The Brief

Perhaps nobody embodies artificial intelligence mania quite like Jensen Huang, the chief executive of chip behemoth Nvidia, which has seen its value spike 300% in the last two years.

A frothy time for Huang, to be sure, which makes it all the more understandable why his first statement to investors on a recent earnings call was an attempt to deflate bubble fears.

"There's been a lot of talk about an AI bubble," he told shareholders. "From our vantage point, we see something very different."

Take in the AI bubble discourse and something becomes clear: Those who have the most to gain from artificial intelligence spending never slowing are proclaiming that critics who fret about an over-hyped investment frenzy have it all wrong.

"I don't think this is the beginning of a bust cycle," White House AI czar and venture capitalist David Sacks said on his podcast All-In. "I think that we're in a boom. We're in an investment super-cycle."

White House AI adviser David Sacks speaks onstage during The Bitcoin Conference at The Venetian Las Vegas in January.

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"The idea that we're going to have a demand problem five years from now, to me, seems quite absurd," said prominent Silicon Valley investor Ben Horowitz, adding: "if you look at demand and supply and what's going on and multiples against growth, it doesn't look like a bubble at all to me."

Appearing on CNBC, JPMorgan Chase executive Mary Callahan Erdoes said calling the amount of money rushing into AI right now a bubble is "a crazy concept," declaring that "we are on the precipice of a major, major revolution in a way that companies operate."

Yet a look under the hood of what's really going on right now in the AI industry is enough to deliver serious doubt, said Paul Kedrosky, a venture capitalist who is now a research fellow at MIT's Institute for the Digital Economy.

He said there is a startling amount of capital pouring into a "revolution" that remains mostly speculative.

"The technology is very useful, but the pace at which it is improving has more or less ground to a halt," Kedrosky said. "So the notion that the revolution continues with the same drum beat playing for the next five years is sadly mistaken."

The huge infusion of cash

The gusher of money is rushing in at a rate that is stunning to financial experts.

Take OpenAI, the ChatGPT maker that set off the AI race in late 2022. Its CEO Sam Altman has said the company is making $20 billion in revenue a year, and it plans to spend $1.4 trillion on data centers over the next eight years. That growth, of course, would rely on ever-ballooning sales from more and more people and businesses purchasing its AI services.

There is reason to be skeptical. A growing body of research indicates most firms are not seeing chatbots affect their bottom lines, and just 3% of people pay for AI, according to one analysis.

"These models are being hyped up, and we're investing more than we should," said Daron Acemoglu, an economist at MIT, who was awarded the 2024 Nobel Memorial Prize in Economic Sciences.

"I have no doubt that there will be AI technologies that will come out in the next ten years that will add real value and add to productivity, but much of what we hear from the industry now is exaggeration," he said.

Nonetheless, Amazon, Google, Meta and Microsoft are set to collectively sink around $400 billion on AI this year, mostly for funding data centers. Some of the companies are set to devote about 50% of their current cash flow to data center construction.

Or to put it another way: every iPhone user on earth would have to pay more than $250 to pay for that amount of spending. "That's not going to happen," Kedrosky said.

To avoid burning up too much of its cash on hand, big Silicon Valley companies, like Meta and Oracle, are tapping private equity and debt to finance the industry's data center building spree.

Paving the AI future with debt and other risky financing

One assessment, from Goldman Sachs analysts, found that hyperscaler companies — tech firms that have massive cloud and computing capacities — have taken on $121 billion in debt over the past year, a more than 300% uptick from the industry's typical debt load.

Analyst Gil Luria of the D.A. Davidson investment firm, who has been tracking Big Tech's data center boom, said some of the financial maneuvers Silicon Valley is making are structured to keep the appearance of debt off of balance sheets, using what's known as "special purpose vehicles."

An aerial view of a 33 megawatt data center with closed-loop cooling system in Vernon, California.

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The tech firm makes an investment in the data center, outside investors put up most of the cash, then the special purpose vehicle borrows money to buy the chips that are inside the data centers. The tech company gets the benefit of the increased computing capacity but it doesn't weigh down the company's balance sheet with debt.

For example, a special purpose vehicle was recently funded by Wall Street firm Blue Owl Capital and Meta for a data center in Louisiana.

