This piece features investor Modest Proposal, who warns that the current AI infrastructure boom (chips, data centers) mirrors the 2000s commodity cycle: a shortage leads to overinvestment, then a glut. He's cautious on NVIDIA long-term, noting its high profits will attract rivals. He also highlights GLP-1 drugs (like Novo Nordisk's Ozempic) as economically huge but limited by patient adherence. He's bullish on Japanese stocks due to corporate reforms pushing buybacks.
At a Glance Modest Proposal discussed AI commoditization and capital dynamics on the Invest Like the Best podcast. The core argument: the current AI investment boom resembles the mid-2000s commodity market, carrying risks of overbuilding. NVIDIA benefits from surging AI computing demand, but open-so
Modest Proposal (anonymous public and private market investor) discusses with Patrick O'Shaughnessy the AI investment frenzy, post-pandemic capital cycles, and the economic impact of GLP-1 drugs. Core judgment: The current AI infrastructure investment boom is replaying the classic capital cycle of the mid-2000s commodity market—"shortage inevitably leads to surplus"—yet the market continues to assign permanent valuation multiples to "temporary surpluses."
Modest Proposal argues that the current surge in AI computing demand closely mirrors the commodity market dynamics following China's WTO accession in the mid-2000s.
Historical Context: In the mid-2000s, China rapidly transitioned from a marginal player in global trade to the largest consumer of commodities, triggering sharp price spikes in copper, iron ore, and oil. Capital flooded into emerging markets, assigning high multiples to "temporary surpluses" at mining companies. Over the subsequent 3-5 years, a wave of new mines came online, and by 2014, oversupply led to a price collapse—"oil fell from $140 to $80, and the commodity index remains below its peak to this day."
Current Analogy: The AI sector is experiencing the classic scenario of "surge in demand vs. rigid supply":
Key Mechanism: "Putting a multiple on a temporary surplus is essentially capitalizing a long-term cash flow." However, capitalism self-corrects—high prices attract supply, eventually leading to a glut. Modest adds, "I joke that we're smart enough to build AI and AGI, yet can't figure out how to supply power efficiently—the irony is quite something."
Specific Analysis of NVIDIA:
| Dimension | Short-Term (12 Months) | Long-Term (Perpetual Cash Flow) |
|---|---|---|
| What Needs to Be Believed | Frontier labs believe that "a 100x/1,000x/10,000x increase in compute intensity can achieve AGI," thus sustaining large-scale GPU purchases | Can one company become a permanent "bottleneck" node for the five largest companies in history? |
| Risk | Labs' willingness to spend may exceed expectations | There are smart people in every garage thinking about how to run GPU-equivalent tasks more efficiently; some teams have already found ways to run certain functions on CPUs |
| Data | Expected to achieve approximately $200 billion in revenue with 80% gross margins | Such a massive profit pool will inevitably attract a flood of competitors |
> Reader's Note: Modest is a public market investor, and their analysis is framed by a preference for identifying "capital cycle inflection points," not a denial of NVIDIA's business itself.
Modest Proposal argues that a consensus is forming in the investment community — that LLM models are becoming commoditized — but this judgment may be falsified.
Current consensus: Open-source models (e.g., Llama, Mistral) will be "good enough," while frontier models may only serve truly leading applications and fail to transition to AGI. If so, the commoditized model layer will cede enormous value to the application layer.
Counterargument: In the past 10 days, two individuals from OpenAI (one former, one current) have respectively stated that "AGI will arrive within 3-5 years." If frontier models can establish a significant performance advantage, then:
The economic consequences of the two paths are vastly different:
| Scenario | Value Flow | Key Variables |
|---|---|---|
| Open-source models "good enough" | Application layer captures most value | Speed of model commoditization, data gravity (data stays with AWS if it is on AWS) |
| Frontier models significantly ahead | Infrastructure layer (Google, Microsoft) captures most value | Whether general-purpose models can be "good enough to replace everything" |
Current commercialization status: On the revenue side (Microsoft Azure's AI incremental revenue, various software applications), the total amounts to roughly "mid-single-digit billions of dollars"; on the cost-saving side (e.g., the Klarna story), it is also limited. Combined, these "cannot justify the $200 billion in capital expenditure" — but Modest believes this is not unusual during an infrastructure platform transition, drawing an analogy to the "$120 billion fiber optic investment" in the late 1990s.
Modest Proposal argues that the demand distortions caused by COVID are triggering a classic capital cycle across multiple industries—overinvestment followed by overcapacity.
Typical Cases:
1. Transportation & Freight Market: The surge in home consumption during 2020-2021 led to a massive influx of trucking capacity. In May 2022, Target and Walmart announced "inventories are full, stop restocking." Two years later, freight volumes have yet to recover, and capacity oversupply has resulted in "terrible pricing."
2. Beverage Can Industry: Global annual growth had long been 2-3%. During COVID, home consumption drove demand to 10% per year. Capital expenditures at Ball and Crown surged from $600 million and $500 million annually to $1.5 billion each. After the pandemic ended, demand fell, leading to severe overcapacity—"a historically very stable, oligopolistic, and capital-rational market structure was broken."
3. Amazon: "Rebuilt UPS in two years"—its delivery network expanded to the scale of building another UPS, followed by a slowdown in demand that triggered a digestion period.
