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Hello friends, welcome to the Current Affairs Teacher YouTube channel. Nowadays we are hearing the same word everywhere. AI means Artificial Intelligence. Everyone is saying that AI will change the world. The shares of companies are rocketing and there is an atmosphere of tremendous excitement in the market.
But when the whole world is running blindly in one direction, then a person from Wall Street comes forward who forces everyone to stop and think. We're talking about Michael Berry. This is the same investor who accurately predicted the biggest US housing crash of 2008 and on whom the famous Hollywood film The Big Shot was made.
Michael Burry has now issued a major red alert regarding the AI revolution. He says that the AI bubble that is swelling in the market may burst much earlier than people expect. Why does Michael Burry feel this way? What is happening at tech companies that the general public cannot see ? And if this bubble really bursts, what impact will it have on your and our pockets?
In today's video we will do a very easy and unbiased analysis of all these questions. So stay tuned till the end. Let us first understand what the latest development is and why this news has suddenly become so much discussed. Michael Burry has previously been skeptical about AI. But his initial estimate was that any major reversal or correction in this trend would come around 2028.
That means, according to him, the market still had 2 to 3 years of time. But now, looking at the recent developments and data, he has pushed his timeline forward. He says that this decline of AI will not stop by 2028 but may knock much before that. Not only this, he has taken another big step. They have abandoned simple short selling and turned to put options.
This simply means that he is betting on a huge downside in a short period of time. Let me make one thing clear here. This is Michael Burry's own market analysis and mathematical thinking. There are no guaranteed predictions. But when history's greatest bearish forecaster changes his timeline, his arguments are listened to very seriously by major fund managers around the world.
Let us know why this is so. For those who are not aware of Michael Burry's background, it is important to know that he is not a typical social media influencer or YouTube analyst. He is the founder of Skin Asset Management, a hatch fund. Between 2005 and 2007, when big American banks, be it Lehman Brothers or Merrill Lynch, were assuming that the real estate and home loan market could never collapse.
Then Michael Burry sat alone and scrutinized thousands of pages of loan data. He found that the entire system rested on a hollow foundation. They built billions of dollars of bearish positions against the entire system. At that time people called him mad. But when the entire US banking system collapsed in 2008, Burry and his investors made huge profits.
Michael Burry's investment style is what we call contrarian investing. That means when the whole world is running in one direction, he stops and looks at the ground reality. He relies on company valuations, real balance sheets and real cash flows, not market dynamics. Yes, it is also true that he has talked about recession many times before, even at the wrong time.
Because correctly predicting one major crash does n't mean you'll be right every time. But it is important for every sensible person to understand the logic behind the warning given by them. Now let's talk about the financial weapon that Bari is using this time. That is, put options. It is very easy to understand it in common parlance.
Suppose you suspect that the price of something in the market is going to fall sharply. A put option is a type of financial contract or downside insurance. This buyer has the right to sell the shares at a fixed price at a future date. If that stock falls to the ground, the person who bought the put option makes huge profits.
Now the question is why did Michael Burry choose put options instead of straight short selling? The answer is leverage and capital efficiency. If you do a simple short, you have to keep a huge amount of capital tied up. But in put options you have to pay only a limited premium. This means that by investing less money, you can take advantage of huge falling profits.
But friends, there is a huge risk involved in this. If the prices of those shares do not fall within the stipulated expiry time, then that option contract becomes completely worthless and the entire premium invested is lost. This means that Michael Burry not only believes these stocks will fall, but he also believes this decline will happen very quickly.
Now let us come to the most important slide of this entire analysis. Why is Michael Burry saying this? What is their math saying ? Understand this with a simple equation. Reckless spending vs. real earnings, i.e., AI revenue vs. AI capex. The biggest tech companies in the world today are what we call hyperscalers.
Like Google, Microsoft, Meta, Amazon, they have opened their treasures in the name of AI. In corporate language it is called Capex i.e. Capital Expenditure. These companies are buying advanced graphics chips worth crores. They are building huge data centers and signing huge power contracts. Here, Barry has made a very subtle point, citing research from Areas Management.
He says that this huge expenditure on infrastructure can be justified only if the customers are paying the same amount for the AI tools upfront. What is the situation today? Tech companies are spending billions of dollars to train models. But the actual revenue or profit coming from those models is still very small compared to this huge expenditure.
Burry argues that the entire AI industry does n't need to be ruined to break this cycle. If earnings fall short of expectations even in just one or two quarters, the company's board of directors will immediately become alert. He will say that's enough. Now stop this data center expansion and invest this money in a business that generates real cash flow immediately.
Now you will think that if tech companies reduce their expenses even a little, then how will it create a stir in the entire market. This is called domino effect which we can understand in these four steps. The first stage is heavy investment i.e. heavy capex. When tech companies place billions of dollars worth of orders for chips and servers, expectations across the supply chain skyrocket.
