The AI Bubble: A Looming Disaster Compared to the Dot-Com Burst
The Generative AI Phenomenon: A Warning Sign
The hype surrounding generative AI has reached fever pitch, with comparisons to the infamous dot-com bubble echoing across financial news outlets. However, savvy trend-following traders need to take a hard look at underlying fundamentals to understand if this hype is justified or if we’re staring at yet another looming financial catastrophe. The articles you’re reading might proclaim that “this time is different,” but more often than not, it’s wishful thinking that ends in tears.
Users vs. Economic Value
The soaring number of users engaging with generative AI tools today indeed surpasses that of the internet boom in the late ’90s, but this comparison is flawed and even misleading. Back then, prospective internet users faced considerable financial barriers; owning a computer was an investment, and monthly service charges added up. The Compaq ProSignia Desktop was priced at an astonishing $2,699—$5,101 in today’s dollars—and internet subscriptions weren’t cheap either.
Fast forward to now, and the access to generative AI platforms is, for many, virtually free. You can jump onto ChatGPT without shelling out much more than the cost of an internet connection. The low entry cost means users have vastly different expectations and don’t necessarily demand substantial payoffs, creating a skewed economic outlook. Generative AI usage is on the rise, but the question we must ask ourselves is—what’s the actual economic value being generated? The answer seems to be a resounding “not much.”
Illusions of Productivity
At this stage, even the Federal Reserve economists have soaked up the hype, examining the work productivity benefits of generative AI. Here’s the kicker: just because something is widely used doesn’t mean it’s useful. Take social media, for example—where’s the productivity boost from scrolling through Instagram or TikTok? The empirical evidence that generative AI has already moved the needle on labor productivity is scant at best.
The Costs Behind the Curtain
Creating generative AI isn’t as straightforward as flipping a switch. Training these sophisticated models is a costly endeavor, often running into the hundreds of millions. Leading companies like Nvidia (NVDA), AMD, and Intel provide the necessary chips, but these resources come at a high societal cost. A never-ending mountain of raw materials—electricity, water, talent—is needed to maintain this AI-engineered utopia, and right now, the costs greatly exceed the purported benefits.
Revenue Invisibility and Market Reality
Think about it: How much revenue is this AI bubble actually generating? Currently, generative AI is raking in less than $10 billion a year, a far cry from the $600 billion annual revenue that icon David Cahn of Sequoia claims is needed to validate current investments. In stark contrast, the dot-com boom saw internet-related revenues of over $1.5 trillion in 2000, even during its peak. Right now, we’re in a situation where OpenAI, for instance, predicts losses of $5 billion against just $3.7 billion in revenue this year. Yet, the company received $6.6 billion in additional funding—a figure that recalls the reckless expenditures of the dot-com era.
Comparing Bubbles: A Ticking Time Bomb
Let’s extend this analysis to see why many experts are concerned that the generative AI bubble could blow larger than its dot-com predecessor. Goldman Sachs’ Jim Covello, Citadel’s Ken Griffin, and market strategist Ed Yardeni have all issued grave warnings suggesting that a breakdown is imminent due to unsustainable valuations and lack of revenue. The staggering $157 billion valuation of OpenAI as of late could easily mirror the irrational exuberance observed during the dot-com years—and that’s a trend traders should view with caution.
Prepare Yourself: Stay Ahead of the Curve
For trend-following traders, the message is clear: remain vigilant. The AI landscape is rapidly evolving, but just because everyone’s diving into AI doesn’t mean you should stake your cash in bubble territory. Keep an eye on revenue generation, look for tangible productivity metrics, and don’t fall for the shiny new tech sell or ‘this time is different’ mantra.
As a trader, your instincts should scream caution in what appears to be a financial illusion. Position your trades wisely, look beyond the hype, and always stay informed about the dynamics shaping this promising yet precarious market. With the right approach, you can navigate through this tumultuous time, leveraging trends while avoiding potential pitfalls. The time to act is now—make your move!
