You Ask, I Answer: Is There An AI Bubble?

In today’s episode, you’ll get a straight answer to the burning question: Is there an AI bubble? You’ll discover the five key signs of an investment bubble and how the current AI landscape measures up. We’ll compare today’s AI craze to historical bubbles and analyze whether “this time it’s different” holds true. Tune in to gain valuable insights into navigating the exciting yet unpredictable world of AI investment and avoid getting caught when the bubble bursts.

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In today’s episode, let’s answer Bob’s question: Is there an AI bubble?

That’s a good question, and the answer is: it depends on how you define a bubble.

Bubbles in investment are generally governed by five things:

Rapid price increases (a lot of money flowing in)
Speculative trading (people buying on what they think the future value is rather than today’s value)
High volume (lots of people rushing in)
Decoupling from fundamentals (the value of something is perceived as way higher than its actual worth)
A “this time it’s different” mentality

Bubbles are nothing new. They’ve been around for centuries. Remember Holland’s tulip bubble in the 1600s? Tulip bulbs were traded at ridiculous prices. Some variants were traded for a year’s worth of income—for a single bulb! That clearly fits the speculative trading, rapid price increases, high trading volume, and especially decoupling from fundamentals.

No matter how nice a tulip is, tulips aren’t useful other than being decorative (and technically edible, but they’re not very good). That’s definitely decoupled from fundamentals.

So, with that lens, is AI a bubble right now?

It kind of feels like you’d have to be blind not to see it. The “stupid money” has arrived. We’re seeing rapid valuation increases, speculative investments and trades, and a lot of people rushing into the space. All those folks who were crypto and NFT experts two years ago are suddenly AI experts today, hawking AI services.

The big one is the decoupling from fundamentals, where how people are spending and investing isn’t based on a company’s actual valuation. Companies like Anthropic and OpenAI are wildly unprofitable. They’re burning money like crazy, and the only reason they’re still in business is that investors keep pouring money in, hoping they will someday be profitable.

There’s a huge decoupling from fundamentals.

With AI, there’s excessive optimism and the “this time it’s different” mentality. In some ways, I agree. AI is a different technology for knowledge work than we’ve ever seen. It’s very similar to automation in agriculture.

Until the steam engine and things like the cotton gin, humans did all the work in agriculture. Then came more and more machinery, to the point where one human can now do the work of 10,000. If it takes one person 10 hours to harvest a bushel of corn, one person driving the John Deere X9 1100 Combine can harvest 7,200 bushels an hour—or 72,000 bushels in 10 hours. That’s a 72,000% increase in productivity for that one person.

As a result, far fewer people work in agriculture these days because the machinery has become so efficient. AI is similar.

Agriculture is a good example because of the tools involved. A shovel makes things easier, but at a certain point, tools crossed over into doing the work for the person. With a shovel or rake, no matter how nice, you are still doing the work. You get into the John Deere X9 1100, and yeah, you’re steering it, but it’s doing the work. It’s picking the corn, harvesting, cutting, and tossing it into a big bin.

That’s the big flip, the change from human to machine. Like robots on assembly lines—assembly lines used to be all human-powered, with people riveting the same five bolts all day long. Now robots do that work. Humans supervise, but they don’t do the work anymore. In some instances, machines do the work; humans supervise the machines.

Knowledge work is experiencing the same change. You write a blog post, an accounting report, balance the books, or draft a contract. Now a machine can do that work, and you supervise the machine. The same thing that’s held from time immemorial—humans doing the work—is shifting to humans supervising something doing the work. That will hold true in AI.

So, from that perspective, it is different this time. But there’s still excessive optimism. There are still a lot of people saying a lot of unfounded things.

It is possible—as Sam Altman from OpenAI said—that 95% of knowledge work jobs could be done by machines. In the same way that it’s possible (and it did happen) that 95% of agriculture jobs are now done by machine.

In many high-yield scenarios—big fields of wheat and corn—it’s all harvested by machines now. You still need people to run the machines, supervise, and inspect, but you don’t have someone out there yanking ears of corn off the plant anymore.

So, is there an AI bubble? Yes, absolutely.

When will it burst? When these companies run out of money and when they continue operating at a loss. Basic economics will take over. A company can run at a loss for only so long before it’s done. This is partly driven by things like excess money still floating around from the pandemic, but there’s definitely a bubble, and it will burst.

What should you do about it?

Be aware of the technologies at play. Make sure you have backups. If there’s a particular vendor you depend on, ensure you have a backup so that if they go away, you’re not left holding the bag.

That’s going to do it for this episode. Thanks for tuning in; I’ll talk to you soon! If you enjoyed this video, please hit the like button. Subscribe to my channel if you haven’t already. And if you want to know when new videos are available, hit the bell button to be notified as soon as new content is live.

You Ask, I Answer: Is There An AI Bubble?

Machine-Generated Transcript

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