Big Tech says AI is booming. Wall Street is starting to see a bubble

I strongly suspect we're in an AI bubble, but that doesn't mean AI is without value. It's just that investors and entrepreneurs and CEOs get the zoomies about stuff like this. They go all in because they're scared someone is going to get ahead of them, or that they'll leave money on the table, and this often leads to a feedback loop as everyone tries to be more hyped than the last guy. But, obviously GenAI has already created a lot of value, and will create more. It's cool.

I hesitate to make comparisons, but I think of it like VR. For a hot minute, VR was supposed to be the future. We were all going to live our lives in VR. Zuckerberg goes all in. Turns out that's not happening anytime soon, but does that mean VR is a sham? No, it's actually really cool, and it'll keep getting better, but that doesn't mean we're going to spend 8-16 hours a day with a helmet on. That was just a bad prediction, and doesn't reflect on the technology or its value. Same with AI.

Bubbles are inevitable. Imagine a single company investing precisely the right amount into a new technology, not a penny more. Now imagine every single company and person doing the same thing, perfectly. It’s impossible.

The stock market has boom and bust cycles even with companies using 100 year old technologies! With an embryonic but all-promising technology like AI: it will pop then reinflate many times over. And this is fine.

I don’t think it’s a bubble yet. I think it’s very real and very early. Yes, most AI startups will fail and have little to no revenue just like how most software startups were prior to the AI boom. That hasn’t changed.

But we are so early in the LLM era. Hell, Slack hasn’t even added an LLM for chat histories, which is something I desperately want. AI agents are just starting. Scaling law hasn’t stopped.

There are a ton of use cases where I think LLMs are extremely helpful but we are bottlenecked by inference speeds and context size. Both of which are rapidly improving. There will come a break point where models are cheap, capable, and fast. We are not there yet. It’s really freaking early.

Expecting AI companies to generate massive amounts of revenue now is silly. Most of them will fail. But some of them will be absolutely gigantic.

> “There was a dot-com bubble, according to Goldman Sachs, because prices went up and prices went down. According to me, internet traffic didn’t go down at all.”

An idea from macro investing [1] that has stuck with me: don't overindex on the last crisis (or watershed moment more generally). All throughout the 2010s a lot of investors were implicitly assuming that if another crisis hit, it would look like 2008. The 2020 crisis proved to unfold in a very different ways than 2008, at least in terms of where you were best off putting your money.

Which brings me back to the Khosla quote from the start of this comment. A lot of people seem to be overindexing on the dot-com boom, assuming that this AI summer will pan out the same way.

I am not making a directional call here. All I'm suggesting is to stay humble about this trite yet profound truth: the future often unfolds in unexpected ways.

[1] Shout out to The Macro Tourist

Kosla: "The rush into AI might cause a financial bubble where investors lose money, but that doesn’t mean the underlying technology won’t continue to grow and become more important. There was a dot-com bubble, according to Goldman Sachs, because prices went up and prices went down. According to me, internet traffic didn’t go down at all.”

That's a good way to look at it. Many of the companies throwing money at AI are going to lose money. For two reasons: 1) it doesn't work well enough yet, and 2) it's getting cheaper, so more people can do it. Most infrastructure stuff ends up as a low-margin business.

Look at AI-guided autonomous vehicles. First demo, 1980s. First major successes, around 2005. First successful commercial use, around 2023. Profitability, ?. Probably half a century from demo to profitability.

AI blockchain 5G IoT ML self driving are a few trends I’ve seen in the last 10-15 years or so. I was too young to witness things like dotcom bubble but the theme remains the same.

Everytime something becomes popular there is always the ‘you got a hammer so now everything is a nail’ problem. Eventually the trend filters out the non sense applications and only the really important and impactful applications stick around.

Humans never change. Neither in stock markets nor otherwise. Everyone falls for the same things again and again.

The tech is super interesting and useful, but it’s also becoming very commoditized. Those selling compute win but most of these AI startups don’t have a viable business plan. I wouldn’t call the tech “a bubble” but the hype around AI startups and their valuation? Massive bubble ready to pop hard.

It's definitely a bubble. Sam Altman wants to build $7tn worth of data centers; if that's not an indication of how ridiculous this has gotten, I don't know what is.

LLM has been vastly oversold to the general public as "AI" when the technology is nowhere near that. We haven't invented turing complete robots that independently identify problems, learn the solutions, and respond. LLM as a technology might not ever be able to do that, by the nature of how it works. We have only created chatbots that reply to prompts, with a higher than acceptable inaccuracy rate. And yet this justifies $7tn.

But silicon valley figured out that saying "AIAI" on repeat works for funding, then other companies started pretending they were the same for the instant stock gain. Rising interest rates and this wave led everyone to pull out of other companies and dump into anything vaguely related to AI. They rode the price up, and now that interest rates are falling (making other companies more attractive) they are rotating out.

This probably didn't become a full on bubble like crypto did because interest rates were high. It's still a bubble, but seems to be pricking of its own accord as opposed to becoming a gigantic, systemic problem.

That said, when rates fall again, we might see a second boom there. Or maybe another fad will strike silicon valley, to continue the trend.

VR - Crypto - Metaverse - LLM?

I would hazard a guess that AI technology is already close to break even from an economic perspective, nearly everyone I know (especially those not in tech) uses it on a daily basis to assist with their work, especially coming in the form of dealing with pointless bureaucracy, writing emails and ideation.

From a cashflow perspective however it is no where near close to capturing its economic benefit, and to be fair to the bubble supporters I agree that I can't see how it can capture this in the short term. In the long term its pretty clear that there will be some major winners here who will reap big rewards.

What is concerning is it seemed like money had dried up, people were laid off. But at the same time, there seems to be so much cash available for AI. If this is a bubble,it will be interesting to see CEOs come back again, in tune, and say "I'm truly sorry I have to lay 30% of you off, layoffs are never easy, this is on me, we could not have foreseen this...best of luck".

It probably is a bubble in the same way the Internet created a bubble in the 90’s. A lot of hype based on the promise of the technology, and when it didn’t expand and pay out quickly enough the bubble “burst”. But over the following few decades the technology did end up living up to the hype, and then some.

It’ll be the same with AI, probably the productivity gains won’t return quickly enough for the current rounds of investment, but on a long enough time line it will absolutely be well-placed hype.

Works where archive.ph is blocked:

https://www.msn.com/en-us/money/markets/big-tech-says-ai-is-...

Text-only:

https://assets.msn.com/content/view/v2/Detail/en-in/BB1qxJH0

They keep building the same thing, but bigger. It keeps exhibiting the exact same issues. It is a bubble because it is very clear that the tech is hitting a dead end.

AI's current trajectory is actually the best one for workers where it increases worker productivity but does not replace them which will increase demand.

At my job it’s assisting new out-of-the box tools that require configuration. Good example of productivity increase and not replacing work, but instead creating new work.