I Know When the Bubble Pops. My AI “Aha Moment.”

 

UNFTR Weekly Roundup

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Economies of Scale The most convincing argument against the AI economy that I’ve heard (and there are many) is that it breaks a fundamental economic law. Economies of scale. AI boosters have long said that the technology is in its infancy and will only continue to improve rapidly over time.   Moore’s Law, check.   Many industry leaders such as Sam Altman and Dario Amodei are beginning to reverse their claims that AI will displace the vast majority of jobs, and instead be closer to prior technological revolutions that created new opportunities at an even pace to displaced legacy roles.   Creative destruction, check.   But none of this compensates for the fact that for AI to improve and to create said opportunities, the cost structure over time grows commensurate with the technology. In other words, AI cannot deliver economies of scale. And this is a very big problem. The theory behind this is pretty straightforward. The larger the system, the more efficient it becomes to produce through a combination of buying power, distribution of unit costs and productivity that results from division of labor. The problem facing AI is that none of these factors are assumed under a core growth model. The bigger AI technology gets, the more expensive it is to produce. The fundamentals are completely upside down.   A lot of comparisons are drawn to the development of the internet. Massive investments into laying fiber and launching satellites didn’t pan out for the government and companies who made the primary investments. But as the internet matured, adoption increased and economies of scale took hold. In the internet economy of today we are all the beneficiaries of large scale government and corporate capital investments. It’s why the internet was compared to telecommunications, which was itself compared to the railroads before it. The first one in (usually the government) loses big. Second, loses less big. By the third, fourth and fifth generation of capital the whole thing kind of evens out then everyone gets paid back by the public equity markets.   Perhaps the most honest statement ever uttered by an OpenAI executive was when CFO Sarah Friar suggested that some sort of government backstop might eventually be part of the funding mix. Wall Street saw “backstop” for what it was: bailout. This quickly prompted founder Sam Altman to make the rounds online and on television to dismiss the idea. But if we think about the capital situation logically, this is what would need to happen to make this technology widely available, useful and affordable.   We’ve said for some time that AI was a lose-lose proposition absent government intervention. First off, in a world where the potential of AI is fully realized in the manner described by its progenitors, half of the country becomes unemployed. Their response to this has typically been that this is a net positive for society because productivity will itself boost GDP, leaving so very many of us with more time to write, garden, paint and generally fuck around. The implication being that we’ll all have a form of Universal Basic Income (UBI). Andrew Yang will be president and everything will be just fine.   Of course, no one stopped to think about what becomes of the people who perform non-technical services in this economy. If the UBI is enough for white collar unemployed people to live the life of Riley, then why wouldn’t everyone else just quit their jobs? And, of course, if the productive economy is fully automated and being run by agents developed by private firms, then all of the gains go to the corporate owners of the technology. Since corporations are taxed far less than individuals (percentage-wise and in absolute terms) then less money flows back into the government, which would necessitate an expansion of the domestic money supply. This would devalue the dollar and invite inflation and on and on and on. So, no. This isn’t well thought out.   But the bigger and more immediate issue is that under the same scenario of “success” we simply aren’t built to actualize it. As in, we don’t have the infrastructure to support the data center electricity and water needs required to guarantee adoption at a level to achieve economies of scale. Even in an “all things being equal” scenario where fossil fuel inputs are cheap (they’re not) and endlessly abundant (also not a thing), our electric grid and water distribution systems aren’t built to manage much more than we already have. And what we already have is producing some pretty bad economics.   Now factor in the fact that our fractured and aging energy grid runs almost entirely on inputs that are subject to massive price swings due to things like, I don’t know…a war in Iran, and the whole cost structure becomes a bit more tenuous. Of course, these centers also require a massive amount of both space and water. The problem here is that the areas with a lot of space don’t have enough water. And the places with water have a lot of people that need it to survive. Quite a conundrum.   If we really thought that AI was transformational in the way railroads, telecommunications and the internet were to the economy, then we would have gone about it in reverse. The grid would be modernized and upgraded to incorporate a wave of massive renewable and nuclear energy projects in largely unpopulated areas. They would be cooled by desalination plants and overbuilt to accommodate next generation chips and GPUs. As the older plants reached their useful lives, they would be recommissioned for the next generation and continue in this pattern. Data centers would be under strict regulatory supervision by a committee with representation from the departments of commerce, interior and energy and brought online gradually over several decades to allow enough time to turn over the labor market as the economy evolved. The regulatory framework would have strict prohibitions against military use cases and privacy and deepfake laws would be airtight.   And even this magical thinking scenario rests on the assumption that we have a clear understanding of what the fuck AI is even good for. (Still waiting for a clear answer on that one.) Don’t get me wrong, it’s neat. Does some stuff faster. Makes other things easier. But the industry has yet to pinpoint that one specific instance of clarity that shows us a different, better future. Saying that everything will just “get better and faster” doesn’t cut it.   It’s little wonder that AI is taking off during the age of Trump. The entire thing is propped up by “trust me, it’ll work out.” It’s all about the next press release and next FOMO investment opportunity. This year it’s the trio of IPOs—Anthropic, OpenAI and SpaceX—and I’m guessing this will be the last big puff into the bubble. None of these companies have revenue to support the outrageous valuations being floated. The one thing they all have in common, however, is a tremendous amount of early capital investments by major funders who stand to get it all back if all goes well.   With the exception of Elon Musk (see the KLTW) the early money investors need a huge opening, a flood of retail investors to ride the post-offering wave, and a sustained level of trading volume for the first year. And you can bet that as soon as their respective lockup periods end, they’ll head for the exits like rats on a sinking ship. That, my friends, is the real bailout. Not for the offering companies, they’re fairly well fucked. But for the early capital investors. Why wait for the government to make them whole with taxpayer money when they can just siphon it directly from your pension, 401(k) and Robinhood accounts?   Now that is market efficiency. But it ain’t economies of scale.

