What Could Derail This Train?
A Survey of Reasons for a Potential Tech Wreck - Article #87
In this 14-minute article, The X Project will answer these questions:
I. Why this article now?
II. What is “Cloud Repatriation,” and is it becoming a thing?
III. Is “Enshittification” coming, and have we entered the “enshittocene”?
IV. What is “The Rot-Com Bubble”?
V. “Could AI be a bubble?”
VI. What is the $600B Question?
VII. Do we have a new Subprime AI Crisis?
VIII. What about “The Other Bubble”?
IX. What does The X Project Guy have to say?
X. Why should you care?
Reminder for readers and listeners: nothing The X Project writes or says should be considered investment advice or recommendations to buy or sell securities or investment products. Everything written and said is for informational purposes only, and you should do your own research and due diligence. It would be best to discuss with an investment advisor before making any investments or changes to your investments based on any information provided by The X Project.
I. Why this article now?
Last week, I wrote, “Where is the Recession? Danielle DiMartino Booth’s Updated Views Since the Fed Rate Cut,” in which I concluded with these thoughts:
“Danielle makes a compelling case for a recession—and she also did so several months ago. And she is not alone. David Rosenberg and Lacy Hunt are other highly respected economists calling for a recession, yet it still hasn’t arrived. If you ask Americans, you would find that many, if not most, think or feel like the economy is in recession.
Reality is a delicate balance between opposing forces. One way to look at it is as a K-shaped economy, with most Americans in the lower leg of the K, most of the population suffering from recessionary conditions, and businesses dependent on this segment of society. On the upper leg of the K are the government and wealthy baby boomers, who, as Luke Gromen has argued, are on a spending binge that more than offsets the weakness in the other leg. Businesses catering to those segments are also doing well. Finally, add in Doomberg’s thesis that low energy prices support the economy, especially the industrial and manufacturing sectors, and that rarely, if ever, has the economy fallen into recession when we’ve had cheap and abundant energy supplies.”
In this week’s Tree Rings Report, Luke Gromen highlights…
“US Federal Outlays (25% of GDP) are running up 34% y/y on a trailing 3-month y/y basis, which suggests that on a trailing 3-month y/y basis, US Federal Outlays are adding as much as (25% x 34% =) 8.5% to headline US GDP.”
What allows the US to continue spending like a drunken sailor? The US Treasury market and the US’s ability to sell bonds to finance its spending. As Luke Gromen has conclusively demonstrated (in my opinion), the US stock market defacto backs the US Treasury market. And what drives the US stock market? Primarily tech stocks. So, if tech stocks falter, correct, or worse, crash, the dominoes could fall and derail not only the stock market’s bull run but the government’s tax receipts, overwhelming the bond market and limiting our government’s ability to spend, which undermines the economy and a vicious downward spiral can spin out of control…
Given the dire consequences of that potential scenario, we should look at why that might happen…
II. What is “Cloud Repatriation,” and is it becoming a thing?
Earlier this year, I read the articles “The Big Cloud Exit FAQ” and “Why companies are leaving the cloud.” Both articles discuss the growing trend of companies leaving the cloud due to cost efficiency, scalability, and control concerns. David Heinemeier Hansson's article "The Big Cloud Exit FAQ" outlines 37signals' decision to exit the cloud, citing significant cost savings as a primary driver. The company found that, despite the cloud's promise of reduced complexity, the costs associated with renting cloud services skyrocketed, especially at scale. By purchasing their own servers and hosting their applications on-premise, they project saving over $7 million in five years. Hansson emphasizes that running their own hardware doesn't compromise security or reliability and that the cloud often isn't the most economical choice for stable, predictable workloads.
Similarly, the InfoWorld article explores why other companies are rethinking their cloud infrastructure reliance. Many businesses that initially adopted cloud services for flexibility and scalability have discovered that costs can escalate rapidly, particularly with data egress fees and long-term use. Companies with more predictable computing needs are realizing that they can achieve significant savings and better performance by moving to on-premise or hybrid models, which offer greater control over resources. The article suggests that while the cloud remains beneficial for startups or highly variable workloads, companies with stable demand might benefit from reassessing their cloud commitments.
Both pieces point out that while the cloud provides unmatched convenience and scalability for specific use cases, it is not the best fit for every organization. The cloud’s value proposition diminishes when costs become unsustainable or companies require more control over their infrastructure and data. This “cloud repatriation” trend highlights the evolving understanding that not all businesses benefit from a one-size-fits-all cloud strategy, pushing companies to explore alternatives like owning and managing their own hardware for long-term efficiency.
