Unprecedented moves in the AI space this week are giving stock market experts flashbacks to one of the most famous corporate scandals in history, stoking fears that we're in line for a similarly catastrophic fallout.
The headline-worthy $500 billion that Wall Street just announced it's providing Nvidia clients to scale their AI infrastructure marks the beginning of an untested new future for financial engineering that commentators such as Ed Yardeni and Michael Burry are extremely wary of. And, based on the implications for the average portfolio and the economy at large, you may need to be wary, too.
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Predicting a fall
Burry, famous for calling the subprime mortgage crisis before it happened, drew comparisons between the mind-blowing recent investment to the 2001 fall of Enron, the energy corporation that went from trading $2.5 billion in commodities a day to filing for bankruptcy (with some unsavory accounting gymnastics to obscure its failures in between).
In a post on his popular Substack, Burry, the former hedge fund manager-turned-investment blogger revealed that, as of Aug. 11, he's leaning more into short-selling Nvidia, the computer chip manufacturing giant that has grown to become one of the world's most valuable companies. This means he expects Nvidia's high-flying share value to fall, not rise after this latest move, which he called a "Wall Street stunt" with "shades of Enron's effort to make wholesale power an investable class."
"Structuring credit is a natural part of the system. Structuring unnatural credits to prolong momentum late in the bull phase is where the worry comes in," he explained in his post, with the warning that "off balance sheet liabilities today are putting both 2000 and 2008 to shame."
His main concern, as he's expressed in the past, is the circular type of financing that Nvidia is engaged in, including backstopping its own customers' enormous projects, loaning entities money that they in turn use to purchase Nvidia technology, and acquiring equity in client firms that keep its business going.
This week's agreement, though it looks like a departure from this worrying funding feedback loop due to the involvement of private credit, only serves to complicate the messy subsidization of the sector, which happens to be underpinning the stock market and economy, and is running almost entirely on debt at this point.