Other things I’m obsessing over… Obsession and Backrooms, the Barbenheimer of horror movies in 2026. Our family took both in over the past week (youngest got us hooked on horror) and they did not disappoint. The fact that these are twenty-something filmmakers is astounding. Backrooms, fascinating. Obsession, genuinely fucking terrifying. The top comment on this video about Bob Caro still working on the final installment in his biography series on LBJ says it all. “Please god let this man finish this book.” I’m genuinely confounded by the coverage of Graham Platner. And by Platner himself. His stump speeches and interviews are finely tuned to progressive ears. His military past, revelations of sexting with others earlier in his marriage, the Nazi tattoo, the misogynistic reddit posts. This guy is out there in a way we don’t normally see. He’s not Fetterman, which has been the concern, but the fact is he’s problematic. And he’s what we got. Scott Bessent continues to demonstrate his antipathy toward the working poor. During a recent press conference where he was pushing for Congress to approve a $250 bill with Trump’s face on it, he called a reporter’s question about dwindling household savings a “doomer view,” saying maybe Americans are so excited about their stock market gains that they’re comfortable spending their savings. To salvage his crumbling empire and ego, Ben Shapiro has taken to buying views in a ridiculously obvious pattern. Here’s how easy it is to spot. Go to his channel. Look for the recent videos that have more than 500k views. Click on any one of them and check out the number of likes and comments. He is 10X purchasing views and forgetting to pay the bot farms to also like and comment. For someone who built The Daily Wire on purchased views from private equity funding, he should be better at this by now. Please check out the new piece on UNFTR.com written by our beloved Unf*cker, Bobby McD. Bobby was inspired by our three-step plan to save Cuba from Donald Trump, so he turned in a brilliant and truly funny work of fiction. Now only if we could make it reality. -Max

Killer Left Take of the Week

KLTW goes to More Perfect Union for reporting on a story that has me utterly speechless. Elon Musk is in the process of pulling off his biggest grift yet with the proposed SpaceX IPO. There’s plenty of coverage out there about the financials, the potential upside, and what this means for his personal wealth (a lot), along with speculation about whether he’ll fold Tesla into the deal down the road to create the world’s most valuable company. But this is the first reporting I’ve seen that clearly details how Musk is not only engineering a personal windfall, but he is doing so by rigging the game in a way I didn’t know was possible. The guy literally changed the rules of how NASDAQ lists companies. Maybe he is smart after all.   Watch: We Uncovered a Hidden Wealth Transfer in the SpaceX IPO. You’re Holding the Bag.

Chart of the Week

Actual Growth or Price Hedge? The recent ISM data showed a surprising uptick in manufacturing activity. And this time it’s pretty widespread, as opposed to previous indicators that seemed to show activity was limited to data center construction.

