Is AI the buzzword fueling another tech bubble? It certainly does have some parallels. I remember the dotcom (later dotbomb) era reasonably well and also remember how long and painful it was, for those of us expecting it to implode, waiting for it to actually happen.
It’s not true that bubbles are only recognized in hindsight, nor is it sufficient to identify a mania to be able to profit from its future implosion. For a trader going short, there’s little difference between being early and being wrong, whether it’s pets.com, Reddit rebellion names, or whatever. Moreover, the dotcom era bulls, while certainly wrong about many of those stocks, were right that the internet would be transformative. This brings me to a cautionary tale about underestimating the impact of technological advancement on society and the economy. In 1998 Paul Krugman, then an economics professor at MIT, now CUNY, Nobel Laureate, and New York Times columnist wrote, “The growth of the Internet will slow drastically, as the flaw in ‘Metcalfe’s law’ becomes apparent: most people have nothing to say to each other! By 2005, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s”.
That prediction, among several others in his rather ironically named article “Why most economists’ predictions are wrong.” did not age particularly well. (Link here: http://www.redherring.com/mag/issue55/economics.html)
Professor Krugman has since attempted to defend that prediction by describing it as a “throwaway article” https://www.nytimes.com/2023/04/04/opinion/internet-economy.html and citing “disappointing” productivity growth in the two+ decades since he wrote those words as evidence that, from an economic point of view, the data suggests the hype was overblown.
Others have attempted to defend him similarly, such as Joe Weisenthal an editor at Bloomberg. https://www.bloomberg.com/news/articles/2021-05-24/paul-krugman-got-something-very-right-about-the-internet-the-fax-machine-and-the-economy?utm_source=website&utm_medium=share&utm_campaign=copy
Time permitting, I encourage everyone to read those articles and make their own determination, but from an investor’s point of view an economic transformation and investment opportunity is not defined by predicting labor productivity data. What work will be done, by whom, and which companies or regions will thrive, and which will not are the predictions investors must make. Not only do investors need to be more accurate than economists to be successful, but they must also be much more specific.
Consider Amazon. Amazon has absolutely changed the way we live, it has altered the retail landscape completely, and even buying the stock at its December 1999 peak would have outperformed the total return for an investment in the S&P 500 or the Nasdaq 100 on the same day by orders of magnitude as of Friday’s close. The issue is it fell 94% from peak to the trough first, an awfully punishing ride. Isn’t it interesting how the multiples of dotcom era darling Cisco $CSCO and the AI era darling Nvidia $NVDA today are fairly similar? Cisco was valued at over $500B in 2000 with ~$19B in trailing 12-month revenues –a rev turn not that different than where NVDA is today. Cisco is a much larger company today than it was then, but it has materially underperformed the S&P 500 as an investment. From June 10th, 1999, a year after Krugman published his article, to the present, the total return of Cisco as of today was 82%, significantly lower than the 226% returned by the S&P 500.
My guess is we’ll see something similar here. When I first began trading options on the exchange floors in the 1990s it was open-outcry. We used paper tickets, runners, and time clocks/stamps. Trading has transformed more in the 30 years since I left college than it did in the 30 years preceding in terms of human jobs and involvement, and I imagine other industries will see similar transformations due to AI in the years ahead. I expect companies like Nvidia will be key to that transformation and will likely grow substantially, but will investments in Nvidia at today’s levels outperform an investment in the S&P 500 over the next 25 years? I suspect not and would invest in the latter in the Fast Money “would you rather” game.
How AI will transform the world is also probably a little different than the vision that captures one’s imagination. NLP/ChatGPT is human facing AND anthropomorphic by design. It’s what humans have thought AI might look like since before Stanley Kubrick brought us HAL in 2001. Self-driving cars too are examples of what people have long envisioned, yet much of AI’s impact may be felt by small sets of the workforce, but enjoyed by a much larger set of the population somewhat invisibly. Floor traders felt the impact of technological advancement quite painfully. Most of those jobs have been eliminated. For them, the transformation has been profound, but for investors what once required a phone call (followed by several others from brokers to exchange trading floors and back) has become a mouse click. Watch a movie today and CGI is transforming special effects – might actors be next? If you’re a professional driver, your job may become redundant if cars and trucks drive themselves. Eventually, that might also be true even if you’re a consultant, a lawyer, a consultant, a pundit, or, one can only hope, even an economist.
