Based on recent rumblings about AI scaling hitting a wall, of which this article is perhaps the most visible - and in a high-reach financial publication, I'm considering increasing my estimated probability we might see a major market correction next year (and possibly even a bubble collapse). (example: "CONFIRMED: LLMs have indeed reached a point of diminishing returns" https://garymarcus.substack.com/p/confirmed-llms-have-indeed...).

To be clear, I don't think a near-term bubble collapse is likely but I'm going from 3% to maybe ~10%. Also, this doesn't mean I doubt there's real long-term value to be delivered or money to be made in AI solutions. I'm thinking specifically about those who've been speculatively funding the massive build out of data centers, energy and GPU supply expecting near-term demand to continue scaling at the recent unprecedented rates. My understanding is much of this is being funded in advance of actual end-user demand at these elevated levels and it is being funded either by VC money or debt by parties who could struggle to come up with the cash to pay for what they've ordered if either user demand or their equity value doesn't continue scaling as expected.

Admittedly this scenario assumes that these investment commitments are sufficiently speculative and over-committed to create bubble dynamics and tipping points. The hypothesis goes like this: the money sources who've over-committed to lock up scarce future supply in the expectation it will earn outsize returns have already started seeing these warning signs of efficiency and/or progress rates slowing which are now hitting mainstream media. Thus it's possible there is already a quiet collapse beginning wherein the largest AI data center GPU purchasers might start trying to postpone future delivery schedules and may soon start trying to downsize or even cancel existing commitments or try to offload some of their future capacity via sub-leasing it out before it even arrives, etc. Being a dynamic market, this could trigger a rapidly snowballing avalanche of falling prices for next-year AI compute (which is already bought and sold as a commodity like pork belly futures).

Notably, there are now rumors claiming some of the largest players don't currently have the cash to pay for what they've already committed to for future delivery. They were making calculated bets they'd be able to raise or borrow that capital before payments were due. Except if expectation begins to turn downward, fresh investors will be scarce and banks will reprice a GPU's value as loan collateral down to pennies on the dollar (shades of the 2009 financial crisis where the collateral value of residential real estate assets was marked down). As in most bubbles, cheap credit is the fuel driving growth and that credit can get more expensive very quickly - which can in turn trigger exponential contagion effects causing the bubble to pop. A very different kind of "Foom" than many AI financial speculators were betting on! :-)

So... in theory, under this scenario sometime next year NVidia/TSMC and other top-of-supply-chain companies could find themselves with excess inventories of advanced node wafers because a significant portion of their orders were from parties who no longer have access to the cheap capital to pay for them. And trying to sue so many customers for breach can take a long time and, in a large enough sector collapse, be only marginally successful in recouping much actual cash.

I'd be interested in hearing counter-arguments (or support) for the impossibility (or likelihood) of such a scenario.