The current situation bears structural similarities to three major accounting frauds: Enron (2001), WorldCom (2002), and Lucent Technologies (2000).
Lucent, once America’s largest telecommunications equipment manufacturer, grew revenue through vendor financing arrangements. The company lent money to telecom carriers to purchase Lucent equipment, booking the equipment sales as revenue while the loans appeared as receivables. When carriers couldn’t repay, Lucent took $8.7 billion in writeoffs.
Lucent’s DSO peaked at 64 days before the fraud became public. Nvidia’s current 53-day DSO remains below that threshold but exceeds its historical baseline by the same percentage that preceded Lucent’s collapse.
Enron used Special Purpose Entities to hide debt and inflate revenue. These entities existed as legally separate companies but were economically controlled by Enron. The structure created artificial revenue through transactions with entities Enron itself funded.
The xAI SPV structure mirrors this approach. Nvidia provides equity capital to an entity that exists primarily to purchase Nvidia products. The transaction appears as an arms-length sale in Nvidia’s accounting, but economically, Nvidia is funding its own revenue.
This bubble will pop because the profits won’t come close to what is needed. They’re betting the house on developing agi with models that are completely unsuitable for that purpose. Even their redefined agi they most likely won’t reach. Basing agi on llm is fundamentally unsound, therefore can’t live up to the hype and won’t get the record adaptation required for profitability.
The arabs can pump all their fossil fuel money into this and keep the development going for much longer than it should, but even they will want to see returns at one point.
I wish you were right, but ponder the last point - do they really want returns ? For the oligarchy it’s just about maintaining power, arabs bought crazily expensive us fighter jets for years with zero ‘returns’, except political favours. In this case datacenters also support fossil demand expansion narratives. Has anybody done the math of the scale of those ‘reserves’, compared to the bubble ?
Some portion of their investment is strategic, and may earn non-monetary returns that they would rather have than money.
But they do still need some of their investments to actually return money. Saudi Arabia’s sovereign wealth fund might not be doing too hot right now, and has almost all of its cash tied up in illiquid investments (some of which appear to be at risk of going bad).
They’ve been quietly trying to unload some of their more liquid assets, and outsiders (and some reporters who claim insider access) say it’s because they’re running low on cash.
If that happens while oil prices remain low (or while they lose market share from artificially lowering their own production) they might not be able to afford to ride out these investments long enough to actually see a return. The whole thing looks financially fragile, and governments can only prop up bad businesses for so long.