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Berkshire's $397B Bet Against an Overheated Market

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Re: Berkshire's $397B Bet Against an Overheated Market

#21

Post by ldoughty »

matwood wrote: post #9
cmiles8 wrote: post #4

There’s really not much question we are in a giant bubble that’s broadly been fueled by AI hype. The only serious question is how do we get out of it. In a controlled scenario the AI sector gets a severe correction with many AI-focused companies wiped out but broader damage more limited. In an uncontrolled scenario the AI bubble bursts and takes the whole economy with it. The likelihood of a scenario where suddenly t…

> In an uncontrolled scenario the AI bubble bursts and takes the whole economy with it. How is the whole economy exposed to AI? Will Anthropic or SpaceX cratering threaten the entire financial system? NVDA will certainly correct, which is probably the biggest risk to the market, but then what? All the FCF being spent by Google, Amazon, MS, Meta, etc... will suddenly start flowing to dividends and stock buybacks again…

> How is the whole economy exposed to AI?

Out of fear/ uncertainty, investors don't just pull out of AI, but the stock market in general.

More money shifts to bonds/commodities, not just people selling AI, but Coca-Cola and Johnson and Johnson, etc.

Of course, the impact would not be equally distributed, staple stocks will crash less, but there will probably be overall a huge pull out as people panic shift assets.

The resulting downturn likely means a crashing job market (temporarily) as government says "there's no way we could have known" and slowly try to stem the bleeding... Meanwhile unemployment shoots up in any industry that needs consumers (retail, food services, etc., but less so healthcare, government), and companies are nervous to hire on a shaky economy (see: early COVID).

The energy shock will also say inflation should go up, but the crash would want to decrease inflation... Companies will likely have to eat costs to keep prices low to sell inventory that cost them more to acquire.

It's all one big economy.

Note: this is all big hand wavey speculating. The moment things start to turn south there numerous things governments can do to help (e.g. handouts, reduce interest, open oil reserves, etc) so what ultimately does happen is anyone's guess. This is just one scenario based on the fact the current US government prefers uncertainty in the market, e.g. we've had peace with Iran ~8 times according to the USA, but Iran claims some of those statements are false. The straight had been reopened ~5 times, but Iran disagrees there to. Seems like the _goal_ is uncertainty

Re: Berkshire's $397B Bet Against an Overheated Market

#22

Post by pjc50 »

akoboldfrying wrote: post #16
cmiles8 wrote: post #4

There’s really not much question we are in a giant bubble that’s broadly been fueled by AI hype. The only serious question is how do we get out of it. In a controlled scenario the AI sector gets a severe correction with many AI-focused companies wiped out but broader damage more limited. In an uncontrolled scenario the AI bubble bursts and takes the whole economy with it. The likelihood of a scenario where suddenly t…

> There’s really not much question we are in a giant bubble IIUC, some indicators correlated with previous bubbles are lighting up now, which is being interpreted as evidence that AI is likewise a bubble. But what about indicators of previous non-bubbles? How did it look when textile mills were first industrialised, or kerosene replaced whale oil for lighting, or the electric grid became widespread, etc. -- real adva…

A number of things were both: the railway bubble was pretty bad for investors even if railways were a genuinely transformative technology that remains in use.

https://en.wikipedia.org/wiki/Railway_Mania : for "railway" substitute "data center".

Re: Berkshire's $397B Bet Against an Overheated Market

#23

Post by rubyfan »

cmiles8 wrote: post #18
matwood wrote: post #9

Earlier quoted context omitted.

> In an uncontrolled scenario the AI bubble bursts and takes the whole economy with it. How is the whole economy exposed to AI? Will Anthropic or SpaceX cratering threaten the entire financial system? NVDA will certainly correct, which is probably the biggest risk to the market, but then what? All the FCF being spent by Google, Amazon, MS, Meta, etc... will suddenly start flowing to dividends and stock buybacks again…

All that AI capital investment is flowing down into construction, utilities, raw materials and many other industries that on the surface appear unrelated to AI. That’s currently all being kept alive by artificial cash flow broadly funded with loans and VC investment. When that hiccups the blast radius is much much bigger than a few AI companies just folding.

I think the market is discounting some of the AI driven growth or maybe pricing in the likelihood of a correction. Look at some of the blow out earnings recently where the market shrugs it off. To your point, many non-AI companies are now driven by AI spend that seems unlikely to be durable.

I’m not a pro here but to me it would seem like an AI crash would hit certain companies really hard (SpaceX, Oracle, NVDA, etc), most other might take a small correction to reset AI driven gains, and potentially some deflation.

If the AI game ends then suddenly there is a return to free cash flow from hyperscalers, some goods and utilities cost less and a lot of investment dollars need a place to eventually go.

