Is There an AI Bubble?

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Ken Fisher:

You don't have to go far in this day and age to see people telling you that AI is a bubble. It's all over media. I doubt if you know many friends or associates that haven't heard the accusation that AI is a bubble. Let me talk to you about that a little bit. Because the question is: A) Is it? And B) If it is, what's the consequence? And if it isn't, what happens next?

So, I'm just gonna tell you that, first off, "bubble" is a phrase when originally conceived a long time ago that referenced something that would not happen very often. Bubbles are supposed to be, or at least originally were supposed to be, rare. In recent times, once the internet comes along, people are looking for bubbles around every corner. Bubbles were also not supposed to be about some singular little category or a stock, like there's a bubble in stock X or in category Y. It was supposed to be about a broader, more systemic thing to our society, and we've had those. The fact is, however, you then get a culture that says, well, there's bubbles—and then, starting in the period around 2000, right after the 2000 bear market, you started getting the concept of "the Black Swan," which would be kind of like a bubble on steroids. The Black Swan was supposed to come along once maybe every hundred years, be very, very rare and be catastrophic. Now, the fact of the matter is, once you got 2007, 08', 09', you started having people talk about Black Swans like they talked about bubbles all the time.

Interestingly, now it's been a while, and we don't hear about Black Swans much, now. But I will say that when it comes to bubbles, we're hearing routinely AI as a bubble. When you have a real bubble, what that means is so much financial resource has gone into it that something little makes a huge amount of it go poof, like a bubble. But I will tell you that when we have a real bubble, there's almost never any talk about it or just a little bit before the bubble pops. The more people talk about how "X" is a bubble, whatever "X" is— I'm not speaking about the Twitter thing— whenever people talk about something being a bubble, that's expressing fear about it. And fear in the marketplace is almost exactly the reverse of what a bubble is. A real bubble sees no fear because the world has now changed in such a whole new way that's going to make this a big, enduring, wonderful thing. It is the epitome of having climbed the wall of worry that bull markets legendarily climb fully into extensive euphoria.

With that, there is always huge amounts of stock offerings and often huge amounts of them in terms of quantity and volume, where there's manufactured IPOs (initial public offerings) trying to capture the financial benefit of taking something public with high hopes that may have little real sustainable business to it. And you'll remember that very clearly if you were around, paid attention during the so-called internet bubble. It was a bubble—there were thousands of companies created out of whole cloth by investment banking, with the purpose of putting entrepreneurs together with capital, with nothing else behind them, or little else behind them. In those days, for that, most of them had no real revenue. They all had hopes that they could create something that would create revenue, but they had to keep coming up with cash because they were losing so much money during the process of trying to do that. And when 2000 came along and they no longer could raise the money, most of those all went bankrupt. The point that I'm making is, and I reiterate, the more people say something is a bubble, the more you know it isn't.

Now, what is AI? AI is a big thing. It will be important. There will be a lot of money lost on it. Having a lot of money lost on something doesn't make it a bubble. It makes it competitive. The players that are spending most of the money on AI are big global tech or tech-like firms. They're making a lot of money. Unlike in a normal bubble, where you have lots of speculative stuff that isn't making money, there is a little bit of that speculative stuff going on, but it's only a little bit, and it's that little bit and then the big one spending so much money and fear of high valuations on the big ones that's causing people to say it's a bubble. But I reiterate, the statement that it's a bubble is an expression of fear in the marketplace, and in a real bubble, there's almost no fear at all. So, if it were a bubble, what you would get is an eventual popping. And with that popping, that category of stocks would lead the market down explosively, or implosively. And then, the almost immediate aftermath of that, 3 to 6 months after the market top, would be a significant, fairly long economic recession as the financial system licked its wounds from all the money that it had poured into the bubble that became worthless.

If you go back and look at some of the bubbles that have existed, some of them have just been kind of crazy. And, you know, one of the most famous ones was the Tulip Mania of 1720, where people bid up the price of tulips to outrageous valuations. And money was put into tulips to lend against tulips, to invest in growing tulips, etcetera, etcetera, as if tulips were some special thing. Sometimes you can get a bubble in the stock market, but again, valuations don't do that. Let me make the most classic example of that for you. 1929, on a global basis, was a bubble. But as I detailed in my 1987 book, The Wall Street Waltz, the price-to-earnings ratio and the price-to-book ratio of the stock market in 1929 was not high, it was actually low. And that made people much more comfortable with the reality of that time period in a market that was cap-weighted, led by value stocks, but lots of money had been poured into speculative creation of smaller stocks. That all popped. I point out that sometimes, again, and I said this earlier, people think of bubbles in categories.

Now, you can look this up with an AI system, like Perplexity, or something like that. If you look at some categories of crazy things, people have often thought they were great investments. At one point in time, in the 1990s, earlier than the peak of the internet bubble, there was a fair amount of money poured into, believe it or not— and you may remember this, You can look it up, I'm not making it up— Beanie Babies, and how anyone actually ever thought that something that is reproducible could become a great investment is a little bit of a stretch, but there's times and places where people get crazy on fads. A singular category being a fad doesn't make a bubble. So with that, I would say AI at this point, for sure, is not a bubble; but something can happen that makes it one. And I'm going to give you the most telltale sign of it.

Move forward in time, more money goes into speculative investments in AI of little startups, all hoping to be the next big thing, and people stop talking about AI as a bubble. Then you have more risk. Then you have more risk that it might actually be a bubble. The fact is, we have had bubbles in the past where people talked about them as a bubble for a period of time when they weren't, and then an extensive period of time, a couple years, 2 or 3, where they just stop talking about it as a bubble. In that regard, that's not impossible. But, the way it is—the more people tell you it's a bubble, the more you know there's fear in the marketplace, because that expression of people pointing the finger and saying it's a bubble is an expression of fear, a skepticism of disbelief. And the more you know it's not.

Thank you very much for listening to me. I hope you found this useful and educational. Hi, this is Ken Fisher. Subscribe to the Fisher Investment YouTube channel. If you like what you've seen. Click the bell to be notified as soon as we publish new videos.