The design of the deal is complicated but it goes something like this: Blue Owl took out a loan for $27 billion for the data center. That debt is backed up by Meta's payments for leasing the facility. Meta essentially has a mortgage on the data center. Meta owns 20% of the entity but gets all of the computing power the data center generates. Because of the financial structure of the deal, the $27 billion loan never shows up on Meta's balance sheet. If the AI bubble bursts and the data center goes dark, Meta will be on the hook to make a multi-billion-dollar payment to Blue Owl for the value of the data center.

Such financial arrangements, according to Luria, have something of a checkered past.

"The term special purpose vehicle came to consciousness about 25 years ago with a little company called Enron," said Luria, referring to the energy company that collapsed in 2001. "What's different now is companies are not hiding it. But having said that, it's not something we should be leaning on to build our future."

Enormous spending hinging on returns that could be a fantasy

Silicon Valley is taking on all this new debt with the assumption that massive new revenues from AI will cover the tab. But again, there is reason for doubt.

Morgan Stanley analysts estimate that Big Tech companies will dish out about $3 trillion on AI infrastructure through 2028, with their own cash flows covering only half of that.

"If the market for artificial intelligence were even to steady in its growth, pretty quickly we will have over-built capacity, and the debt will be worthless, and the financial institutions will lose money," Luria said.

Twenty-five years ago, the original dot-com bubble burst after, among other factors, debt financing built out fiber-optic cables for a future that had not yet arrived, said Luria, a lesson, it appears, tech companies are not worried about repeating.

"If we get to the point after spending hundreds of billions of dollars on data centers that we don't need a few years from now, then we're talking about another financial crisis," he said.

Circular deals raise even more concern

Another aspect of the over-heated AI landscape that is raising eyebrows is the circular nature of investments.

Take a recent $100 billion deal between Nvidia and OpenAI.

Nvidia will pump that amount into OpenAI to bankroll data centers. OpenAI will then fill those facilities with Nvidia's chips. Some analysts say this structure, where Nvidia is essentially subsidizing one of its biggest customers, artificially inflates actual demand for AI.

"The idea is I'm Nvidia and I want OpenAI to buy more of my chips, so I give them money to do it," Kedrosky said. "It's fairly common at a small scale, but it's unusual to see it in the tens and hundreds of billions of dollars," noting that the last time it was prevalent was during the dot-com bubble.

Open AI CEO Sam Altman speaks during Snowflake Summit 2025 at Moscone Center in June.

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Lesser-known companies are getting in on the action, too.

CoreWeave, once a crypto mining startup, pivoted to data center building to ride the AI boom. Major AI companies are turning to CoreWeave to train and run their AI models.

OpenAI has entered deals with CoreWeave worth tens of billions of dollars in which CoreWeave's chip capacity in data centers is rented out to OpenAI in exchange for stock in CoreWeave, and OpenAI, in turn, could use that stock to pay its CoreWeave renting fees.

Nvidia, meanwhile, which also owns part of CoreWeave, has a deal guaranteeing that Nvidia will gobble up any unused data center capacity through 2032.

"The danger," said the MIT economist Acemoglu,"is that these kinds of deals eventually reveal a house of cards."

Some high profile investors see bubble-popping on the horizon

Some influential investors are showing signs of bubble jitters.

Tech billionaire Peter Thiel sold off his entire stake in Nvidia worth around $100 million earlier this month. That came after SoftBank sold a nearly $6 billion stake in Nvidia.

And in recent weeks, AI bubble pessimists have rallied around Michael Burry, the hedge-fund investor who made hundreds of millions of dollars betting against the housing market in 2008. He was the subject of the 2015 film The Big Short. Since then, though, he's had a mixed reputation for market predictions, having warned about imminent collapses that never came to pass.

For what it's worth, Burry is now betting against Nvidia, accusing the AI industry of hiding behind a bunch of fancy accounting tricks. He's homed in the circular deals between companies.

"True end demand is ridiculously small. Almost all customers are funded by their dealers," Burry wrote on X. He later wrote: "OpenAI is the linchpin here. Can anyone name their auditor?"

As tech companies sink billions into data centers, some executives themselves are freely admitting there looks to be some over exuberance.

OpenAI CEO Sam Altman told reporters in August: "Are we in a phase where investors as a whole are overexcited about AI? My opinion is yes. Is AI the most important thing to happen in a very long time? My opinion is also yes."

And Google chief executive Sundar Pichai told the BBC recently that "there are elements of irrationality" in the AI market right now.