III. Is “Enshittification” coming, and have we entered the “enshittocene”?
The article “‘Enshittification’ is coming for absolutely everything,” published in February in the Financial Times by Cory Doctorow, introduces the term "enshittification" to describe the decline of digital platforms. He argues that platforms initially benefit users by providing free or useful services but gradually shift their focus toward extracting profits. This process begins by favoring users, then shifts to benefiting advertisers or business customers, and finally focuses on maximizing returns for shareholders, often degrading the user experience. Doctorow highlights Facebook as an example of this trajectory, from its early days as a user-friendly platform to its current state, where users' feeds are cluttered with ads and algorithmically manipulated content, benefiting advertisers and the platform itself.
The concept of "enshittification" is further explored through the lens of monopolistic practices in the tech industry. As competition declines, large tech companies like Facebook, Amazon, and Google exploit their dominant positions by raising prices, lowering quality, and abusing user trust. Doctorow argues that the erosion of regulatory checks, worker power, and the ability for consumers to find alternative platforms has allowed tech giants to consolidate power and push enshittification to new extremes. The commodification of personal data and targeted advertising illustrates how these platforms have turned users into products to be sold to advertisers.
Doctorow concludes by advocating for a reversal of enshittification through strengthened competition laws, better regulation, and worker empowerment. He emphasizes the importance of maintaining an open internet where users have the freedom to choose and modify the services they use. By addressing the root causes of enshittification—namely monopolistic practices, regulatory capture, and lack of competition—Doctorow believes it is possible to reclaim the internet as a space that serves its users rather than exploiting them for profit.
IV. What is “The Rot-Com Bubble”?
The article "The Rot-Com Bubble" by Ed Zitron critiques the current state of the tech industry, coining the term "Rot-Com Bubble" to describe a market focusing more on disruption and hype than solving real-world needs. Zitron argues that tech companies, driven by the need for perpetual growth and market capitalization, often develop products based on speculative potential rather than actual utility. He points out that while earlier innovations like the iPhone introduced clear, valuable features, modern tech leaders often promote vague promises about what their technology might accomplish, such as with generative AI, which has yet to prove its transformative potential.
Zitron highlights how companies like Microsoft and OpenAI are pushing technologies that appear to be more about market growth than user benefit, with products like generative AI being touted as the "next big thing" despite not delivering much in terms of practical, everyday utility. The tech industry's obsession with finding new markets to disrupt instead of focusing on sustainable business models or solving authentic problems leads to a cycle of inflated valuations and overhyped products that often fail to live up to expectations. According to Zitron, this reflects a broader issue within the industry where leaders prioritize growth at all costs over long-term stability.
The article concludes that the tech industry's current trajectory may be unsustainable, fueled by investor expectations and the need to innovate or disrupt constantly. Zitron suggests that focusing on growth at the expense of genuine innovation has led to stagnation, which he dubs "Rot Economics." He calls for a shift towards building products and businesses that meet real needs rather than chasing speculative ventures with questionable utility
V. “Could AI be a bubble?”
A Morning Brew article of the same title in July was reported on a Goldman Sachs report from June and stated the following:
“Veteran Goldman Sachs tech analyst Jim Covello thinks that the $1 trillion that companies plan to spend on AI development and infrastructure in the coming years won’t pay off. He claims the tech doesn’t have wide-ranging use cases and that the efficiency boost it can offer costs potential customers a pretty penny, unlike:
The early internet, which brought life-altering solutions that were immediately cheaper than the old-school way of doing business.
Smartphones, which had immediate consumer use cases like replacing “clunky GPS systems” in cars.
Covello doesn’t think running AI will get cheaper soon since Nvidia—which briefly became the world’s most valuable company last month amid surging demand for its specialized AI microchips—dominates the AI hardware supply, so there might not be enough competition to push down prices.
He argues that the only way to justify the eye-popping costs of AI is for it to “solve complex problems, which it isn’t designed to do.” Covello thinks that investor enthusiasm for AI might wane in the next 18 months “if important use cases don’t start to become more apparent.””
VI. What is the $600B Question?
“AI’s $600B Question” is the title of Sequoia Capital’s David Cahn’s June article, in which he asks where the $600B in AI revenue is required for payback in investments in Nvidia’s chips. This article was an update to his September 2023 article, which asked the same question, but it was only $200B at the time. In this latest one, he says:
“One of the major rebuttals to my last piece was that “GPU CapEx is like building railroads” and eventually the trains will come, as will the destinations—the new agriculture exports, amusement parks, malls, etc. I actually agree with this, but I think it misses a few points:
Lack of pricing power: In the case of physical infrastructure build outs, there is some intrinsic value associated with the infrastructure you are building. If you own the tracks between San Francisco and Los Angeles, you likely have some kind of monopolistic pricing power, because there can only be so many tracks laid between place A and place B. In the case of GPU data centers, there is much less pricing power. GPU computing is increasingly turning into a commodity, metered per hour. Unlike the CPU cloud, which became an oligopoly, new entrants building dedicated AI clouds continue to flood the market. Without a monopoly or oligopoly, high fixed cost + low marginal cost businesses almost always see prices competed down to marginal cost (e.g., airlines).
