March 8, 2024
No, the AI bubble is not bursting yet. It is far from its inflection point and it will continue inflating for a while. Many still believe that AI is a magical panacea. Until that sentiment fades away, the AI boom will continue feeding an AI bubble in some stocks such as NVIDIA.
AI in no a solution to all problems. AI will solve many problems and will create even more problems. That is part of the inescapable Problem Paradox by which a solution to a problem creates more problems. The new problems are oftentimes more difficult to solve. The Problem Paradox is neither "good" nor "bad". It is what it is. The Problem Paradox serves as the engine behind progress. It keeps humans spinning forward chasing the tail of problem after problem. The continous solution of problems leads to the unidirectional change called progress.
AI is computerized human-like intelligence. AI is a continuation of computer revolution. This revolution began with stand-alone computers (electronic devices processing data by applying logical operations and arithmetic calculations). It continued with the internet (a worldwide web of interconnected computers). From there it was expanded by smartphones (ubiquitous hand-held, mobile, super computers processing voice and text over via radio telecommunication stations and the internet). It was expanded by cloud computing (high capacity server farms storing and processing big data back and forth the internet), the internet of things (all sort of digital devices communicating via the internet with servers in the cloud), and telecommunications in general (e.g. 5G networks).
Intelligence is the pinnacle of organic life. Intelligence is the ultimate success of organic life. In hindsight, generating intelligence (problem-solving ability) can be regarded as the purpose of life. Current life on planet Earth is a highly complex set of organic (carbon-based) compounds seeking electromagnetic stability. Intelligence is the ability to acquire knowledge and develop skills (i.e. ability to learn) to solve problems. Intelligence is problem-solving ability.
Ultimately, the main problem to be solved by AI is the existential problem of the human condition. The human condition is an intellectual being trapped in an animal body. AI will help humans transcend the limits of organic chemistry, by replacing biology with technology. AI will help humans advance biomedicine to not only cure biological bodies, but also to replace them bionic bodies. AI will help humans transplant their entire nervous system into robotic bodies and bot servers.
AI will eventually free humans from many of the constraints of biology. Humans will no longer be victims of non-neurological diseases such as cardiovascular disease, most cancers, diabetes, and other primitive organs on which humans depend for survival to this date. All those organs and systems--other than the brain and the nervous system--can be replaced with artificial parts and systems and you still have the same underlying human yet one that could live significantly longer. Perhaps Robocop can give ideas on the direction where AI may take humanity within the next centuries. In the distant future, AI will help humanity escape the human condition by replacing significant parts of human biology with artificial technology. But that is a transhumanism story for another day.
Going back to finances, today, March 8, 2024, was a relative bad trading day for AI bubble stocks like NVIDIA and Super Micro Computer. They were down about 5% and 2%, respectively. Nothing serious or alarming; just part of the normal and healthy market fluctuation cycle. Chances are that over the next months, these two companies will continue appreciating. The AI boom is real, and the promises of AI are spectacular.
At some point in time, however, due to classical human stupidity and irrationality, the rate of appreciation of these stocks and similar contenders in the technology sector can significantly outpace the realistic rate of economic growth. To some extent, the valuations are already there. NVIDIA, for example, is already unreasonably valuated and should take a correction of about 25% any time soon. Now, financial markets are impossible to predict accurately because they rely mostly on psychological factors deriving from human imagination.
So long as investors can imagine a rosy picture for NVIDIA, they will keep pushing the stock to unreasonably high valuations. The way the market and the legal system is set up, NVIDIA's management owes a duty to shareholders in keeping the frenzy alive. NVIDIA's CEO has repeatedly hinted to the crazy market reaction and overvaluation of NVIDIA, but he cannot go out fully and say so without risking being ousted and exposing the company to liability. He must keep the incredibly lucrative show going. The show must go on. Stupidity and irrationality must go on.
What should investors do?
That is for investors to decide based on their financial goals and risk tolerance. An idea is to keep safe 90% of the investment portfolio in low cost, well diversified, index funds. Then play the AI bubble with the other 10%. There will be volatility ahead. That 10% can go long or can go short. There will be money on each side, but obviously not at the same time. And timing the market is almost impossible. Not even AI may be able to time the market because it is mostly subject to human emotions and very much subjective and almost unpredictable.
Having said that, we believe that the AI bubble may push NVIDIA to a price to earnings ratio (P/E) of 100. It is currently 73. That means that today's investors or speculators are paying $73 for every $1 earned in revenue by NVIDIA. Apple's P/E is 27. Meta's P/E is 33. Alphabet's P/E is 25. NVIDIA's earnings have been increasing so there is plenty of room for market capitalization to continue increasing prior to reaching a P/E of 100. If NVIDIA hits a P/E of 100, many will ring the AI bubble alarm. The market is not there yet.
Modern life on planet Earth can be very boring sometimes. Good thing is that the future has not been created yet and it is uncertain by nature. Stay tuned to see what will happen, what will be created, next.
Creatix.one, AI for everyone.
Comments
Post a Comment