How would an AI bubble effect most people?

[punkinhead]

I'm seeing more and more predictions of an AI bubble and comparing it to the 90's dot-com bubble. Back then (and still today) I was invested in broad market index funds - mostly a simple S&P 500 fund. I didn't have much money in the NASDAQ. Today I still don't buy individual stocks. I'm in broad market index funds like the S&P 500, Vanguard Total Market, and Total International Market funds. I know these large companies are investing in AI, but my memory of the dot-com collapse is that it mostly just eliminated companies with no real product or earnings that were cashing in on the word "internet". Would an AI bubble bursting be similar in that it would mostly effect companies using the word "AI" without earnings or a marketable product?

Other than people directly targeting AI companies for their investments similar to what some people did with the NASDAQ in the 90's, how will a tech bubble effect most people? I'm trying to get a feel for how worried most people should really be. Will significantly effect the S&P 500? Will there be job losses in companies that aren't heavily investing in AI?

 

[Luvtoride]

Nobody knows or can predict it. I’m not worrying about it if you are taking a poll.

 

[punkinhead]

Nobody knows or can predict it. I’m not worrying about it if you are taking a poll.

I'm not taking a poll. I'm trying to understand how a bubble bursting would effect most of society, not specific people.

 

[Aerides]

Google's CEO had a comment on this yesterday (from US News Decision Points newsletter):

Sundar Pichai, CEO of Google parent company Alphabet, warned in an interview with the BBC that the AI investment boom had “elements of irrationality.” And if it turns out to be a bubble that pops, “no company is going to be immune, including us.”​

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Apparently alluding to the late 1990s dotcom bubble, Pichai said, “We can look back at the internet right now. There was clearly a lot of excess investment, but none of us would question whether the internet was profound.”​

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"I expect AI to be the same. So I think it's both rational and there are elements of irrationality through a moment like this."​

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If he's not sure but expecting bumps in the short term, I think we all should! Irrational Exuberance anyone?

 

[Aerides]

And "society" will be just fine. I think we'd be better if it all went to pot, but that's just me.

Investors will be burned a bit, TBD how much that economic impact drags across an already challenged economy.

 

[VanWinkle]

It will affect us all in some ways, investment loss, job loss, lower interest rates........ That has been the path in the past.

 

[punkinhead]

I ask because during the dot-com collapse I was a young engineer. My investments were all long term so I didn't look at them for months at a time. I don't remember my job being at risk (I was at an automotive OEM). So it didn't really effect me or most people I knew. The only people I knew who were effected were those who went heavily into the NASDAQ following the craze. If AI collapses and it only effects investors who were following the AI craze then it's no big deal. I'm retired with 2.5 years of cash so it won't effect me. But I'm wondering if there's anything about this bubble that will have a broader effect on regular people, like my working age neighbors or recently launched children. I'm also wondering if it will significantly effect larger companies like Meta, Google, etc, who are investing in AI but are using it for real products rather than slick marketing packages to lure in investors.

 

[Surewhitey]

I'm expecting the winners to be fine & companies using the tools to find efficiencies for profits to be had. Jobs may be lost on the low end, but that is progress, right?

The losers, they'll quickly go down as investors will dry up & they're spending is so much that they'll be gone quick.

The life expectancy of the guts are interesting to me. Curious about the future of lifespan and having to stay up-to-date with the hardware to compete.

 

[street]

There will good and bad in AI and will play a role in everything. I also beleive it will create opportunity and more progress will increase to many other areas in business. In a nut shell I lean toward it being a positive event.

 

[target2019]

You can ask AI to list the most likely scenarios. That would be insightful and ironic!

I think the bubble prick will expose more than fake AI-labeled companies. But that story goes very dark.

 

[FIYes]

a bubble burst would ripple the economy and have some effect on all of us. However the effect on individuals would vary greatly. When the dot com bubble burst I was still working and not heavily invested. I was still contributing to my 401k, my pension plan, and paying off my mortgage.

The great recession had more impact on DH and I. DH lost his business and that was a difficult time economically. I was still working and we paid off his business debts and I was able to retire. Our neighbor lost his house due to foreclosure. We had paid off our house a couple of years prior, so we had that security. I recall being at a party and an older gentleman said that he didn’t understand all the great recession talk, he was just fine. Just goes to show that impact individually will vary.

