Below cost
Kevin Warsh wants to kill inflation. The convenient way would be AI doing the job for him.
The new Fed chair has told markets plainly today that he intends to break inflation, that the Fed missed the job for five years, and will now fix it. The easy way is to believe artificial intelligence will do the job. He may be right about where this ends. What leaked this week just shows how unsustainable the current price of AI actually is.
OpenAI’s revenue is growing about as fast as it can. It is nowhere near covering its costs. Research and development alone – the cost of training the next model – exceeds what the company earns. Nine hundred million people use ChatGPT each week; only a fraction pay, and serving the rest costs money. The product is remarkable. It is also sold below cost for now. That is the real source of the disinflation everyone is celebrating without really seeing it yet, the “structurally disinflationary” miracle the Fed is counting on: a transfer from shareholders to users, funded by losses.
The largest loss-maker of the cycle has chosen this moment to go public.
Activity on the supply side – above all, large IPOs priced at full value – is a more reliable signal of a top than anything on the demand side. Insiders sell to the public when appetite is high, not when it is low (‘feed the ducks while they’re quacking’, as they say). And the signal asks nothing of my view on valuation: I do not need OpenAI’s mark to be wrong. When the marginal loss-maker moves its funding burden off a closed circle of believers and onto the public market, that decision is information, whatever the equity turns out to be worth.
And it arrives in anything but calm. There is a war, a truce that may not hold, and a Strait of Hormuz – through which roughly a fifth of the world’s oil passes – that sits one headline from closing again (assuming it’s currently open).
It is all one position: long the miracle, short the cost of capital, calm in the middle of a war, and now inviting the public to write the cheque. Retail investors are buying calm, and someone is selling it.