Asked how Google would fare if the bubble burst, Pichai responded: "I think no company is going to be immune, including us."

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Doctors and health insurers filed a lawsuit Friday alleging Gov. Gavin Newsom and the Legislature violated the law when they approved a healthcare tax that could substantially increase insurance premiums for Californians.

The lawsuit claims the recently passed tax on health plans, known as the managed care organization tax or MCO tax, circumvents a 2024 initiative that limits healthcare taxes and directs revenue toward specific purposes. The California Medical Association and California Association of Health Plans filed the complaint with the California Supreme Court.

“California voters passed Proposition 35 and made it law. The state does not get to ignore that law simply because following the law is inconvenient,” medical association CEO Dustin Corcoran said in a statement.

Newsom’s office did not immediately respond to a request for comment. H.D. Palmer, a spokesperson for the Department of Finance, said in a previous statement to CalMatters that the state wanted to balance the affordability concerns of privately insured patients against large-scale federal Medi-Cal cuts.

Newsom stopped short of opposing the 2024 initiative when it was on the ballot, but he warned at the time it would “hamstring” the state budget.

For more than 20 years, California has levied taxes on health insurers to help fund Medi-Cal, the state’s insurance program for low-income people. The state historically taxed private health plans at a lower rate than Medi-Cal insurers, but in June, the Legislature passed a bill substantially raising the tax on private plans.

Health insurers said they will pass the cost directly on to consumers, spiking premiums by about $100 per person each year. That means a family of four could pay a $400 annual increase. That would come on top of the rate increases people typically see year to year.

“California is breaking the law by blowing through a tax limit voters put in place to protect Californians and businesses from higher health care costs,” said Charles Bacchi, CEO of the health plans association.

Doctors, hospitals, clinics and Medi-Cal insurers have argued for many years that the revenue from the tax should go toward improving Medi-Cal. They said that the state was inappropriately using the money to replace general fund spending, and that many providers were being paid far less than their services cost. In 2024, they asked voters to approve a limited tax that would be reserved for Medi-Cal improvements.

But Congress last year changed the rules on taxes used to generate revenue for healthcare, including the ones imposed on health plans. Rather than lose the money generated by the tax, Newsom proposed and the Legislature agreed to submit two taxes to the federal government for approval: one that complied with the 2024 initiative but would be rejected by the feds, and one that complied with federal regulations and largely disregarded the initiative.

Supported by the California Health Care Foundation (CHCF), which works to ensure that people have access to the care they need, when they need it, at a price they can afford. Visit www.chcf.org to learn more.

This article was originally published on CalMatters and was republished under the Creative Commons Attribution-NonCommercial-NoDerivatives license.

California could create its own multi-billion-dollar science and health research agency under a bill signed by Gov. Gavin Newsom Wednesday, helping to fill a gap left by the politicization of science under the second Trump administration. Voters will decide in a year and a half whether to fund the idea, which the University of California has championed.

Approved by state lawmakers at a time when federal science funding has become increasingly unpredictable, the bill places a $7.5 billion bond measure on the March 2028 ballot to pay for the creation of the California Foundation for Science and Health Research. The new state agency would provide grants and loans for projects in public health, climate science, agriculture and other areas. Panels of scientists would review proposals, and the agency would develop rules allowing the state to share in some of the profits from inventions made with its support.

“Scientific advancements are curing and preventing diseases, improving the lives of people living with chronic conditions, protecting our communities from wildfires, lowering the cost of food, and powering our economy,” the bill’s author, state Sen. Scott Wiener, said in a statement. “We cannot allow the federal government to throw away that hope for a better future.”

Newsom joined Wiener to sign the bill Wednesday atop the Golden Gate Bridge, a landmark built with voter-approved bond money in the 1930s that his press office described as a symbol of California ingenuity. He said the proposed science agency “does the opposite of what Donald Trump is doing (and) will allow us to double down on what makes this state great.”

It was a dramatic comeback for a measure that almost died in the Legislature earlier this year, when a more ambitious $23 billion version of the plan failed to make it onto the November ballot despite bipartisan support.

Researchers from UC Berkeley and elsewhere had joined with UC leadership to lobby for the bond, hosting rallies and inviting lawmakers to a science fair highlighting projects that had seen their funding stalled or canceled by the federal government.