Investment incineration: Even in the case of railroads—and in the case of many new technologies—speculative investment frenzies often lead to high rates of capital incineration. The Engines that Moves Markets is one of the best textbooks on technology investing, and the major takeaway—indeed, focused on railroads—is that a lot of people lose a lot of money during speculative technology waves. It’s hard to pick winners, but much easier to pick losers (canals, in the case of railroads).
Depreciation: We know from the history of technology that semiconductors tend to get better and better. Nvidia is going to keep producing better next-generation chips like the B100. This will lead to more rapid depreciation of the last-gen chips. Because the market under-appreciates the B100 and the rate at which next-gen chips will improve, it overestimates the extent to which H100s purchased today will hold their value in 3-4 years. Again, this parallel doesn’t exist for physical infrastructure, which does not follow any “Moore’s Law” type curve, such that cost vs. performance continuously improves.
Winners vs. losers: I think we need to look carefully at winners and losers—there are always winners during periods of excess infrastructure building. AI is likely to be the next transformative technology wave, and as I mentioned in the last piece, declining prices for GPU computing is actually good for long-term innovation and good for startups. If my forecast comes to bear, it will cause harm primarily to investors. Founders and company builders will continue to build in AI—and they will be more likely to succeed, because they will benefit both from lower costs and from learnings accrued during this period of experimentation.
A huge amount of economic value is going to be created by AI. Company builders focused on delivering value to end users will be rewarded handsomely. We are living through what has the potential to be a generation-defining technology wave. Companies like Nvidia deserve enormous credit for the role they’ve played in enabling this transition, and are likely to play a critical role in the ecosystem for a long time to come.
Speculative frenzies are part of technology, and so they are not something to be afraid of. Those who remain level-headed through this moment have the chance to build extremely important companies. But we need to make sure not to believe in the delusion that has now spread from Silicon Valley to the rest of the country, and indeed the world. That delusion says that we’re all going to get rich quick, because AGI is coming tomorrow, and we all need to stockpile the only valuable resource, which is GPUs.
In reality, the road ahead is going to be a long one. It will have ups and downs. But almost certainly it will be worthwhile.”
VII. Do we have a new Subprime AI Crisis?
The article “The Subprime AI Crisis” explores the growing concerns surrounding the generative AI hype and its unsustainable nature. Ed Zitron critiques the tech industry’s overreliance on generative AI, which he argues is being promoted as the next big thing despite its questionable utility and financial viability. Companies like Microsoft, OpenAI, and Anthropic have invested billions into AI technologies, yet the tangible benefits of these investments remain elusive. The author points out that while AI can perform specific tasks, like generating content or assisting with business copy, its outputs often require significant corrections, leading to doubts about its practical value.
Zitron also highlights the economic risks posed by the massive expenditures on AI infrastructure. Big tech companies have heavily invested in cloud computing to support AI operations, creating what he calls "golden handcuffs" that tie AI startups to cloud providers like Microsoft Azure, Google Cloud, and AWS. This situation guarantees revenue streams for the cloud giants but raises concerns about the long-term profitability of AI ventures, which struggle with high costs and low margins. According to Zitron, the AI boom mirrors previous tech bubbles like cryptocurrency and the metaverse, both of which failed to live up to their promises.
The article concludes with a warning that the generative AI industry may soon face a significant downturn if companies and investors realize that the promised returns are not materializing. The hype surrounding AI may eventually collapse like previous tech busts, with companies being forced to cut costs or pivot away from AI. Zitron argues that the AI industry’s failure to generate real revenue growth will have far-reaching consequences for startups and established tech giants, leaving the future of generative AI uncertain.
In the next Section, I will tell you about another Ed Zitron article about another potential tech bubble. Then, in Section IX, what I think, and in Section X, why should you care and, more importantly, what more can you do about it? However, I have hit a new paid subscriber threshold, so you must now be a paid subscriber to view the last three sections. The X Project’s articles always have ten sections. Soon, after a few more articles, the paywall will move up again within the article so that only paid subscribers will see the last four sections, or rather, free subscribers will only see the first six sections. I will be moving the paywall up every few weeks, so ultimately, free subscribers will only see the first four or five sections of each article. Please consider a paid subscription.
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