 

[Andre1969]

Well, to compare it to the Tech bubble burst, which started in March of 2000 I believe, it was considered the primary cause of the whole 2000-2002 downturn. I've been investing seriously since 1998, and 2000-2002 is the only time period I've had a negative return three years in a row.

The 9/11 tragedy definitely contributed, but we were already on a serious downward slide even before that.

So, if there is a bursting of the AI bubble, hopefully it won't be as bad as that!

 

[target2019]

I just wonder if my experiences with dot-bomb and Great Recession will be relevant to the next bottom. We'll find out.

 

[DJRR]

I ask because during the dot-com collapse I was a young engineer. My investments were all long term so I didn't look at them for months at a time. I don't remember my job being at risk (I was at an automotive OEM). So it didn't really effect me or most people I knew. The only people I knew who were effected were those who went heavily into the NASDAQ following the craze. If AI collapses and it only effects investors who were following the AI craze then it's no big deal. I'm retired with 2.5 years of cash so it won't effect me. But I'm wondering if there's anything about this bubble that will have a broader effect on regular people, like my working age neighbors or recently launched children. I'm also wondering if it will significantly effect larger companies like Meta, Google, etc, who are investing in AI but are using it for real products rather than slick marketing packages to lure in investors.

Bleed over into the real world is hard to predict. During Dot.com I got my first "real" job at a Telco company. My salary tripled in 3 years, so good times My group went from 4 in 1996 to 38 by 1999 to 2 by 2004 then I got laid off, leaving 1 who is still there 20 years later. People who visited me would brag that they were millionaires with stock options and I was pissed because my bonus was paid in cash. Well, those options never vested and most of them got nothing. We laid enough dark fiber and DWDM equipment that people said we would have 50 years capacity after the bubble. Fast forward 10 years and we were out of capacity and high speed internet was transforming the world. People were early and lost a fortune, but everyone benefited from the investment eventually.
AI is different. This is not Pets.com selling to consumers. The players are top businesses with real money and earnings, not vaporware and promises. I am sure some investors will wish that their favorite tech company paid dividends instead of building datacenters, but the payback will be real. We just don't know yet if the magnitude will justify the capital investment. There are already use cases that are saving money - love it or hate it AI chat support is real and growing. Productivity tools will help make up for a weaker education system. Can't create an outline or diagram a sentence? - there is AI for that. People will lose their jobs. Other jobs will be created. Great time to be a AI software engineer, no so great to be a CSR. I tell my kids to focus on jobs that have direct interaction with customers and/or require a security clearance. Those jobs are hard to outsource or replace with AI. We will continue to bifurcate into a tech class and a service class that serves the tech class. I have one daughter who does 6 figures providing facials to wealthy clients and another who waits tables in a tech hub and makes $50/hour on good nights. They are already investing in their 20's and have no student loan debt. Think they will be fine. People stuck in retail or back office functions will not do so well. They will be replaced if possible. This has been going on for a long time, but will accelerate.

 

[donheff]

I expect an AI bubble pop would be like others - temporary. That said, I flipped my AA from ~77/23 to 40/60 because I have won the game and think there will be a pop. I will be fine whether it pops or not and made the AA adjustment in line with my children's needs. They are keeping their 401Ks in equities but are glad we are switching our estate to a more conservative allocation in case they guess wrong.

Like you, I am a broad market, index fund investor. The AI companies are so weighty they will have a big effect on the indexes if they explode. If the indexes are rebalanced to the new weight before the AIs bounce back, the indexes could get a double whammy if AI companies then rebound rapidly. It's all a crap shoot.

 

[audreyh1]

The equity markets are at valuation extremes, similar to 1999.

But I just stick with my well diversified investments and expect a rollercoaster. I rebalance or tax loss harvest when the opportunity arises, otherwise I just sit on my hands.

Even though the S&P500 is market cap weighted and thus tends to be concentrated in the top 7-10 companies, that doesn’t bother me either, as the leaders do change over longer periods of time, like over decades.

