Time to Short the AI Bubble?

June 11, 2025 | For the longest time now, we have been struggling with the global marketing hype fest known as “AI” or artificial intelligence.  Before AI, you will recall, we had blockchain, but the tattered remnants of that sham are still with us. Some bubbles last longer than others. And some credulous souls invest in dead hypes long after the thrill is gone.

We can recall a time with no computers, when intelligence was limited to moral persons and communication involved paper and pencil. Later we had typewriters and then word processors, and finally a Hewlett Packard (HPE) HP-12C with a piece of silicon inside that was actually made in the USA. When we first did interest rate swaps, we had to input the cash flows into the HP-12C, then push the "run" key and wait for a result.

We covered the semiconductor capital equipment sector when Sunnyvale, CA, was the center of the known world. You can imagine how we laughed as we watched Nvidia (NVDA) soar like a rocket post COVID on a wave of AI hype, then stepped off the elevator before the correction (h/t Jim Cramer). We even bought a little NVDA as it plummeted past our exit point. Why? Hype aside, Nvidia is a great company. 

It will interest readers to know that we are a good bit more negative on AI than we are on crypto. AI is the result of a coming together of many conflicted and confused global corporate interests, particularly in the US and China. These corporate sponsors know how to run a stock scheme. With crypto there is at least the possibility of a speculative profit. Jensen Huang, co-founder and chief executive officer of NVDA, seems to be one of the few profiting from the global AI bubble.

One of the biggest drivers of the global AI bubble is China. As with domestic housing and electric vehicles more recently, China is “all in” on AI, which means that the amount of resources directed to AI is completely out of proportion to any real benefits. But China, lest we forget, is a nation where economic considerations are of no importance.  All that matters is defending the political monopoly of the Chinese Communist Party.

For years, Toyota Motor Corp (TM) has been telling us that EVs make no sense, either economically or in terms of the environment, but the decision of politicians in Washington and Beijing prevailed. Have we plummeted down a similar dark rabbit hole of massive misallocation of economic resources with AI? The waves of private and public support for emerging technologies has spawned a series of related periods of hype and exaltation, followed by disappointment and financial reckoning. 

Researchers at Apple just released a paper that throws cold water on the "reasoning" capabilities of the latest, most powerful large language AI models. In the paper, a team of machine learning experts makes the case that the AI industry is grossly overstating the ability of its top AI models, including OpenAI's o3, Anthropic's Claude 3.7, and Google's Gemini.  Maybe Elon Musk should count the end of his political affair with President Donald Trump, and the negative impact on his AI project, as a blessing.

Goldman Sachs (GS) Chief Global Equity Strategist Peter Oppenheimer noted in a recent report that “bubbles form when the total value of companies involved in the innovation becomes much higher than the future potential cash flows they are likely to generate.” Since equity markets are all about discounting the future, the prospect of new technologies and related gains usually overwhelms any concern about the actual value of a given innovation.

Oppenheimer wrote about the dot.com bubble three decades ago:

“By December 1996, the head of the Federal Reserve at that time, Alan Greenspan, famously warned of “irrational exuberance,” where he later lamented in February 1997 that ‘regrettably, history is strewn with visions of such 'new eras' that, in the end, have proven to be a mirage.’"

One of the signs that a tech bubble is getting long in the tooth comes when “investors” in a given technology or sector start to write-down these expenditures, usually at the insistence of an auditor or angry shareholders. Chief among these loss leaders is blockchain, which has not only absorbed billions of dollar in “investments” but has also enabled billions more in theft by hackers. 

Blockchains are not only insecure, but they are very inefficient. "The bottom line is that while the blockchain system represents advances in encryption and security, it is vulnerable in some of the same ways as other technology, as well as having new vulnerabilities unique to blockchain," writes Stuart Madnick in a 2019 paper for MIT.  But the AI bubble is orders of magnitude bigger than blockchain.

In 2023, the global AI market was estimated at $150 billion. This market was projected to reach $200 billion by 2025, a figure that has already been exceeded. In a 2019 paper, GS researchers, who always cover their gorgeously exposed flanks, asked whether the $1 trillion in prospective investment in AI would pay off.  The big risk, they noted: “It’s possible that the large language models being built by a handful of companies will find they are competing in a winner-takes-all market.”

In a Bloomberg interview, hedge fund mogul Paul Tudor Jones said that AI is “the most disruptive technology in the history of mankind.”  AI is certainly disruptive, but we keep wondering if the focus on analyzing the significance of existing data is not a gigantic dead end for investors. Is the gigantic spend on generative AI too little benefit for too much spend? We suspect that the answer is yes.  

John Maynard Keynes observed in his General Theory, most professional speculators are concerned “not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public.”  That is, get out before the crowd notices their mistake.

We think the time when investment in AI could produce a positive return for most companies is long since past. Indeed, as with the blockchain fiasco, the number of corporate sponsors of AI who are reporting losses or restructuring their assets and management teams is likely to grow a lot faster than AI stocks in coming months. WPP Group (WPP) CEO Mark Read, for example, pushed to adopt artificial intelligence. Now he has exited with the WPP share price languishing and the company facing a massive write down of its AI spend.

As William J. Bernstein writes in his book “The Delusions of Crowds Why People Go Mad in Groups,” central banks are ultimately the engines of investment bubbles. It was during the zero interest rates of 2020-21 that the marketing hype around AI accelerated. As Bernstein notes: “Low interest rates are the fertile ground in which bubbles sprout.”

The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.