🫧 AI Bubble to burst?

Explore the potential AI bubble and its implications for investors. Discover parallels with past market bubbles and gain insights into the current financial landscape in this in-depth analysis.

It's been quite a long time since I posted any blog, especially on investing and finance. Nonetheless, I have been watching and cautiously analysing the entire capital markets and felt something is very fishy for the past three months.

If you are a 90s kid, you would definitely remember the 90s dot-com bubble and the US housing bubble in the mid-2000s. And I personally feel that there is something strange and weird this time as well.

So to those who aren't aware of the dot-com bubble, here is a short gist of it - the internet bubble was a period of excessive speculation and rapid growth in the value of internet-related companies during the late 1990s and early 2000s. Every company which had a website on the internet (aka .com) was over-valued and investors and VCs borrowed shit tons of money and poured excessive capital into these companies making them overrated and overvalued unicorns and decacorns.

However, by the early 2000s, it became clear that many dot-com companies were not able to turn a profit or sustain their business models. As a result, investor confidence dropped, and stock prices began to plummet.

There were a lot of other bubbles in the capital markets apart from the internet bubble. Each of these bubbles involved speculative investment and inflated asset prices, often driven by irrational exuberance and unrealistic expectations. When these bubbles burst, they typically result in substantial financial losses and economic consequences.

But the question is why am I drawing a comparison with the past events with the current scenario?

Because HISTORY WILL ALWAYS REPEAT ITSELF!

So, if you look at the markets now -

• Inflation hasn’t cooled down. The Fed isn’t stopping interest rate cuts.

• CPI is still high - climbed 0.3% in January (slightly more than in December) and 3.1% from a year prior.

• Companies are still laying off left, right and center.

• FMCG Brands are engaging in Shrinkflation tactics.

But but but, on the other hand -

• Gold all-time high.

• Bitcoin all-time high. NFTs are rallying. Memecoins like Doge and Shiba Inu coins are rallying.

• S&P 500, Nasdaq, Nifty 50 all-time high.

• Housing Market all-time high.

So what? Isn't this good for the investors?

No. Big NO! I will explain with an example.

The basic law of macroeconomics says that - Ideally when the interest rates are low, the housing market is high cause you get cheap access to capital leading to increased demand in the real estate driving the housing prices And when there is an increase in interest rates, real estate prices cool down as people need to pay more interest for their home loans. Hence, interest rates and the housing market are inversely proportional. But right now, despite the increase in interest rates, the housing market is at an all-time high.

Another case is that gold is also known to have an inverse relationship with the stock market... when the market rises, gold rates fall or remain stagnant... and when the markets fall, gold rate rises. Because investors want safer bet options when the markets are bad and they turn to gold when the markets drop. But surprisingly this time, both the markers and gold are all-time high.

I can give a few more real-time current scenarios -

• Americans have been borrowing more via credit cards and BNPL services since 2021—despite sky-high interest rates providing an incentive to do the opposite.

• Foreign travel spending increased 28% last year, and live events expenditures went up by 27%, according to the Bureau of Economic Analysis. There were 9% more travellers on March 25 than a year ago, per the Transportation Security Administration.

📈 But Why?

Why the markets are at an all-time high?

Because of the tech companies. Especially the AI boom.

Nvidia’s stock is up by 80% this year alone. Some retail investors even started tagging NVIDIA as one of the N in MAANG companies replacing Netflix.

🫧 AI Bubble?

So the million-dollar question is - Are we in an AI bubble?

Is history repeating now? Are these AI companies overhyped and overvalued similar to the dot-com companies in the 1990s?

I personally feel kind of. There is some level of AI washing happening.

AI washing involves by providing fake information about the capabilities and potentials of their AI products. Adding a tag powered by AI, even though, there is nothing to do with AI.

For instance,

• There was a startup called Delphia - SEC asked to pay a penalty of $225,000 because it was identified that the company was providing false statements about their AI capabilities.

• Another funny story is about the Amazon Fresh stores which promised AI-powered auto checkout but it was actually a group of engineers in India doing the manual checkout by looking at the security cameras.

• According to a Bloomberg article, there have been 1,072 mentions of AI on S&P 500 company earnings calls so far this year.

In fact, there is an entire site on the recent AI failures, mistakes and errors - AI Gone Wrong

💥 Bubble burst?

So is the AI bubble gonna burst anytime soon? Maybe. Maybe not.

Some experts speculate that this isn't like the dot-com bubble.

Mark Cuban in Lex Fridman’s podcast said that the Lack of IPOs in the AI sector is what makes this time different from the internet bubble era. The current market doesn’t exhibit such characteristics like the Funky Internet companies that came up in the dot com bubble. When you look back at the history of the dot com bubble - investors would just throw money into whatever companies that had dot com at the end. Eventually, to provide a return to these investors, an enormous number of non-valued startups went for IPO which led to the market crash.

Another psychological theory is that - humans get overhyped about a new product or technology leading to inflated expectations, hype it up until the market crashes. The real companies that survive this crash, correct themselves and become the survival of the fittest.

So today feels a lot like the early days of the auto industry. At that time, there were hundreds of small car companies and each of them came up with their innovative car models like how now AI companies are coming up with their own LLM models. But after a decade, a major chunk of these automotive companies failed, and only a few survived such as the GM, Ford, and Volkswagen.

So what to do now? I would recommend saving as much as you can while also continuing your SIPs and not stopping investing.

DIVERSIFY!!! Gold. Silver. Bonds. SGB. Bitcoin. Index funds.

What do you think about the current scenario? Do you think this AI bubble gonna burst? Or it is just people overhyping AI? Comment down your thoughts.