One evening, Bertie found himself in a well-worn leather chair at the Fat Cats Club. As regular readers know, our man is an old-school investor, which means he still believes in reading and prefers to do it from printed pages. Therefore, every so often, he stuffs his piled-up reading material into a cloth bag and makes his way to the Fat Cats library.
As Bertie adjusted his glasses and began skimming through his haul, he noticed how obsessed the global intelligentsia was with artificial intelligence (AI), and specifically with what would cause the AI bubble to burst. “This is like the railroads,” argued one columnist, and then proceeded to make the case that the underlying technology, then and now, is revolutionary, but the huge amount of investment chasing it would ensure that returns for everyone would be piddly, if any. This, the columnist concluded, would cause investment to stall, and with it, everything that the bubble had lifted skywards would be slammed back to earth. Bertie found himself nodding at this line of thought.
Another erudite article explored the social angle and began by quoting an American survey, which said that an overwhelming majority of Americans were opposed to building data centres in their home states. They were protesting against rising electricity costs and the general perception that AI would cause widespread job losses. Politicians would have no option but to legislate curbs on data centre investments, argued the article. And that would cause the bubble to pop. Bertie nodded again.
By the time Bertie picked up the third piece, the AI doomsayers were preaching to the choir. This one talked about rising interest rates and bond yields across the world, and how they would be the death knell for any mal-investment. The biggest home of mal-investment, the macro commentator said, was AI, and the gravitational force of higher rates and tightening liquidity would bring it back to earth.
By now, Bertie was convinced that the AI bubble was on its last legs and was already thinking of ways to benefit from the coming apocalypse. He left the library for some well-deserved refreshment and headed to the cafeteria for his usual cup of masala chai. As Bertie relayed his order across the café counter, he heard a familiar voice say, “… and chamomile for me!” Bertie turned around to face his old mate, Vik. Many years ago, the two had been dorm-mates at a red-bricked business school.
“Still the pucca sahib!” grinned Bertie. Both parties then let loose a string of expletives, which is the customary way of greeting your old dorm-mate. The barista was now having second thoughts about accepting what her job description said was a position at an elite private club with the city’s crème de la crème as its members. She did not let it show, though, and quietly handed the gents in front of her their respective beverages.
Vik had gone to the US after graduating and had risen through the ranks of the research department at a Wall Street behemoth. He had recently been despatched to lead the firm’s India office, which was perceived to be punching below its considerable global weight. Bertie decided to flaunt how well read he was by steering the discussion to the AI bubble and regurgitating the three articles that he had just finished reading. “A bubble waiting to burst,” he concluded.
Vik listened to Bertie’s monologue with a smile. “All true,” he said.
“So, let’s go short some ETFs, no?” The action-oriented fund manager in Bertie was getting restless.
“But think of this, Bert.” Vik was still calmly sipping his chamomile, miles away from any action orientation. “What you are saying has been said and understood for a while now, and yet the markets march on. As we speak, the Nasdaq and the S&P 500 are at new all-time highs.”
Bertie hadn’t thought of this. “What’s more,” continued Vik, “every stock that is at the heart of the so-called AI bubble now trades much cheaper than it did a year or two ago. Amazon is down from 28 times earnings to 20; Microsoft from 30 to 25.”
“Nvidia, which is at the vanguard of the AI story,” he went on, “has almost halved, from 35 times to 17. Go across to Asia and it’s the same story with the big AI foundries and memory names there.”
“What are you trying to say, Vik?” A confused Bertie wanted answers.
“Just that when you call something a bubble, you are yearning for symmetry. Something that has gone up vertically also has to come down in a straight line. That may not always be the case.
“Bubbles can deflate slowly when markets assume that today’s strong growth is not going to last long, and start to pay a gradually lower multiple for the same earnings. That is what is happening right now, and it will continue. You might want the bubble to burst with a pop, but it might just leak air slowly. It’s like the morning after a birthday party—the balloons you pasted on the wall did not burst in the night, but nonetheless, they were limp in the morning.”
Bertie had finished his masala chai, and the two men bade each other farewell. He had now experienced a full circle of emotions about the AI bubble—from ignorance to clarity to confusion. He headed back to the library and decided to read Bombay Times for a while—something that he was certain would not add to his confusion.
Bertie is a Mumbai-based fund manager whose compliance department wishes him to cough twice before speaking and then decide not to say it after all.
