To understand how stocks will be impacted by AI, we should stop looking to the future. Look backwards instead, to the 1920s — another era when, in the words of John Kenneth Galbraith, 'men sought not to be persuaded of the reality of things, but to find excuses for escaping into the new world of fantasy.’
The parallels between the 1920s and the 2020s are uncanny. Commentators today blur the lines between sci-fi and reality. Where does it all end? Will optimism produce a great crash, as it did in 1929? Or will we arrive at what Ray Kurzweil calls the ‘Singularity,’ the point where AI surpasses human intelligence and technological change becomes exponential?
This week, I will present the bear case against AI, with a particular focus on LLMs (Large Language Models) and two companies leading this space, namely OpenAI and Anthropic.
In a subsequent article, Graham will offer a more bullish rebuttal.
Writing On The Cocktail Party Wall?
Before diving into financials, we should analyse the zeitgeist of our time.
There are two telltale signs of a bubble.
- Skeptics who warn of danger are shunned;
- Shares become the main topic of conversation at dinner parties.
Tell someone that AI is an overhyped fad, and watch their reaction. Many will dismiss you as a naysayer. Keep your ears open on the Tube, or in the supermarket. How often do you hear someone say ‘AI’ or ‘ChatGPT’? When everyone is talking about the same thing, herd mentality may be taking hold, the very psychology that fuels market bubbles.
Another telltale sign of a market bubble is people saying: ‘It’s different this time’. Just before the 1929 crash, one economist said that markets had reached ‘a permanently high plateau’, as if the laws of finance had changed and stocks would go up forever. Today, people say that AI will change everything. Maybe it will, but we’ve heard it all before.
The following illustrations are fictional, generated using DALL·E 3 (OpenAI). Nevertheless, they are plausible caricatures of the times. They highlight plausible parallels between the 1920s (left) and 2020s (right).
Do The Valuations Make Sense?
The clearest sign of a bubble is the high valuations that OpenAI and Anthropic have secured in recent funding rounds. Investors need to answer a simple question: does it make sense for these companies to…
