Michael Burry raised the alarm on an AI bubble in a recent Substack exchange, calling out market darlings and warning that a prolonged slump is coming.
The investor of “The Big Short” fame took aim at the tech boom in a written debate with Anthropic cofounder Jack Clark and podcaster Dwarkesh Patel.
Escalator to nowhere
Burry cautioned that so-called hyperscalers, including Microsoft and Alphabet, are wasting huge sums on microchips and data centers that will quickly become obsolete, to power AI tools such as chatbots that will become commoditized.
He drew a parallel to a Baltimore department store briefly owned by Warren Buffett in the 1960s: Hochschild-Kohn.
“When the department store across the street put an escalator in, he had to, too,” Burry wrote. “In the end, neither benefited from that expensive project. No durable margin improvement or cost improvement, and both were in the same exact spot. That is how most AI implementation will play out.”
When one of the local department stores upgraded its window displays or debuted a new cash-register system, “the others had to follow suit,” author Alice Schroeder wrote in “The Snowball: Warren Buffett and the Business of Life.”
Buffett and his late business partner, Charlie Munger, compared the situation to “standing on tiptoe at a parade,” she added. “Once anybody did it, everybody had to do it.”
Burry wrote on Substack: “This is why trillions of dollars of spending with no clear path to utilization by the real economy is so concerning. Most will not benefit, because their competitors will benefit to the same extent, and neither will have a competitive advantage because of it.”
Based on how previous capital-spending booms have played out, Burry wrote that we’re now “past the point where stocks will reward investors for further buildout, and getting into the period where the true costs and the lack of revenue will start to show themselves.”
Looking forward, he predicted that tech industry employment will “be lower, or not much higher, because I think we are headed for a very long downturn.”
‘Poster children’
Burry shot to fame after his contrarian bet against the mid-2000s housing bubble was chronicled in Michael Lewis’ book “The Big Short,” and actor Christian Bale portrayed him in the movie adaptation.
He pivoted from running a hedge fund to writing on Substack late last year. Several of his early posts have taken aim at high-flying AI stocks, warning they’re overvalued and destined to tumble.
“I think the market is most wrong about the two poster children for AI: Nvidia and Palantir,” he told Clark and Patel.
The chipmaker and data-analysis specialist are “two of the luckiest companies” because their products were inadvertently well-suited to AI from the get-go, he added.
“Nvidia is the power-hungry, dirty solution holding the fort until the competition comes in with a completely different approach,” Burry wrote.
He also said Palantir CEO Alex Karp criticizing him for being short the stock showed he’s “not a confident CEO.”
“He’s marketing as hard as he can to keep this going, but it will slip,” Burry added.
Palantir and Nvidia didn’t respond to requests for comment from Business Insider.
Surprises and plumbers
The value investor shared three things that have surprised him about the AI boom. The first was that Google “fumbled it and gave an opening to competitors with far less going for them,” he said. “Google playing catch-up to a startup in AI: that is mind-blowing.”
The second was that ChatGPT, OpenAI’s chatbot, “kicked off a multi-trillion-dollar infrastructure race.”
“It’s like someone built a prototype robot and every business in the world started investing for a robot future,” he wrote.
The third was Nvidia’s continued dominance when he expected more power-efficient chips to have taken off by now.
Speaking about AI’s real-world impacts, Burry cast doubt on the idea that trade careers are an “AI-proof choice.”
“If I’m middle class and am facing an $800 plumber or electrician call, I might just use Claude,” he said, referring to Anthropic’s AI chatbot.
“I love that I can take a picture and figure out everything I need to do to fix it,” he added.
Burry also raised the prospect that AI chatbots will “make people dumber,” such as doctors who overuse them and start to forget their medical knowledge.
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