{PREMIUM} The A.I. Bubble’s Existential Paradox: Why This Time Is Both Different and Exactly the Same!
When national survival meets market euphoria, bubbles can inflate far beyond rational limits; but the systemic risks demand hedging strategies that the overwhelming majority of investors are ignoring
H/T DARIO PERKINS FOR CHART
Bubbles are a feature of capitalism, not a bug; a recurring theme throughout history that reveals more about human psychology than financial engineering.
In the 1630s, it was merchants trading tulips in Dutch taverns. In the 1720s, it was companies in France and Britain promising access to the riches of the New World. In the 1800s, it was railway mania. The modern era gave us the Roaring Twenties, Japan’s property crash, dotcom, and subprime.
As a highly disruptive technology with the potential to change the world, Artificial Intelligence creating a bubble wouldn’t look out of place among the great speculative manias of the past. In fact, there is a certain inevitability to the AI “bubble.”
The parallels between today’s AI frenzy and the dotcom boom are impossible to ignore. NVIDIA has become the Cisco of the AI era, the company selling “picks and shovels” to digital gold miners.
Cisco’s revenues exploded during the internet buildout, just as NVIDIA’s are exploding during the AI buildout. Cisco was hugely profitable in 1999, and it’s now six times more profitable.
But investors who bought at the peak still lost 90% of their money in the crash. The technology thesis was correct; the timing and valuation were catastrophically wrong.
The Seven Markers of a Market Top
For most investors, the only question that counts is how much longer the current run-up in these stocks can last. Is the “bubble” about to deflate or could it continue for several more years?
Unfortunately, there is no easy way to answer this question and no simple metrics that can help investors navigate these markets. But history does provide certain markers when it comes to identifying the market top.
Let’s dig into:
The markers of a market top
Why this bubble is different than any previous bubble
The systemic risk everyone is ignoring
The imperative of hedging
And the Cinderella problem of when to leave the ball…