Source: ISM   Money continues to course through the economy, and it’s lifting the indicators in manufacturing. Attempting to pin down why exactly the figures are improving now is proving somewhat tricky. As Bloomberg notes, “The measure has now signaled expansion for five straight months, pointing to renewed vigor in the manufacturing sector amid a surge in artificial intelligence investment, more favorable tax provisions and diminished trade policy uncertainty.”   That’s one side, but the article continues saying, “Part of that strength may also reflect customers trying to  stockpile merchandise in an effort to front-run future price hikes.”

Most of the inputs point to a marginal uptick in activity, except for the price index, which is the biggest outlier. Despite the very recent downward trend in spot oil, which most observers don’t expect to hold, the fact is that prices have been increasing for all raw materials and are expected to continue this pattern. This is what gives more weight to the notion that a broad swath of the industrial economy is frontloading inventory again. This will be a crucial pattern to observe in the coming months.

Headlines

Who’s Left Is Way More Interesting A slew of artists have dropped out of the kickoff to America’s 250th celebration including Martina McBride and Young MC, who both claimed that the event was supposed to be non-partisan but now feels like a bait-and-switch job. Don’t worry, America. We still have Vanilla Ice, half of Milli Vanilli and one of the “Cs” from C&C Music Factory. Also of note, the agent of most of the remaining members is a guy named Jeff Epstein and, no, I’m not making that up. The president’s response to all of it was pretty normal (below) as one might imagine.   From the article: “‘We should have a giant MAKE AMERICA GREAT AGAIN RALLY, for 250, instead of having overpriced singers, who nobody wants to hear, whose music is boring, and yet who do nothing but complain,’ he posted later Saturday, adding, ‘Cancel it.’”   CNN: Artists are bailing on a Trump-backed concert series for America’s 250th. Now he’s hosting his own ceremony   IPOs Bring an AI About Face on Jobs As discussed in Max Notes, the principals of AI are now backing off their predictions of the AI job apocalypse. Another way to state this would be, “AI isn’t as good as our fundraising activities would lead you to believe. Sorry we gobbled up all of the available capital on Wall Street that would have gone into research and development. Please don’t let that influence your decision to buy our stock now that we’re racing to go public before everyone realizes what these statements really mean.”   From the article: “‘I thought there would have been more impact on entry-level white-collar jobs being eliminated by now than has actually happened,’ Altman said. ‘I now think I understand more about why it hasn’t, and I’m obviously grateful, but that is an area where my intuitions were just off.’ Altman went on to explain that the ‘human part’ of employment could not be replaced by AI, and that people care about interacting with each other at work.”   Time: Sam Altman Says AI ‘Jobs Apocalypse’ He Once Predicted Probably Won’t Happen.   Boxed in up North The trade pressures have reached critical mass in the Canadian economy. The Iran war is compounding the negative impact of the reckless U.S. tariff regime and suppressing growth. The Canadian central bank already has relatively low rates so Carney has chosen to double down on investments into oil and gas and mining. Unfortunate and predictable. The end of Trump’s term can’t come fast enough for any of us.   From the article: “The surprise decline in the first quarter stands in contrast with forecasters’ expectations. Economists surveyed by Bloomberg were anticipating a 1.5% annualized increase in the first quarter, aligning with the Bank of Canada’s projection.”   Bloomberg: Canada Dips Into Technical Recession for First Time Since 2020

Resources

Pod Love “Finkelstein joins Current Affairs editor-in-chief Nathan J. Robinson to discuss Israel’s plan to make Gaza unlivable, the racism of Israeli society, Tony Blair and Trump’s colonial ‘Board of Peace,’ why he refuses to condemn Hamas, and why he argues that governments, human rights organizations, and international legal authorities have helped enable the Gaza genocide.”   Current Affairs Podcast: Norman Finkelstein on the Insane Racism of Israeli Society and the Plan to Erase Gaza   Book Love We still have catching up to do so thankfully we’re still getting great recommendations from well-read Unf*ckers.   Check Out the Unf*cker Recommendations   Unf*cker Comment of the Week From @rogerhouptjr154: “Take your TDS and put it where the sun does and shine.”

Progressive Corner

Progressive Organization of the Week: Animal Equality.   “Animal Equality is an international organization working with society, governments, and companies to end cruelty to farmed animals. It is guided by compassion, determination, and effectiveness, committed to saving as many animals as possible and reducing the enormous suffering animals endure on factory farms.”   Check Out the UNFTR Directory of Progressive Resources for More

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