Is the AI Bubble Bursting?

MARKETS & GEOPOLITICS

Is the AI Bubble Finally Crashing?

As you know, this newsletter is forward-looking. We analyze the present to strategize about the future and make better decisions.

Recently, many of the world’s most important stocks crashed, making investors ask if the recent crash in chip companies and AI stocks is a wake-up call to the fragility of their valuations, which, as we covered, are partly based on hype rather than reality in the latter case.

The explanations provided by news and ‘experts’ have been, mildly put, only scratching the surface of what is really going on, as latent in this crash is the possibility of this being the beginning of a great market debacle.

Therefore, today, we are uncovering the true reasons the markets are so volatile and, importantly, how you should approach the valuations of many of the most important corporations, alongside some hidden opportunities and risks.

A Problem Going Back Decades

Words spoken by the right—or wrong—people can carry much weight, and this time, the impact was very negative.

Huge Sell-Offs

This is the summary of recent events in the markets concerning stocks from semiconductors and AI stocks:

NVIDIA fell 8%, losing its $3 trillion value

Microsoft 4%, although we need to factor in the Crowdstrike mess, too

Apple fell 5%

ASML, a chip manufacturing equipment EUV company, fell 18%

Applied Materials, another equipment and software provider for chip manufacturing, fell 14%

TSMC, the global foundry of advanced chips, 12%

And so forth, combined for a total loss of $1.1 trillion, with $500 billion wiped on Wednesday alone. But why?

Although there’s much more than meets the eye, as you’ll see in a minute, the shortest answer publicly provided is that the symbiosis between Joe Biden and Donald Trump’s comments caused the massacre.

On the one hand, a Bloomberg report indicated that Biden was seriously considering a tougher stance on companies exporting chip manufacturing equipment or GPU cloud services to China.

As for the former, the US is obsessed with preventing China from becoming a powerhouse chip manufacturer.

Regarding the latter, the US Government felt that the penalties they were enforcing on companies like NVIDIA to prevent China from acquiring chips and GPUs were being sidestepped by the Land of the Red Dragon thanks to US hyperscalers providing GPU services to Chinese companies.

Biden’s stance is extremely geopolitical and much less economical; China manufacturing chips would cause a massive deflationary effect due to increased competition and supply increase, but could be devastating to the geopolitical interests of the US in the region.

On the other hand, Trump’s comments have been directed more toward Taiwan, scaring the living shit out of investors… and the aforementioned country itself.

Specifically, Trump said the following:

"I know the people very well and respect them greatly. They did take about 100% of our chip business. I think Taiwan should pay us for defense." He’s implicitly referring to how Taiwanese manufacturers, high on Barbie and TV manufacturing in the 1980s, went to…

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