The second stage is the earnings test i.e. revenue test. Now is the time to show investors whether the general public and companies are ready to buy these expensive AI software. The third step is capital relocation. As soon as there is even a slight decrease in revenue. Companies will slow or cancel their orders for new chips and data centers.
The fourth stage is market-wide repricing, and this is where the real shock begins. If big companies reduce the purchase of chips, the profits of chip manufacturers will fall. Shares of server manufacturing companies will fall and the entire stock market, which was dependent on the growth of these tech stocks, will start sliding rapidly downwards.
Now to understand this warning, Michael Burry has given the example of two biggest financial shocks in history. The crash of 1987 and the dot bubble of 2000. First let's talk about 1987. October 19, 1987, which is known as Black Monday in history. The duu js index fell by almost 23% in that single day.
Even at that time, there was tremendous leverage in the market. Computer-based automated trading was going on and as soon as a little fear spread, the entire system collapsed in a single day. There are strong warnings that the kind of leverage that exists in options and tech trends today could lead to a similar sudden shock.
And another example is the .com crash of 2000. At that time the internet was new. Companies were laying optical fiber cables thousands of kilometers long. Servers were being set up and people thought the Internet would change everything overnight. The Internet definitely changed the world. But at that time, excessive infrastructure was built in a very short time.
Due to which hundreds of companies went bankrupt. Understand one thing very clearly here. Badi is not saying at all that history will repeat itself exactly. But history definitely teaches us this lesson. No matter how revolutionary the technology is. If the valuations of companies are disconnected from ground realities, then the gravity of the market pulls them down mercilessly one day.
Often a common man thinks that I do not trade in the stock market nor do I buy any AI software, so what do I have to do with all this ? Friends, this is the biggest misconception. AI is no longer just a matter of computer screens or Silicon Valley. Today, the data centers being built to run AI require huge amounts of electricity to run.
For this, work is being done on new power plants. Transmission lines are being laid. There is a huge demand for copper and cooling systems. That means today's real estate, power sector, construction and semiconductor sectors all depend on huge investment in AI. Michael Burry believes that a large part of the GDP growth of the US and global economy in the last one or two years has been driven by this AI infrastructure.
If this capex stops tomorrow, it will not only impact tech engineers but will also have a direct impact on power companies, infrastructure firms, hardware suppliers and ultimately jobs. As an unbiased analyst, it is our duty not only to talk about fear but also to look at the other side of the coin.
How can this analysis by Michael Burry be proven wrong? It also has three very strong bases. The first is the rapid pace of AI adoption. It is possible that companies and ordinary consumers will adopt AI tools faster than expected. If companies selling software start earning twice the expected revenue, then all this huge expenditure will automatically prove justified.
The second is the delayed surge in productivity. History shows that when electricity or computers came, the productivity of factories did not increase immediately. It took 5 to 10 years. The same is true with AI, but the real financial benefits may be visible in the next few years. The third and biggest reason is the huge cash reserves of tech companies.
In the dot bubble of 2000, companies went into debt. But today's companies, be it Microsoft, Google or Apple, have $0 billion worth of cash stashed in their vaults. Even if these companies continue investing at a loss for two or three years, they will not go bankrupt. And always remember an old rule of the stock market.
The market may remain irrational for much longer than you expect. Now let's talk about the most important question. What impact can this have on our country India ? We have to look at this from two perspectives. First is risk and second is opportunity. First, the risk of market sentiment. Today the world's financial markets are deeply interconnected.
If there is a major fall or panic selling in US tech stocks, then foreign institutional investors (FIIs) start withdrawing money from emerging markets. The direct pressure of which can be seen on our broker state and Indian IT stocks. Second is a huge opportunity for India. If tech companies focus on preventing reckless spending and cost optimization, they will look for partners who can develop excellent AI solutions at low cost.
India has the largest tech talent pool in the world. We have excellent digital infrastructure and our IT companies are adept at implementing practical enterprise AI. That is, while on one hand there may be fluctuations in the stock market in the short term, in the long term it can also become a big opportunity for a talent-rich economy like India.
So friends, if we extract the essence of today's entire analysis, then three things are absolutely clear. The first is that Michael Burry has moved his timeline forward and placed an aggressive bearish bet via put options. Second, his warning is not that AI technology doesn't work. His warning is based on the financial mathematics of whether the expenditure of billions of dollars is yielding profits accordingly or not.
Third, whenever a new revolution comes in the market, a huge hype is created first. Then a correction comes and in the end only those companies survive which have a real business model. Therefore, as a common citizen and investor, instead of getting carried away by any social media hype, we should keep an eye on the ground reality, actual profits and financial discipline of the companies.
What is your opinion on this subject ? Do you think Michael Burry's prediction will prove correct? Or this growth of AI will continue for many years to come. Please share your opinion in the comment section below. If you liked this simple yet detailed analysis, please like this video and share it with your friends and family so that they can also understand this major market development.
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