There were plenty to choose from: The Trump administration canceled nearly $2 billion in research grants to the University of California beginning in early 2025, later acknowledging in court that officials searched for keywords such as “health equity” and “sexual orientation” in order to decide what to cut. While a court order restored much of the money, the National Science Foundation has since slowed grantmaking nationwide, and President Trump has proposed giving political appointees more power to veto National Institutes of Health grants that don’t align with his agenda.

This spring, the National Science Foundation canceled an additional $21 million in grants to UC Berkeley, accusing the projects’ lead researchers of accepting foreign funding without disclosing it, a charge some of those scientists denied. UC President James Milliken has called the disruption of federal research funding “one of the gravest threats to the University of California in our 157-year history.”

Lawmakers nevertheless declined to move the science bond forward this spring amid worries about competing demands on state funds – including a housing bond on the November ballot and the possible need to backfill other federal cuts. But negotiations among bill supporters, legislative leaders and the governor over the summer led to the scaled-down version that Newsom signed Wednesday.

Along with the University of California, California State University, private universities, and independent labs would all be potentially eligible for grants from the new state fund. A $7.5 billion state fund would not by itself make up for the instability in federal grants – the UC alone received nearly $5 billion in federal research funding in fiscal year 2024-25. But supporters say it could be especially helpful to researchers in fields such as climate science that are critical to the state’s future but have run afoul of Trump administration priorities.

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Berkeleyside partners with the nonprofit newsroom Open Campus on higher education coverage.

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This story was originally published by Berkeleyside and distributed through a partnership with The Associated Press.

A winter of potentially devastating weather driven by what scientists predict to be a massive El Niño event could strain many of California’s TK-12 public schools, experts say, likely damaging aging structures and forcing school closures.

The southern and central parts of the state are expected to be hit hard along with coastal areas, as they were in 2023 when mid-March storms forced the closure of at least 178 schools. Only this time, weather scientists predict El Niño could stress levees to the max, and even bring potential for tornadoes, along with torrential rains, mudslides, storm-driven tides and heavy winds.

While district superintendents in especially vulnerable areas are already planning ahead, some schools may be ill-equipped to handle punishing weather. At least 59 California school districts are seeking voter approval for bonds in the November election, and have identified the need to repair or replace “leaky,” “dilapidated” and “decaying” roofs, an EdSource examination of local ballot language shows.

Gov. Gavin Newsom declared a state of emergency on Sept. 21, ordering pumps and sandbags to be stockpiled near vulnerable areas, among other precautions. Federal flood data show roughly 20% of the state’s schools are located within flood plains. In 2023, heavy storms flooded schools in Alameda and Merced counties as well as one near Watsonville, where a levee ruptured.

“Climate-driven El Niño conditions could mean months of dangerous weather, heavy rain, strong winds, deep mountain snow and flooding,” Caroline Thomas Jacobs, director of the California Office of Emergency Services, said at a news conference, adding that the public shouldn’t underestimate “the power of water.”

Preparing for a severe El Niño

As predictions of severe weather spread, there isn’t a school superintendent in an area that the El Niño is predicted to impact “that hasn’t been thinking about this for weeks already,” said Scott Borba, executive director of the California Small School Districts Association. Many small districts have aging buildings — some as many as 75 years old, Borba said.

“You’ve got leaks and dry rot and all the things that a super wet winter is going to just exacerbate,” he said.

While district leaders work with other local agencies during weather emergencies, they are largely on their own when making major decisions, such as whether to cancel school, Borba said.

“Sometimes you have some county office of emergency services’ support. But when it comes to making that decision, that decision lies with the superintendent alone,” he said.

One small school district leader who may soon be making such decisions is Raven Coit, the superintendent and principal of the 61-student TK-8 Peninsula Union School District on the south end of the Northern Humboldt Peninsula in Humboldt County. It’s perhaps the most isolated coastal school in California, roughly 600 yards from the ocean. Dunes often serve as a play area for students.

Coit took steps this year to try to limit storm damage. She had trees cut back and used money saved by deferring other projects to complete much-needed roof repairs. “There was a big storm that caused leaking. I’m proud to say that it won’t rain inside this year,” she said.

But the likelihood of impacts from El Niño remains. The school’s “in a vulnerable spot,” she said. Flooding could cut off access to the only road leading to the school. There’s a backup generator that she’s “trying to figure out if I can make it work.”

