this post was submitted on 06 Sep 2024
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You can do it easily with a balloon (add some tape then poke a hole). An economic bubble can work that way as well, basically demand slowly evaporates and the relevant companies steadily drop in value as they pivot to something else. I expect the housing bubble to work this way because new construction will eventually catch up, but building new buildings takes time.
The question is, how much money (tape) are the big tech companies willing to throw at it? There's a lot of ways AI could be modified into niche markets even if mass adoption doesn't materialize.
You do realize an economic bubble is a metaphor, right? My point is that a bubble can either deflate rapidly (severe market correction, or a "burst"), or it can deflate slowly (a bear market in a certain sector). I'm guessing the industry will do what it can to have AI be the latter instead of the former.
One good example of a bubble that usually deflates slowly is the housing market. The housing market goes through cycles, and those bubbles very rarely pop. It popped in 2008 because banks were simultaneously caught with their hands in the candy jar by lying about risk levels of loans, so when foreclosures started, it caused a domino effect. In most cases, the fed just raises rates and housing prices naturally fall as demand falls, but in 2008, part of the problem was that banks kept selling bad loans despite high mortgage rates and high housing prices, all because they knew they could sell those loans off to another bank and make some quick profit (like a game of hot potato).
In the case of AI, I don't think it'll be the fed raising rates to cool the market (that market isn't impacted as much by rates), but the industry investing more to try to revive it. So Nvidia is unlikely to totally crash because it'll be propped up by Microsoft, Amazon, and Google, and Microsoft, Apple, and Google will keep pitching different use cases to slow the losses as businesses pull away from AI. That's quite similar to how the fed cuts rates to spur economic investment (i.e. borrowing) to soften the impact of a bubble bursting, just driven from mega tech companies instead of a government.
At least that's my take.
A lot of Nvidia's stock price is based on AI demand. If that evaporates, Nvidia's stock price would drop back to where it was before AI became a major profit driver. The big players will fight to keep AI business going, so I think we'd be in for a pretty soft landing there.
"Bubbles" are typically defined by stock/commodities prices. The 2000 dotcom bubble was defined by investor losses, the 2008 housing bubble was defined by housing price drops, etc. So an AI "bubble" will be quantified by stock prices of AI-related companies, like Nvidia.
I think the stock price will be at least partially supported by spending by the big tech companies trying to keep AI relevant. So I expect less of a "pop" and more of a gradual deflation.
I think the opposite is true. Stock values factor in expected future earnings, so if the market seems to be shifting, the stock price will generally drop before the disappointing earnings report comes in.