SGIOY

By Brett Arends

Worried about the AI bubble? You will be if you read this report.

If you needed any further reasons to be worried about the massive boom or bubble that has inflated the stock market, and raised the risks for ordinary investors, look no further than the latest promotional report from superstar Silicon Valley venture-capital firm Andreessen Horowitz.

The "State of the Markets" from the famous firm, which has over $100 billion in assets under management, is presented as yet more evidence that AI and technology are heading for the moon.

And so you'd expect, given that the company is a major backer and promoter of artificial-intelligence and technology companies.

It features a wealth of charts and data under such exciting headlines about AI as "Tech is the everything cycle," "We keep underestimating the capex to meet demand," and "Revenue growth is unprecedented for speed and scale" - as well as, somewhat implausibly, "Surprise! Data centers may be lowering your electricity bill."

But the numbers don't tell quite the hubristic message implied by the headlines.

Quite the reverse.

Did you know that ordinary retail investors - John and Jane Q. Public - have now poured record amounts of their hard-earned savings into turbocharged, high-risk exchange-traded funds that use derivatives to produce two or three times the daily performance of technology stocks, up or down?

I didn't, but here it is on page 13, where AH reports market data - from Bloomberg, Citadel Securities and other reliable sources - showing that as of the end of August investors had a staggering $192 billion invested in these leveraged ETFs, about twice the figure of just two years ago. The bulk of it is funds that give you leveraged exposure to chip makers and other technology companies - because, after all, why wouldn't you gamble on these things with massive leverage if the only way is up anyway?

And did you know that the big hyperscalers have already poured at least $1 trillion into data centers and other AI hardware, and are preparing to pour $4.6 trillion more over the next few years? Or that this investment bonanza has already blown all the hyperscalers' annual cashflow, and then some?

Actually, these figures are widely known - on Wall Street, anyway. But why they are being presented as bullish news for the stocks, instead of enormous grounds for caution, is anyone's guess.

If these data points don't inspire you to double up your investment in the Nasdaq Composite COMP or Nvidia (NVDA) call options, how about the news that pretty much all the demand for AI is coming from a tiny 1% of superusers, who are in total outspending the entire top 10% by a factor of eight?

Or that the AI prices, as measured by the price per token of usage, are already plummeting, long before the next $4.6 trillion worth of data centers come on line?

No? How about the news that the percentage of U.S. households actually paying for AI has just skyrocketed to an all-time high of... er... 2.2%? Or that, among the tiny number who are actually paying to subscribe to an AI model, average monthly spending has also just skyrocketed to... er... $31 a month.

Oh, and there's the observation that technology companies already account for about 60% of the market value of the top 100 firms in the world, a percentage that has doubled in 10 years and quadrupled in about 15.

Does this make you think the only way is up - or perhaps, the next move might be downwards?

Maybe the percentage will double again in the next 10 years, so that technology companies account for... er... 120% of the market value?

Good luck with that.

One of the (many) problems in finance is that most of the people working in it are so young. The Andreessen report refers to the past five to 10 years, apparently without irony, as "the long term."

If you're 28 or 35 it probably seems that way. Oh, the excitement of youth, before you go through your first bear market and discover, to your shock and amazement, that luck isn't the same as genius, that leverage is a double-edged sword, and that trees don't grow to the moon.

Half of this report shows sudden upward spikes in spending or earnings. To those with long memories, such things rarely end well.

(Actually, if they did, capitalism would be broken.)

Wall Street manias and crashes, sadly, are about as variable as a Scooby-Doo episode. Some of the names and details change, but the fundamental story is always the same. Are you still astonished that the ghost or the mummy or the skeleton or the monster that's been chasing Shaggy and Scooby through the haunted house turns out to be the amiable old guy we met in the opening scene? Or that he would have gotten away with his dastardly plot, too, if it weren't for these pesky kids and their dog?

If so, I have some very exciting leveraged technology ETFs for you!

Some people trace the stock-market mania story back to the railroad boom in the 1800s, the South Sea Bubble in the 1700s or the Dutch mania for tulip bulbs in the 1600s. But even a few thousand years ago Ecclesiastes was warning us that cycles repeat, and "there is no new thing under the sun."

But when it peaks, and where? As it says in the New Testament, nobody knows the day or the hour. Not even the angels in heaven.

But when the bulls start reporting that massive stock gambling by the retail public, using levered ETFs, are a reason to be bullish, you have to start wondering if the end is nigh.

-Brett Arends

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10-27-26 2215ET