Henry Ford once said, “If everyone is moving forward together, then success takes care of itself.”

But what if not everyone ends up moving forward — or even going backward? There has been growing discussion over the past couple of years about “circular financing” in artificial intelligence.

With dollar amounts hitting records, perhaps there is at least some reason for concern. Consider this example:

• Nvidia invests in an AI company that needs graphics processing units. 
• The AI company uses cloud providers such as CoreWeave or Oracle.
• Those cloud providers purchase Nvidia GPUs.
• Nvidia may also invest in or guarantee financing for those cloud providers.
• Nvidia may guarantee some of the customers’ lease payments or commit to buying unused computing capacity.

The relationship becomes more of a web rather than even circular. And there are questions.

In the example, Nvidia, CoreWeave or Oracle all report impressive growth, but there are not necessarily independent sources of demand, like someone actually buying AI products and services. 

According to the Financial Times, Morgan Stanley recently estimated that Nvidia’s potential credit exposure from these kinds of arrangements could reach $200 billion by the end of 2028.

Nvidia founder, president and CEO Jensen Huang recently launched a $500 billon financing initiative with six major Wall Street asset managers to help fund the global AI infrastructure buildout.

Partners included Apollo, BlackRock, Blackstone, Brookfield, Goldman Sachs and KKR. The plan is to create dedicated pools of third-party capital to provide affordable financing for Nvidia customers, including cloud providers and AI labs.

Note this pool is from third parties, not Nvidia. And Reuters recently reported that Nvidia has paused some revenue sharing arrangements with AI cloud companies due to concerns about the structure. It often seems better to use other people’s money.

Investors continue to pour money into AI with hope that the technology will create big economic and societal payoffs. But investors are beginning to look for signs that the payoffs will be real.

And what if demand slows or we go into a recession?

Let’s say the AI company revenues disappoint, and it can’t afford its cloud commitments? Now the cloud company has excess capacity and its economics worsen, so it can’t buy as many GPUs from Nvidia.

So, Nvidia’s revenues fall and its stock price drops, making financing more difficult.

The circular relationships that boost results when “everyone is moving forward” can accelerate a bust if we hit a downturn.

I’m certainly not predicting an AI bust, but all of this should serve as a reminder about being a disciplined investor.

In a recent Schwab Market Talk, chief investment strategist Liz Ann Sonders stressed the importance of staying disciplined with good diversification and rebalancing.

It’s amazing how difficult it can be to follow this timeless advice when parts of the markets become euphoric, but history argues for both.

All of this reminds me of the Warren Buffett quote about “finding out who’s been swimming naked when the tide goes out.”

I guess we’ll find out before too long if “everyone” is moving forward together or not.