The news that there's an oversupply of Nvidia GPUs convinced me that the AI bubble is bursting and it'll burst *hard*. So here's a thread where I go over the financial, technological and hardware implications of this. Strap in because this is going to be long and probably a bit rambling too. 🧵 1/
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If Nvidia GPUs are in significant oversupply as was reported then it means the prices will come down, as there's nobody willing to buy that stuff anymore. And this poses an immediate and very tangible problem for those who bought them: they have to write down the loss of value for the stuff they already own. That's hundreds of billions of dollars of value evaporating, because that value only existed if these things were really scarce, which they aren't. Oops. 3/
@gabrielesvelto it’s like DeBeers manufacturing diamond scarcity by hoarding, when there is an actual abundance.
Which brings to another very thorny topic: mark-to-market accounting. Let's say you buy something worth 1 billion $, say DRAM, that's 1 billion $ of assets on your balance. But let's say that the next year the price of that stuff goes up by 100%, what are you going to do? The prudent choice is to leave that asset at the value you paid it for, in case it comes down later. And then there's the choice of changing the value of that asset to account for the increase in price, that's mark-to-market accounting. Enron became famous for this, I guess you can see why. 4/
I don't know if hyperscalers did it, but given everybody involved in the AI bubble has been reckless and dishonest my guess is that it's highly probable they did. It's also considered a generally accepted accounting practice (GAAP) these days. Anyway, if they did it it means that when the prices of this mountain of hardware come down the companies owning it will have to do gigantic write downs on their balance sheets, booking huge losses, much larger than if they hadn't. 5/
But wait, it's worse than this because none of these companies had the money needed to buy this hardware. They either used venture capitals or made loans. Hundreds of billions of loans. And what does a company use as the collateral for a loan? Its own assets, right? Like GPUs. And memory. And the datacenters they're in. Which all of a sudden are losing value. And what do you call a loan whose collateral is insufficient to cover it? An underwater loan. And what does it cause? A margin call: the debtor must either deposit cash or provide a different collateral to compensate. I guess you already know where this is going. 6/
Let's start with the oversupply and what that means for everybody involved. Whether it's traditional players like Google or new entries like CoreWeave every single company in the tech sector has been buying an increasing amount of hardware at increasingly steep prices. GPUs, memory, servers, power supplies, and the prices went up and up and up. Now when a company does that, it looks neutral on their balance sheet, because the money they spend is compensated by now having an asset of the same value. Then over the following years they write down that value in what is called depreciation, this is visible as an expense on their balance. 2/