Bank of England: 'AI Bubble Possible Burst', Oracle's 'Low Profit' OpenAI 'Self-Trading'
The Bank of England released minutes on the 8th warning that global financial markets would undergo a 'sharp correction' due to excessive AI investment coupled with the erosion of the independence of the US Federal Reserve (Fed), leading to a rapid expansion of the AI bubble. South Korean media outlets reported that Nvidia's Jensen Huang's broadcast appearance, in response to the announcement, "It's not a bubble," had "completely dissipated the bubble."
The New York Times reported on the 9th that Nvidia, which invested in OpenAI and used the deal as bait for a chip sales contract, was brokered by a Malaysian "mysterious Huang" who appeared to be a "Chinese chip sales intermediary" through Singapore's "Megaspeed," highlighting the difficulties faced by US government officials trying to block China's access to powerful AI chips.
After spinning off from a Chinese gaming company in 2023, Megaspeed established a subsidiary in Malaysia and quickly acquired nearly $2 billion worth of Nvidia's cutting-edge products. Most of these chips, according to trade data platform ImportGenius records, came from U.S. branches of Chinese companies already sanctioned for allegedly providing technology to the Chinese military, the Times reported.
Next to Nvidia CEO Jensen Huang was a woman named Huang Le, or Alice Huang, an executive at Megaspeed's Singapore-based data center company, which is poised to acquire $2 billion worth of Nvidia AI technology next year. The "mystery woman" behind the cover company, Megaspeed, has gone from being an undisclosed player in the AI industry to a top U.S. government concern about its relationship with Nvidia and its CEO. Four reporters from the Times investigated this mysterious relationship.
U.S. Commerce Department officials told the New York Times that they are investigating whether Megaspeed, which has close ties to Chinese tech companies, is helping Chinese companies evade U.S. export restrictions, a "private investigation" has been launched.
Nvidia, a dominant supplier of AI chips, has seen its annual revenue surge nearly sevenfold over the past four years, making it the world's most valuable publicly traded company. Bloomberg reported on the 8th that the AI company "wheel trading," in which it received investment from Nvidia, sold OpenAI stock at a low price, and in return signed a deal to purchase high-priced chips from Nvidia, driving up the stock price.
In another article, the New York Times reported on the 9th that "Oracle's Fears Add to Doubts About the AI Rally," and that "Investors have been concerned about the financial health of the tech giant's cloud computing business, adding to widespread concerns about the skyrocketing stock prices." Shares of Oracle, the largest server vendor to AI chip seller Nvidia, fell as much as 7% on Tuesday after The Information, citing internal documents, reported that the tech giant's cloud computing business was generating lower profits than Wall Street had expected.
The documents show that in the three months of the third quarter ending in August, Oracle generated about $900 million from renting servers powered by Nvidia chips, generating a gross profit of $125 million, or 14 cents for every dollar of revenue.
These figures are lower than the gross margins of many non-tech retailers, the Times reported. "While revenue nearly tripled last year, the gross margin on that revenue ranged from less than 10% to just over 20%, averaging just 16%," the documents said.
The Bank of England's Financial Policy Committee (FPC) stated in its third-quarter Financial Stability Report that "the risk of a sharp market correction has increased," and that the potential for an AI-driven market collapse poses a "material" risk of spillover effects on the UK financial system.
The FPC met on the 1st of last week, and in its report, Bank of England Governor Andrew Bailey noted that "US equity market valuations, by some measures, are approaching the peak of the dot-com bubble."
The FPC stated that "any sudden or significant change in perceptions of the Fed's credibility could trigger a sharp repricing of US dollar assets, particularly US Treasury bonds, leading to increased volatility, higher risk premiums, and global spillover effects." Regarding the August rise in 30-year UK government bond yields, which reached their highest level since 1998, the FPC attributed the rise to concerns about the difficulty of managing high borrowing in developed economies, exacerbated by political instability in France and Japan. He warned of a debt-ridden economy.
At a Silicon Valley Exchange event on the 9th, San Francisco Fed President Mary Daley responded to a question about the impact of artificial intelligence on the economy by saying, "There's good reason to think AI could be transformative, but innovations that transform the economy typically take decades to achieve, so enthusiasts may be disappointed." She added, "This time, it could be different, not just because of the technology itself, but also because the economy is slowing."
Fed President Daley continued, "Companies are reluctant to hire employees who might have to be laid off if demand declines further, so they're trying to figure out how to use AI to fill the labor gap."
She added, "We're now in a position where benefits can come faster, not just because of what AI and technology can do, but also because of where we are in the economy and how companies can use it."
Regarding the interest rate cut, she said, "A weak labor market and easing inflation were the reasons for the rate cut last month. The economy is slowing a bit, and consumers are using whatever excess savings they have." It is depleting and dealing with higher price levels. And we have a restrictive monetary policy,” he said. “We’ve now reached a point where labor market weakness could become more concerning if we don’t manage risks.”
Reuters said of the stock market, “With Wall Street indices hitting record highs this year on optimism about emerging AI technologies, investors are likely to focus more on AI-related capital spending than on tariffs and other risks.” The latest LSEG forecasts show analysts expect S&P 500 companies to post earnings of 8.8% in the third quarter of 2024, but year-over-year growth is expected to be more than 13% in both the first and second quarters of 2025, the report said on the 9th, with expected returns falling.
Anthony Saglimbene, chief market strategist at Ameriprise Financial in Troy, Michigan, said earnings from the so-called Magnificent Seven group of large-cap and AI leaders “could be very solid,” but added, “Investors will be skeptical of some of the commentary on capital spending, as they will be concerned about the money being spent there and the impact on the broader economy.” "I'm starting to be a little more concerned about the return on my investment," he told Reuters.
Reuters reported, "According to LSEG Datastream data, the S&P 500 Index is currently trading at about 23 times forward earnings estimates, well above its 10-year average of 18.7, reaching levels that some investors consider a bubble." They added, "The high valuations of mega-cap technology and growth stocks pose particular risks given concerns about AI investment and spending."
Money Today reported on the 9th, "AI Bubble? Jensen Huang's One Word Shattered It All," with the subtitle, "CNBC Appearance: 'Computing Demand Surges in Half a Year' Fuels Optimism, Related Stocks Rebound All at Once... Confirming Industry Growth Potential."
The article, from New York, stated, "Computing demand has increased sharply over the past six months this year." Jensen Huang, CEO of AI semiconductor leader Nvidia, said on the 8th that the AI "It reignited optimism," he said, adding, "AI-related stocks, which had been shaken by recent bubble theories, rebounded en masse, believing that CEO Hwang's remarks in the CNBC interview confirmed the potential for growth in the AI industry based on real demand."
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