Is It a Bubble?

Summary

• A transformative technology is ascending that requires companies to invest sums of money unlike anything in living memory.
• News reports contain widespread fears that America's biggest corporations are propping up a bubble that will soon pop.
• Bubbles follow a regular progression where new revolutionary technologies capture imagination, early participants enjoy huge gains, & others pile in due to fear of missing out without knowledge of future returns.
• The end result for investors in bubbles is inevitably painful in the short to medium term, although it is possible to end up ahead after enough years have passed.
• Memories are short, & prudence is no match for the dream of getting rich on the back of a revolutionary technology.
• Derek Thompson compared the current AI situation to the railroad boom of the 1860s, illustrating that history rhymes.
• There are two interrelated bubble possibilities: one in the behavior of companies within the industry & the other in how investors are behaving with regard to the industry.
• Market bubbles result from the application of excessive optimism to technological or financial developments rather than the developments themselves.
• Newness plays a huge part in bubbles because the lack of history allows the future to appear limitless, justifying valuations beyond past norms.
• John Kenneth Galbraith noted the extreme brevity of financial memory, where past experience is dismissed as primitive refuge.
• Bubbles are temporary manias characterized by irrational exuberance.
• Bubbles can be categorized as "mean-reversion bubbles" or "inflection bubbles."
• Mean-reversion bubbles, such as the sub-prime mortgage bubble, destroy wealth & do not represent overall progress for mankind.
• Inflection bubbles, such as those around railroads & the internet, accelerate technological progress & create the foundation for a more prosperous future.
• Inflection bubbles enable the "Installation Phase" where money-losing investments lay the groundwork for the "Deployment Period."
• Bubbles finance the building of infrastructure required by new technology & accelerate its adoption through parallel experimentation.
• Speculation provides the massive financing needed to fund highly risky & exploratory projects.
• Artificial intelligence has the potential to be one of the biggest technological developments of all time, reshaping daily life & the global economy.
• AI is responsible for a very large portion of companies' total capital expenditures.
• Capital expenditures on AI capacity account for a large share of the growth in U.S. GDP.
• AI stocks have been the source of the vast majority of the gains of the S&P 500.
• A Fortune headline from October 7 stated that AI accounts for 75% of gains, 80% of profits, & 90% of capex in the S&P 500.
• Nvidia's market value grew from $626 million at its initial public offering in 1999 to briefly become the world's first company worth $5 trillion.
• Nvidia's appreciation represents around 8,000x growth, or roughly 40% a year for 26+ years.
• Most people have no idea exactly what AI will be able to do, how it will be applied commercially, or what the timing will be.
• New technology is notoriously disruptive, & today's leaders may give way to upstarts.
• The automobile was the most important invention of the first half of the 20th century, yet only three of 2,000 car companies survived.