Investment Implications: "If you can catch the bottom of these capital cycles—after excessive spending, capital expenditure cuts, capital expenditure hitting a trough, and then a new upcycle begins—that is a very interesting entry point." However, Modest cautions: "Freight hasn't reached that point yet; people have been trying to bottom-fish for a year."
Modest Proposal argues that the economic impact of GLP-1 drugs could rival that of AI, but patient adherence remains a key bottleneck.
Economic Potential: "Lifting a large portion of the population out of obesity, diabetes, and long-term care costs—this will free up productive resources in an unprecedented way." However, Modest cites data from Stanford's Burstyn research report, noting:
Key Issue: "Human behavior is very difficult to change, especially when even life-saving drugs have an adherence rate of only three-quarters." Long-term safety data is still being accumulated, but "safety looks tenable for now."
Modest Proposal argues that the excessive flow of institutional capital into private markets has become one of the most distorted phenomena in capital markets.
Data Comparison:
| Metric | Public Markets (Nasdaq 100) | Private Markets |
|---|---|---|
| 10-Year Rolling Return | Approx. 5x MOIC | Even top-tier venture capital funds struggle to consistently achieve 5x MOIC |
| Private Equity IRR | — | Claimed mid-teens IRR, corresponding to approx. 1.6-1.7x MOIC |
| Liquidity | Fully liquid | Locked up for years |
| Leverage | None | 4-6x |
Key Data: "Over the past three years, capital returned to private markets has been approximately $300 billion less than capital deployed." Modest believes the rationale for institutional allocation to private assets has shifted from "optimizing the efficient frontier" to "smoothing returns and avoiding volatility"—"If you actually sit down and do the math, I don't think it's optimal for these pools to allocate 30-45% of their assets to illiquid private markets."
Recommendation for Large Allocators: "For the first time in a long while, bonds have become a genuine option today—the 10-year U.S. Treasury offers a 1-2% real return." The allocation should include: U.S. equities, international developed market equities, some bonds, and a small amount of private assets—but "one must be very clear about why they are investing in private markets."
Modest Proposal believes that the capital management reforms promoted by the Tokyo Stock Exchange may create structural opportunities.
Mechanism: The TSE requires listed companies to submit capital management plans and regularly publishes lists of "submitted/not submitted" companies. Companies that fail to submit face the pressure of "public shaming." Common issues among Japanese companies include:
Risk Note: "Every international investor has been rug-pulled at least twice in their career by Japan's 'this time is different' narrative." However, Modest believes that the reform starts with "the first step" and may bring several years of opportunities for Japanese equities.
| Position | Guest Stance | Key Data |
|---|---|---|
| NVIDIA | Short-term bullish (lab spending willingness), long-term cautious (competitive risk) | Estimated ~$200 billion revenue, 80% gross margin; current P/E ratio around 30x |
| Apple | Neutral (hard to disrupt) | P/E ratio around 30x; "No standalone device has ever beaten the smartphone" |
| Microsoft | Positive (AI beneficiary) | P/E ratio around 30x; Azure AI incremental revenue quantifiable |
| Google/Alphabet | Positive (AI beneficiary) | P/E ratio around 20x |
| Meta | Neutral (proponent of open-source strategy) | Plans to spend ~$40 billion to "quickly follow" AI |
| Amazon | Neutral (post-pandemic capital cycle case) | "Rebuilt UPS within two years" |
| ASML | Positive (choke point) | Cited as a case of "a moat that is hard to disrupt" |
| Ball / Crown | Watch (beverage can capital cycle) | Capital expenditure rising from $600M/$500M to $1.5 billion |
| Novo Nordisk (Ozempic) | Positive (economic potential), cautious (compliance) | Compliance rate may be only 35% |
1. "The market persistently assigns permanent valuation multiples to temporary earnings—this is a confusion I have never been able to understand." —Modest Proposal
2. "NVIDIA's long-term problem is: Can one company become the permanent bottleneck for the five largest companies in history? Someone in every garage is thinking about how to bypass it." —Modest Proposal
3. "Open-source models being 'good enough' vs. frontier models being significantly ahead—the economic consequences of these two paths are vastly different, but the investment community has almost written off the first path." —Modest Proposal
4. "The capital cycle distortions caused by COVID are far broader than I imagined—beverage cans, freight, Amazon's delivery network—every industry is experiencing 'shortage followed by glut.'" —Modest Proposal
5. "The economic impact of GLP-1 could rival AI, but human behavior is the biggest obstacle—even cancer drugs have only a 60-70% adherence rate." —Modest Proposal
6. "The rationale for institutional capital flowing to private markets has shifted from 'optimizing the efficient frontier' to 'smoothing returns and avoiding volatility'—this may be the most distorted phenomenon in capital markets." —Modest Proposal
7. "The Japanese stock market may be a structural opportunity—the TSE is 'shaming' companies into submitting capital management plans, and Japanese companies are generally overcapitalized, with zero buybacks and low dividends." —Modest Proposal
8. "The market structure has changed: the definition of 'small-cap' has shifted from a $1 billion market cap to $15 billion—companies without a story are essentially abandoned below that threshold." —Modest Proposal