In Adam McKay’s 2015 Oscar-winning film, The Big Short, Christian Bale portrays Michael Burry, the offbeat hedge-fund manager who first spots cracks in the US subprime mortgage bubble.
asserted
who → win → bubble
Burry is a well-known contrarian investor, nicknamed “Cassandra” by Warren Buffett for his oft-ignored warnings about lesser-spotted problems buried in the financial system.
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Burry → know → system
Now Burry has a new target in his sights: a $US3 trillion ($4.3 trillion) bill he says is being hidden by AI companies which threatens to wreck the global economy.
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which → have → economy
In a recent essay, Burry dug deep into the arcane filings made by Big Tech to regulators to uncover a string of data centre debts he said risks popping the AI bubble.
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he → dig → bubble
Apple, Google owner Alphabet, Microsoft, Meta and Oracle have ploughed enormous sums into building data centres crucial for the adoption of AI.
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Apple → plough → AI
But Burry poses a simple question: what if the AI excitement fails to live up to expectations?
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excitement → pose → expectations
What if all the spending – most of it fuelled with debt – is overblown?
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most → fuel → debt
The risk here for all of this is what happens when the music stops.’Michael Burry
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music → happen → this
Being forced to write down such a massive investment would deliver a huge blow to the profits of these companies, which have a combined valuation of about $US13 trillion.
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which → force → trillion
Yet in a worrying sign for investors, Burry’s analysis suggests these companies are on the hook for far more.
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companies → suggest → more
To make matters worse, he shows how the AI companies have kept these commitments off their balance sheets under controversial accounting rules.
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companies → make → rules
“A company can sign a non-cancellable 20-year data centre lease, disclose it in a footnote, and carry nothing on the balance sheet until the keys turn and the data centre boots up,” Burry says.
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Burry → sign → sheet
This has allowed these five AI giants to sign $US1.2 trillion of leases on future data centres – of which at least $US857 billion is non-cancellable – but keep those liabilities off their balance sheets.
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billion → allow → sheets
Similarly, the group has made more than $US1.5 trillion worth of promises to pay for items in the supply chain, known as purchase commitments.
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group → make → commitments
These do not appear on their balance sheets either but are shown in regulatory filings.
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These → appear → filings
Add in some various special purpose vehicles, guarantees and other items and the total worth of their off-balance-sheet obligations climbs above $US3 trillion.
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worth → add → trillion
Burry says the pace of growth suggests this figure could reach $US5 trillion by 2028.
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figure → say → 2028
“Let’s also remember this past year, the combined earnings of the big five are less than $US400 billion,” he says.
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he → remember → five
The risk here for all of this is what happens when the music stops.”
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music → happen → this
Such fears have started to take the gloss off the “magnificent seven” US tech stocks, with Oracle, Microsoft and Meta all falling from their stockmarket peaks in recent weeks.
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Oracle → start → weeks
“The core argument is whether all of the spending by hyperscalers can generate the necessary return on invested capital to justify it,” says Ross Mayfield, an investment strategist at US-based Baird.
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Mayfield → generate → Baird
“It’s a fair argument, and one that is reflected in both the magnificent seven and Oracle’s underperformance in 2026.
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that → ’ → 2026
‘Once that off-balance-sheet debt comes on, the interest expense and the amortisation and depreciation charges start to explode for these companies.
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expense → come → companies
Julian Klement, an analyst at UK-based Panmure Liberum, says that even if demand for AI does live up to the hype, the effect on the hyperscaler balance sheets of these commitments will be huge.
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effect → base → commitments
“Once that off-balance-sheet debt comes on, the interest expense and the amortisation and depreciation charges start to explode for these companies,” Klement says.
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Klement → come → companies
“Once these data centres become revenue-generating in the next two years or so, this off-balance-sheet debt will have to come onto the balance sheet and will have to be serviced, including paying interest and amortising the assets acquired with this debt.”
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debt → become → debt
The five hyperscalers picked out by Burry are also showing other signs of strain.
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hyperscalers → pick → strain
Oracle this week attempted to declare “force majeure” on a massive data centre project in New Mexico, a legal protection designed to shield parties from events that prevent them from fulfilling a contractual obligation.
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that → attempt → obligation
In the past, there have also been examples of what has happened when the “music stopped” on major investments by tech companies.
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music → happen → companies
Meta took a $US5 billion impairment on its 2022 results when it concluded it had leased too much office space after COVID.
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it → take → COVID
The same could happen with AI data centres.
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same → happen → centres
Too little demand will lead to an oversupply of capacity.
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demand → lead → capacity
As Burry says: “Data centres, when they are not needed, will be written down.
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they → say → ?
So what if the worst happens and these massive AI investments are, at least partially, written off?
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investments → happen → ?
“There will be a fairly large hit to their earnings,” says Chris Clothier, the co-chief investment officer at London-based CG Asset Management.
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Clothier → say → Management
“Let’s say that we get halfway or all the way through this monumental capex build out, trillions and trillions of dollars spent.
“Most of it has been financed with debt.
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Most → let → debt
Then all of a sudden we see that the revenues aren’t going to be there to generate reasonable returns on those investments.
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revenues → see → investments
“The next thing that’s going to happen is that the valuations of the frontier AI labs, OpenAI and Anthropic, are going to collapse, whether publicly or privately.
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valuations → go → labs
“And then on top of that, you’re then required to bring a bunch of liabilities that are currently off balance sheet onto the balance sheet.”
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that → require → sheet
In response, Klement expects more accounting tricks from the AI hyperscalers.
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Klement → expect → hyperscalers
…and 11 more, not listed.
The Aporia