While nearly all the school’s students live nearby, many teachers do not, and may not be able to get to work. Local high school students are bussed to Arcata on the mainland — if buses can get through.

She said the school could also turn to remote learning in a crisis.

How El Niño may impact schools in coastal areas

One of the things that makes El Niños so dangerous in coastal areas like Coit’s is that they are known in California for also causing rising tides known as Kelvin waves.

They are slow moving, and can raise sea levels for weeks. Some could reach shore as early as October. At the same time, an astronomical phenomenon known as super king tides is expected from November to January, Danial Swain, a climate scientist with the University of California Agriculture and Natural Resources, said in an online presentation.

“That would probably bring record-breaking coastal flooding this year.”

A worst-case scenario “would be an El Niño Kelvin, plus a peak king tide, plus a significant storm,” he said.

A Southern California school leader of one of those districts said it’s bracing for storms.

Don Austin, superintendent of Laguna Beach Unified School District in Orange County, said that living on the coast, “I have seen our beaches get washed away with recent storms and homes destroyed.”

His schools have “roof leaks and other issues that will be heavily impacted by an El Niño,” he said.

The most impactful weather-driven damage to a California school in recent years was in March 2023 when a broken river levee caused the Pajaro Middle school near Watsonville to flood, along with the heavily Mexican immigrant and farmworker community it serves.

The school reopened in 2024. A complete replacement of the entire levee by the U.S. Army Corps of Engineers could take a decade, officials said.

Mark Strudley, executive director of the Pajaro Regional Flood Management Agency, said the agency is spending roughly $1 million to strengthen the levee, and that the breach that led to the school flooding has been permanently repaired. El Niño, he said, is the obvious concern, and the work is aimed at protecting the town of Pajaro and the middle school.

Leaders of the Pajaro Valley Unified School District remain concerned about El Niño, but haven’t identified a temporary site to move students to if the school floods again, according to Peggy Pughe, the district’s executive director of teaching and learning.

Asked what the district officials are doing based on their experience with the 2023 floods and the threat of El Niño, Pughe said they are “canvassing local neighborhoods, encouraging families and residents to sign up for emergency alert services.”

Data journalist Daniel J. Willis and staff writer Emma Gallegos contributed to this story.

In August, the Trump administration announced a significant overhaul of the Head Start program, leaving early childhood providers in Los Angeles concerned about their ability to serve low-income children.

The proposed rules strip Head Start of many of its regulations and impose new requirements, like teaching in English only.

The public comment period ends Oct. 6 — after which the administration could finalize the new rule. It’s unclear when that will happen, and experts say it could be caught up in litigation.

Why does the administration want to change the rules?

Federal officials said the deregulation would provide for more local flexibility.

An administration statement said the moves reduce both regulatory burden and administrative costs, allowing for more available slots — as many as 236,000 Head Start slots nationwide — and save $2.2 billion.

“We are removing unnecessary bureaucracy, strengthening nutrition and physical health, trusting parents and local communities, and opening Head Start to hundreds of thousands more children,” said Robert F. Kennedy Jr., the secretary of health and human services. “That’s how we renew the promise of Head Start for the next generation.”

Earlier in the administration, the White House proposed to cut Head Start entirely from the budget but reversed course.

The case against the proposed rules

Head Start providers worry the new rules, if implemented, could be the start of whittling down a program that provides early education and other wraparound services for about 70,000 children across the state.

“It's a holistic program really designed to lift kids out of poverty and to set them up for future success, so what's at risk when the standards are changed are a lot of those elements and guidelines that support the program quality,” said Melanee Cottrill, executive director of Head Start California.

For example, Head Start provides support services beyond education, like developmental screenings and dental care, which would no longer be required under the Trump administration’s plan. The new rules would also require documentation beyond self-attestation for families experiencing homelessness.

“Putting a lot of documentation requirements in place would be very onerous for people who are in really difficult circumstances,” said Donna Sneeringer, president of the Child Care Resource Center, which serves about 2,000 kids in its Head Start programs in northern L.A. County. The program opened up a Head Start center at a family homeless shelter last year.

The administration’s proposal also sets a 5% cap on administrative costs, down from the current 15%, which Sneeringer said will be hard for nonprofits to implement.

“I think many Head Start operators are really going to struggle to even keep their programs open,” she said.