AI goes boom. Or boom?
Investors must understand that correctly predicting artificial intelligence (AI) technology will change the course of humanity, even if for the better, does not automatically translate to desirable investment returns.
General Purpose Technologies (GPT) of the past, such as the automobile, electricity, commercial flight, steam locomotion and TV, have all changed the course of human history and yet more than a thousand car manufacturers have disappeared from the U.S. and none exist today that are profitable and have not been bailed out by government or private equity.
The hype surrounding a new technology generally brings down the cost of investment for the participants, and they naturally take advantage of that cheap capital to build out and scale that technology in a fast-paced land grab. But overcapacity typically follows and returns disappoint. Disappointing returns transpire because while the “this-technology-is-going-to-change-history” theme is perceived to be both structural and uninterruptable, the reality is that the suppliers must meet customer demand that is not structural but cyclical.
A period of Creative Destruction ensues, and everyone other than the earliest investors lose between 60 and 95 per cent. Nothing has changed of course and investors are confused because they have correctly predicted the life-altering nature of the technology.
Eventually, after the massive losses, buyers of distressed assets secure the technology from the distraught investors of the first part of the hype-cycle, and ensure the technology is widely and affordably distributed and the course of human history begins to change as the tech is widely adopted.
The process of invention, hype, low cost of capital, over capacity, creative destruction and distressed buying is the process that ensures the technology does change the course of human history, because it is the process that puts that technology into every human’s hands.
Today
Today, the artificial intelligence revolution dominates Wall Street, driving unprecedented investments by participants while sparking intense debate about whether we’re witnessing sustainable growth or an impending bubble.
My bet is this is a bubble. We just can’t predict when it will burst. But we can predict it will.
Earlier this week, reports of the U.S. government shutdown nearing an end and a geopolitical detente between China and the U.S. gave investors a fresh excuse to buy into the rally. Yet beneath the optimism are my above concerns as well as massive debt issuance by tech giants, circular deals fuelling spending commitments, and high-profile warnings from the likes of Michael Burry and Ray Dalio.
“Because of Berkshire’s size and because of market levels, ideas are few – but not zero.” – Warren Buffett, 10 November 2025
Additional tension can be derived from evidence of tech giants’ ambitious future spending commitments and the reality of insufficient current revenue, while retail investors’ fear of missing extend valuations. Yet, as I have already articulated, history reminds us that every capital expenditure boom ends in excess – humans inevitably get too excited, leading, this time, to losses of potentially trillions. As BCA Research’s chief geopolitical strategist Marko Papic puts it, “There will be blood and tears, and it will be terrible.”
Debt binge and funding gaps
The artificial intelligence (AI) boom has triggered a massive debt spree among hyperscalers. In just seven weeks, Amazon, Google, Meta, Microsoft, and Oracle raised a staggering US$120 billion in bonds. This reflects cash flows insufficient to cover exploding capital expenditures, projected to reach US$534 billion next year and consume 80 per cent of the group’s forecasted cash flow.
OpenAI has inked deals worth over US$1.4 trillion in computing power over the next eight years, despite anticipating only US$20 billion in annual revenue by year-end. Recent announcements include a US$38 billion multi-year pact with Amazon and Microsoft’s US$9.7 billion deal with Australian data centre operator Iren. The circular arrangements – often between OpenAI, Nvidia, and other tech players – highlight interdependence and rightly raise questions about sustainability.
Perhaps most importantly, bond traders are wary. Debt spreads for hyperscalers have widened from 50 basis points in September to nearly 80 basis points. Bank of America’s Michael Hartnett notes this as a key metric to watch. Why? Because tech bonds dropped eight per cent in the year before the dot-com peak in March 2000.
Government backstops
Another question mark was raised in the last week by OpenAI executives who floated the idea of government involvement in AI financing. CFO Sarah Friar initially suggested the U.S. government could “backstop” the sector to ease massive investments, later clarifying it meant broad support rather than direct guarantees. CEO Sam Altman followed suit in a social media post.
Altman explicitly stated: “We do not have or want government guarantees for OpenAI data centers.” He argued against taxpayers bailing out failing companies and opposed picking winners. Instead, he proposed governments build and own their own AI infrastructure, potentially with lower-cost capital, to create a “strategic national reserve of computing power” benefiting the public sector.
A cynic might say Altman and Friar were testing the waters for indirect aid that could lower capital costs industry-wide – benefiting leaders like OpenAI. Should we start speculating that the resumed Federal Reserve (the Fed) quantitative easing (QE) could lead to the central bank buying hyperscaler bonds?
Burry’s warning
Michael Burry is the famed subprime short-seller portrayed in the big and subsequent movie, The Big Short. Burry has established a short position of more than US$1 billion against Nvidia and Palantir. He highlights decelerating cloud revenue growth at Amazon, Alphabet, and Microsoft, alongside capex levels that rival those of the dot-com era.
Burry goes further, arguing the hyperscalers overestimate a chip’s useful life, understating depreciation and therefore inflating profits. Specifically, Burry estimates overstatements of 26.9 per cent for Oracle and 20.8 per cent for Meta by 2028.
A bull argument
According to some strategists, bubbles only burst on higher rates, and because “the Fed ain’t hiking, and yields ain’t spiking,” these pundits believe the boom isn’t going to bust anytime soon. They note U.S. rates are falling, enabling household leverage; bond markets remain calm despite debt worries; and the U.S.-China trade detente has reduced risk of an expanding trade war.
As an aside, the trade truce allows China to grow within defined parameters, benefiting allies like Australia – potentially the third-biggest winner after Mexico and Canada. With low 10 per cent tariffs and U.S. approval for resource exports (“selling China our rocks” to fund submarines), Australia gains from stabilised trade.
The A.I. sector’s fate will be determined by investors recognising that extreme valuations and blue sky TAMs (Total Addressable Markets) might not be supported by customers, yet.
Warning signs, including concentration risks, rapid debt growth, depreciation issues and unrealistic revenue targets, are potentially offset by supportive fiscal and monetary policies, and economic resilience might extend the runway. It might be worth tracking debt spreads, Fed actions, AI adoption rates, and geopolitical shifts, but really, the Nasdaq index will tell you all you need to know.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
