turn have commitments to suppliers like Nvidia, and on down the line the losses propagate, with corresponding drops in equity values in the sector which are extremely growth sensitive. Just as the same dollar showed up in the correlated revenue on the way up, so will the same dollar show up in the correlated losses on the way down. That's the balloon effect here.
Re: The Second Derivative: Why No One Understands the AI Boom
#7It's hard to read this because it's AI written, and at least three times as long as it needs to be. TL;DR: A lot of credit crises happen because of a decrease in acceleration (the second derivative) rather than a decrease in point in time slope (first derivative), or absolute value. The author (or at least the person who prompted AI for the article) says they think AI capex has to continue to accelerate in order for…
In light of the article, why are you bullish?
I think in the long term AI will be a massive market. I just don’t think it will be massively profitable. The hardware will get better, the models will be even more commoditised. It’s useful and it will get even more useful.. it’s just not going be a licence to print money.
Re: The Second Derivative: Why No One Understands the AI Boom
#8I dream of a world where I can just read a prompt behind some slopicle and cut the middleman entirely.
> The bulls and I do not disagree about AI. We disagree about which derivative the structure is written on. They are watching the level. I am watching its acceleration. That is not a difference about technology. It is a difference about arithmetic - and arithmetic, eventually, does not take opinions.
Regardless, 2nd order (and higher) derivatives are nothing new in finance and are a part of any decent university’s curriculum. Corporate debt is not an options contract. Using Gamma risk to explain AI bubble mechanics is a poor fit.
Re: The Second Derivative: Why No One Understands the AI Boom
#9Earlier quoted context omitted.
In light of the article, why are you bullish?
I think in the long term AI will be a massive market. I just don’t think it will be massively profitable. The hardware will get better, the models will be even more commoditised. It’s useful and it will get even more useful.. it’s just not going be a licence to print money.
I think I agree. The question is what happens before then. The S&P 500 went down about 40% following 2000 and 2008. The FTSE 100 showed similar losses.
My questions are: Will we still have jobs if there’s a crash? How can we start researching what the optimal hedge is against such a crash?
Re: The Second Derivative: Why No One Understands the AI Boom
#10It's hard to read this because it's AI written, and at least three times as long as it needs to be. TL;DR: A lot of credit crises happen because of a decrease in acceleration (the second derivative) rather than a decrease in point in time slope (first derivative), or absolute value. The author (or at least the person who prompted AI for the article) says they think AI capex has to continue to accelerate in order for…
In light of the article, why are you bullish?
If you were bullish on housing in 08 you would have been right long term but the timeline would have been way off.