You could see a scenario where the overall market keeps chugging and the AI crash ends up being a rotation.

Re: Berkshire's $397B Bet Against an Overheated Market

#25

Post by HPsquared »

roenxi wrote: post #19
bonesss wrote: post #7

It’s such an odd time investment wise… We have a blooming oil war that could take chunks of the global economy with it, booming and teetering credit levels threatening collapse, the “AI” companies have a lot of tinkerbell magic and impossible returns needed to justify their stocks, major cash rich tech giants are suddenly hands-out pockets-out for big money, and … well: Elon is the worlds richest man/CEO who also sha…

Yeah but that is likely the normal state of things - high status people are human too, we're all shocked. And on Twitter comment - mass media has been a tool of propaganda since shortly after it was invented. Twitter is substantially better than something like a newspaper or TV channel. The difference in the modern era is the internet is such a robust communication channel that the ultra-wealthy can't pay money to ha…

The information control meta has evolved from suppression to distraction.

Re: Berkshire's $397B Bet Against an Overheated Market

#26

Post by sscaryterry »

> The Buffett Indicator, a ratio that measures the market cap of the entire stock market against the GDP of the United States, has hit a record of ~232%. Historically, anything above ~120% is a signal of the market being overvalued.

So nearly 2x over-valued. A market correction would take that to ~0.5x possibly, so a loss (for those getting in now) of 75% is on the cards.

Re: Berkshire's $397B Bet Against an Overheated Market

#27

Post by le-mark »

rajnathani wrote: post #6

I would rename the title to “The Buffett Indicator shows an overvalued market”. For those curious of its definition (from the article): > The Buffett Indicator, a ratio that measures the market cap of the entire stock market against the GDP of the United States, has hit a record of ~232%. Historically, anything above ~120% is a signal of the market being overvalued. That being said, it’s not clear that the Buffet Ind…

The fact the AI emperor wears no clothes seems clear to me at least. The dot-com bubble looked obvious in 1997; it popped in 2000. Anyone shorting in '97-'98 was carried out on a stretcher before being vindicated. In fact 2000-2002 fell in three brutal legs over two years, and anyone who leveraged up after the first 25% leg was destroyed by the next two.

My strat is to accumulate cash to buy the drop. The danger with this is; will the bubble continue until the bottom is even higher than today? I’ll take that bet.

Re: Berkshire's $397B Bet Against an Overheated Market

#28

Post by roncesvalles »

akoboldfrying wrote: post #16
cmiles8 wrote: post #4

There’s really not much question we are in a giant bubble that’s broadly been fueled by AI hype. The only serious question is how do we get out of it. In a controlled scenario the AI sector gets a severe correction with many AI-focused companies wiped out but broader damage more limited. In an uncontrolled scenario the AI bubble bursts and takes the whole economy with it. The likelihood of a scenario where suddenly t…

> There’s really not much question we are in a giant bubble IIUC, some indicators correlated with previous bubbles are lighting up now, which is being interpreted as evidence that AI is likewise a bubble. But what about indicators of previous non-bubbles? How did it look when textile mills were first industrialised, or kerosene replaced whale oil for lighting, or the electric grid became widespread, etc. -- real adva…

I just don't think AI is any of those things. I understand that my argument is anecdotal and qualitative, but I just don't see AI (LLMs) materially increasing net productivity in the economy.

Re: Berkshire's $397B Bet Against an Overheated Market

#29

Post by bawana »

This bubble will never burst. The big investors are feeding a leverage cycle and cannot afford to stop. In addition, corporate nepotism has taken hold - for example, AI firms(the current flavor of software) invest in hardware companies. Hardware companies make money as the AI firms buy their product. Hardware companies then take that money and in vest in AI firms. The 'free market' no longer looks at 'value' to assess prices. And as equity prices become a reflection of the algorithmic trading that AI is doing, we have no way of knowing when and if they will decline.

Re: Berkshire's $397B Bet Against an Overheated Market

#30

Post by abc123abc123 »

sph wrote: post #8
bonesss wrote: post #7

It’s such an odd time investment wise… We have a blooming oil war that could take chunks of the global economy with it, booming and teetering credit levels threatening collapse, the “AI” companies have a lot of tinkerbell magic and impossible returns needed to justify their stocks, major cash rich tech giants are suddenly hands-out pockets-out for big money, and … well: Elon is the worlds richest man/CEO who also sha…

How I view the market: Short term: high volatility and uncertainty, feels more like gambling at a casino Medium term: the world is too unstable, best to hold cash Long term: dollar cost averaging and time in the market always win so depending how long your horizon is, it’s a good time as any to invest Longer term: we all die

You do, your children will live. Or, if you don't have children, your non-profit does not.

I wish people would stop using this "we all die" slogan when it comes to their financial lives, and think a bit about the people who will be left after you retire.

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