Is the AI bubble about to burst? Some top names think so

Conditions are right for a repeat of the dotcom collapse but, as Chris Blackhurst explains, some big names are less worried about the impact of a crash this time

Some 25 years ago I was shown round a “dotcom incubator”. It was a converted office building in London’s Clerkenwell. On each floor, there were huddles of young people, all dressed in black T-shirts, jeans and Converse, staring earnestly at computers. Each group was plugging a different ecommerce idea. Up on the roof, there was a terrace with a barbecue, bar, DJ booth, pot plants and giant bean bags. So cool, so out of northern California.

One group was selling pet food. I asked why people would buy their dog biscuits directly in quantity – how much did they actually need, did they have the storage, didn’t the likes of Tesco sell it already and how could they hope to undercut the supermarkets? I was looked at askance. Clearly, I wasn’t on message.

Soon after, the dotcom bubble burst. One of the biggest casualties, as it happened, was Pets.com in the US; they weren’t the Clerkenwell lot, but they might as well have been. Like hundreds of firms that collapsed, San Francisco-based Pets.com didn’t independently research the market, they simply assumed they were onto a winner. They didn’t reckon on the cost of transporting pet food in bulk; seemingly, it never occurred to them why supermarkets build vast, automated warehouses and run fleets of lorries. They had no proper business plan. Pets.com earned $619,000 in revenue in its first year but spent $11.8m on advertising alone (including a slot during the Super Bowl that cost $1.2m). The dotcom crash of 2000 instantly wiped $1.755 trillion off the values of internet stocks. Subsequent corporate scandals like Enron, and the 9/11 attack further contributed to a stock market downturn, which by the end of 2002 had cost a total of $5 trillion. Hundreds of companies worldwide went under, and tens of thousands lost their jobs.

JPMorgan Chase CEO Jamie Dimon says he’s ‘far more worried’ about a bubble than most (BBC)

Experts are warning that conditions today are ripe for a repeat. Back then, it was dotcom’s bubble that burst, this time it will be AI – and it’s claimed the numbers will be far higher. The Bank of England’s financial policy committee is warning that “the risk of a sharp market correction has increased” due to soaring US tech valuations; its language is typically couched – for “sharp market correction”, read plunge.

US hedge fund billionaire Paul Tudor Jones, a stock market sage if ever there was one, is more forthright: “All the ingredients are in place for some kind of a blow off. History rhymes a lot, so I would think some version of it is going to happen again. If anything, now is so much more potentially explosive than 1999.”

Tudor Jones has been joined by the world’s top banker, Jamie Dimon, who says he is “far more worried than others” about a meltdown in the next six months to two years. Dimon, head of Wall Street colossus, JP Morgan, says: “I would give it a higher probability than I think is probably priced in the market and by others. So, if the market’s pricing in 10 per cent, I would say it is more like 30 per cent.”

Back then, it was the addition of “dotcom” that seemingly conveyed a special alchemy; now it’s the letters AI. They’re everywhere. Again, there has been a stampede of investors to climb aboard the bandwagon. Billions upon billions of dollars have been loaned in pursuit of the new technology. In 2000, we had to become acquainted with “vendor financing” – lending to start-ups so they could buy the equipment they needed; it is very much alive and now the money has been used to acquire AI technology. As before, business valuations have soared. Nvidia, which makes the processors that power AI, is apparently now worth $4.67 trillion.

Nvidia is one of the “Magnificent Seven” tech behemoths – along with Alphabet, Amazon, Meta, Tesla, Apple and Microsoft – that account for 36 per cent of the S&P 500. Think about it: that US share index comprises more than 60 per cent of global equities. That’s how concentrated the world’s financial muscle has become; that’s why it could be disastrous for savers and for workers in all countries if the AI gold rush stalls and goes backwards.

Even Sam Altman, OpenAI boss, admits people will lose a ‘phenomenal’ amount of money if the AI bubble bursts (Getty)

What the gold panners usually lacked was tangible profit. Likewise, in the dotcom boom the tech was slick, the premises smart, the marketing material bold and beautifully presented – but the missing vital ingredient was profit. Investors always want a return on their commitment, regardless of how much testosterone they are expending. That’s what lies behind current anxiety: that fortunes are going into AI with, so far, little commensurate reward. Meanwhile, the global economy remains extremely fragile in an uncertain world.

Tech titans are trying to put a brave face on it, claiming any crash, should it occur, would be different. Their thesis is that, while cash has been borrowed to fund AI, the debt is not proportionally as high as the skyward levels that were allowed to build up prior to 2000. There is more wealth to go around, they argue. OpenAI boss, Sam Altman, acknowledges that some people will lose “a phenomenal amount of money” if the AI bubble bursts. Jeff Bezos has said similar. Whatever transpires, AI will deliver “gigantic benefits” to society, he believes. It is true that AI is bound to have a far greater transformational impact than dotcom. But long-term gain for the world does not negate the short-term pain (although it’s a stance more easily taken of course if you are as rich as Altman and Bezos).

As to what the rest of us can do, the answer is “not much”. Avoid investing in AI and tech, stick to the old-fashioned necessities, such as food retailing. Knuckle down for what may be one hell of a ride. Fingers crossed, sense will prevail and the threat will recede.