The Big Short, Part II?

When it comes to AI, ignore the stock charts — the real story may be in the amortization schedules. Pundits who spent last week watching the red arrows on the Nasdaq (down 2.7% for the week) may have missed the real story: The sell-off was noise, when the signal is in the accounting.

What we’re seeing now is the real-time collision between two fundamental views of the AI economy: The “deployment phase” optimists who see a productivity boom, and “capex realists” (think: Michael Burry) who see (at best) a hole in the balance sheet that revenue cannot (yet?) fill.

The bulls see a deployment dividend on the horizon. The New York Times has recently argued that the “hype cycle” is coming to an end and the “deployment cycle” has begun. The argument: AI is no longer a parlor trick — it’s starting to show up in GDP and output-per-hour data. Bulls claim we’re at the start of a structural shift comparable to electrification or the internet — but happening at 2x the speed.

The evidence: The cost of adoption is stabilizing while the efficiency dividend widens, suggesting the path to profitability is clearer than the market thinks.

The bears see a capex treadmill — and maybe some hinky accounting. There’s a flaw in the Internet 2.0 analogy, and it’s in the physics of the infrastructure. When the Dotcom bubble burst, it left behind mns of km of “dark fiber” — assets with a >20-year useful life that powered the internet for decades at near-zero incremental cost.

The catch: Today’s AI boom is built on silicon, not glass — and GPUs have short lifespans. Unlike fiber, GPUs are depreciating assets with “frontier lifespans” of roughly 3-4 years before energy efficiency gains make them economically obsolete.

The accounting hijinks: Hyperscalers like Microsoft and Google have quietly extended their server depreciation schedules to 5-6 years to protect current earnings. If the hardware becomes obsolete in three years, those earnings are a mirage.

The “re-buy” problem: As Sequoia’s David Cahn noted last year, the industry isn’t just building a railroad — it’s building a railroad where the tracks dissolve every 48 months. To stay in the game, Big Tech must re-spend its capex budget in perpetuity.

Famed contrarian Michael Burry (of The Big Short fame) has reportedly placed a USD 1.1bn wager against Nvidia and Palantir, warning that the sector is sleepwalking into a crash. His argument mirrors the depreciation thesis: He accuses hyperscalers of inflating earnings by artificially extending the “useful life” of their servers — a “depreciation trick” that boosts profits on paper while the hardware rots in reality.

The bottom line: If the Times is right, the revenue arrives just in time to pay for the next generation of chips. If it’s wrong, we aren't looking at a bubble, but at the most expensive depreciation write-down in corporate history.

MARKETS THIS MORNING-

Asian markets are mixed in early trading this morning, with both the Hang Seng and Kospi up 1.1% and the Shanghai Composite down 0.2%. Meanwhile, Japan’s Nikkei is closed in observance of Labor Thanksgiving Day.

THE CLOSING BELL-

The ADX fell 0.9% on Friday on turnover of AED 1.2 bn. The index is up 4% YTD.

In the green: RAK Co. for White Cement & Construction Materials (+5.0%), Agthia Group (+2.9%) and Aram Group (+2.6%).

In the red: Ins. House (-9.8%), ADCB Rights Issue 2025 (-7.2%) and Eshraq Investments (-5.1%).

Over on the DFM, the index fell 1.3% on turnover of AED 525 mn. Meanwhile, Nasdaq Dubai was down 2.0%.