Interesting to watch the interplay between the AI bubble, rate expectations, and the Straight of Hormuz crisis.
Higher interest rates could absolutely deflate AI capex. Indeed, other than CIOs deciding en masse that AI doesn't actually save them money, it's possibly the only thing that could deflate the AI bubble. Higher rates decreases the availability of capital; the bulk of the marginal capital losses are in "risk-on" assets like (currently) AI investments; there goes the funding source that's been used to build all these data centers. It's very much like how the 1.75% increase in rates from 1999-2000 caused the dot-com bust, or the 4.25% increase in rates from 2004-2006 caused the 2009 crash, or the 5% increase in rates from 2022-2023 caused the last tech crash.
After the initial set of hostilities ended, the market largely shrugged off the Straight of Hormuz crisis. But now that it's 3 months later, the Straight is still not open, and if anything hostilities are intensifying, the market is finally starting to price in higher inflation and higher rates. That's why 10Y Treasuries have started creeping up almost to 5%, and GOOG has fallen 12% since its $400 high a couple months ago, and why MSFT is down more than 20% since its 2025 high. The memory chip makers are more exposed, with more of a bubble, and so they could potentially crash even harder if rates start to rise.
> other than CIOs deciding en masse that AI doesn't actually save them money
One additional item: Frontier LLM Labs start charging actual prices for their services. We all know that even at $200/month that Anthropic is losing money. The actual cost to them on inference alone (at the time of writing) is estimated to be between $800-$5000 / month. They may not even know.
I'm sure they've got a whole finance department devoted to studying it, so they know better than we, the general public do. $800 to $5000 is quite the spread. Frontier labs have competition with each other and China and third party hosting of open weight models. There is no doubt that we're at the $1 Uber ride point on the timeline, but Uber finally managed to be profitable. Advancements in hardware and optimizations in software, along with patient investors mean that when they do have to start making money, it's not guaranteed that they'll sink. It's not guaranteed that they'll win, either, but I'm not an investor.
The unspoken difficult to talk about detail is so what if it costs $5,000 a month? That's someone making roughly $23/hr. If businesses could get an AI employee that was as capable as someone making $23/hr that was never sick, didn't complain about working conditions, was sufficiently competent, would work 24/7 when asked, could be cloned on demand, could be fired the second the task was done; companies wouldn't have a problem paying $5,000/month, they'd probably pay twice that since they don't have to pay for other stuff like health care or holidays or HR or an office for that AI employee.
Interesting to watch the interplay between the AI bubble, rate expectations, and the Straight of Hormuz crisis.
Higher interest rates could absolutely deflate AI capex. Indeed, other than CIOs deciding en masse that AI doesn't actually save them money, it's possibly the only thing that could deflate the AI bubble. Higher rates decreases the availability of capital; the bulk of the marginal capital losses are in "risk-on" assets like (currently) AI investments; there goes the funding source that's been used to build all these data centers. It's very much like how the 1.75% increase in rates from 1999-2000 caused the dot-com bust, or the 4.25% increase in rates from 2004-2006 caused the 2009 crash, or the 5% increase in rates from 2022-2023 caused the last tech crash.
After the initial set of hostilities ended, the market largely shrugged off the Straight of Hormuz crisis. But now that it's 3 months later, the Straight is still not open, and if anything hostilities are intensifying, the market is finally starting to price in higher inflation and higher rates. That's why 10Y Treasuries have started creeping up almost to 5%, and GOOG has fallen 12% since its $400 high a couple months ago, and why MSFT is down more than 20% since its 2025 high. The memory chip makers are more exposed, with more of a bubble, and so they could potentially crash even harder if rates start to rise.
> other than CIOs deciding en masse that AI doesn't actually save them money
One additional item: Frontier LLM Labs start charging actual prices for their services. We all know that even at $200/month that Anthropic is losing money. The actual cost to them on inference alone (at the time of writing) is estimated to be between $800-$5000 / month. They may not even know.
I'm sure they've got a whole finance department devoted to studying it, so they know better than we, the general public do. $800 to $5000 is quite the spread. Frontier labs have competition with each other and China and third party hosting of open weight models. There is no doubt that we're at the $1 Uber ride point on the timeline, but Uber finally managed to be profitable. Advancements in hardware and optimizations in software, along with patient investors mean that when they do have to start making money, it's not guaranteed that they'll sink. It's not guaranteed that they'll win, either, but I'm not an investor.
The unspoken difficult to talk about detail is so what if it costs $5,000 a month? That's someone making roughly $23/hr. If businesses could get an AI employee that was as capable as someone making $23/hr that was never sick, didn't complain about working conditions, was sufficiently competent, would work 24/7 when asked, could be cloned on demand, could be fired the second the task was done; companies wouldn't have a problem paying $5,000/month, they'd probably pay twice that since they don't have to pay for other stuff like health care or holidays or HR or an office for that AI employee.
You can keep paying your employee $23 right up until they start agitating for a raise (many never do), and often for some time beyond that.
Your AI employees will all cost more each year and you will have very little leverage over them.
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Crickets