 

[sengsational]

Companies are going to love AI CSR's. Even cheaper than a call center in India and even better at wasting your time without solving the problem

 

[mrfeh]

I ask because during the dot-com collapse I was a young engineer. My investments were all long term so I didn't look at them for months at a time. I don't remember my job being at risk (I was at an automotive OEM). So it didn't really effect me or most people I knew. The only people I knew who were effected were those who went heavily into the NASDAQ following the craze. If AI collapses and it only effects investors who were following the AI craze then it's no big deal. I'm retired with 2.5 years of cash so it won't effect me. But I'm wondering if there's anything about this bubble that will have a broader effect on regular people, like my working age neighbors or recently launched children. I'm also wondering if it will significantly effect larger companies like Meta, Google, etc, who are investing in AI but are using it for real products rather than slick marketing packages to lure in investors.

I don't understand what you're asking. You keep using the term "bubble", which is an investing/market term. But you also seem to be asking about AI's effect on society.

Two different things.

 

[GrayHare]

This is why we all diversify imvestments. When the music stops, there will be a flight to quality. If you have available cash, it will be an opportunity to purchase stocks at a discount price. It will be a good time to convert to Roth. Then a recovery will follow. Lather, rinse, repeat.

 

[punkinhead]

I don't understand what you're asking. You keep using the term "bubble", which is an investing/market term. But you also seem to be asking about AI's effect on society.

Two different things.

I'm not asking about AI's effect on society. I'm asking about the economic effects of an AI bubble burst on society.

 

[target2019]

I ask because during the dot-com collapse I was a young engineer. My investments were all long term so I didn't look at them for months at a time. I don't remember my job being at risk (I was at an automotive OEM). So it didn't really effect me or most people I knew. The only people I knew who were effected were those who went heavily into the NASDAQ following the craze. If AI collapses and it only effects investors who were following the AI craze then it's no big deal. I'm retired with 2.5 years of cash so it won't effect me. But I'm wondering if there's anything about this bubble that will have a broader effect on regular people, like my working age neighbors or recently launched children. I'm also wondering if it will significantly effect larger companies like Meta, Google, etc, who are investing in AI but are using it for real products rather than slick marketing packages to lure in investors.

punkinhead, I do see broader problems ahead for retirees, and the point you make about working-age people and their children is something that concerns me also.

I think it gives comfort to believe that a bubble has limited effect on a retiree like me. But that will not happen in a think-tank. Real world effects won't play out in perfect predictions.

 

[pb4uski]

This is why we all diversify imvestments. When the music stops, there will be a flight to quality. If you have available cash, it will be an opportunity to purchase stocks at a discount price. It will be a good time to convert to Roth. Then a recovery will follow. Lather, rinse, repeat.

But... the Magnificent Seven (Apple, Microsoft, Alphabet/Google, Amazon, NVIDIA, Tesla and Meta/Facebook) are 35-37% of the S&P 500 or 25-30% of the total US stock market so those who are heavily invested in index funds for their equity allocation are much more concentrated than they might realize so if there is an AI bubble and it pops then the hurt will likely be substantial and broad.

 

[mrfeh]

I'm not asking about AI's effect on society. I'm asking about the economic effects of an AI bubble burst on society.

Assuming there is a bubble, which is not a given...I'd say the effect would depend on why the bubble bursts. Is it purely financial (people throwing too much money at a given sector), or is it because AI is not going to affect employment in a major way?

 

[jebmke]

One should always be able to withstand a 30-40% drop in equity -- it certainly happens routinely. I retired in December, 2007.

From a pure economic perspective I think downturns of this magnitude can often be healthy for the long term inasmuch as it clears out a lot of deadwood in the capital markets. Unfortunately, it also affects individuals either through the effects on investments or employment security.

 

[GrayHare]

But... the Magnificent Seven (Apple, Microsoft, Alphabet/Google, Amazon, NVIDIA, Tesla and Meta/Facebook) are 35-37% of the S&P 500 or 25-30% of the total US stock market so those who are heavily invested in index funds for their equity allocation are much more concentrated than they might realize so if there is an AI bubble and it pops then the hurt will likely be substantial and broad.

I don't disagree. Index funds have been very popular, perhaps overly so, which is why I've been minimizing my exposure to them.