How would an AI bubble effect most people?

[Al18]

I've been working on diversifying away from the Magnificent Seven for a few years, buy investing in RSP and funds that invest a % in foreign equity such as FFNOX

 

[punkinhead]

Here's an interesting article that explains some of the financial moves being made in AI. I'm not an accountant so I don't know how common these schemes are but they seem pretty sketchy. For example, circular deals where NVIDIA invests $100 billion in OpenAI who spends that money on NVIDIA chips.

Another example from the article:

For example, a special purpose vehicle was recently funded by Wall Street firm Blue Owl Capital and Meta for a data center in Louisiana.

The design of the deal is complicated but it goes something like this: Blue Owl took out a loan for $27 billion for the data center. That debt is backed up by Meta's payments for leasing the facility. Meta essentially has a mortgage on the data center. Meta owns 20% of the entity but gets all of the computing power the data center generates. Because of the financial structure of the deal, the $27 billion loan never shows up on Meta's balance sheet. If the AI bubble bursts and the data center goes dark, Meta will be on the hook to make a multi-billion-dollar payment to Blue Owl for the value of the data center.

 

[Markola]

I figure, the herd is usually wrong, so if the media hysteria machine is on bubble-watch, there probably isn’t one. Second, AI is a truly disruptive force, and its effects are unpredictable, so stay humble and diversify.

Even if there is a AI bubble, and it pops, we all know now what comes next: Liquidity injections, ie “The Big Print”, to keep the party going.

With the debt ballooning, short-term concerned politicians can’t afford a recession in 2026 elections, or any election, with lower tax receipts to pay higher unemployment services, mushrooming debt payments, social chaos, and voter anger. They’ll take the easy way, print money to get through it, and the cost will be silently borne by the ongoing dilution of each dollar’s spending power. There is no fiscal or monetary discipline anymore, and the problem is bipartisan. Spending power dilution is hard to see clearly, because AI is putting the brakes on the overall inflation that the debasement of currencies is creating.

After DOGE was quickly abandoned this spring, and the federal government did a 180 into increased military spending, slashed tax revenues further, and aggressively jawboned the Fed into lowering interest rates, I saw the writing on the wall and rebuilt my portfolio with a long-term strategy aimed to protect my spending power from debt-ladened governments and to position it for AI disruption. I can’t and won’t know if I was right until many years from now. I chose to:

1. Diversify stocks globally in VT, because the multiples are lower internationally, and because we can’t know which global businesses AI will help or disrupt most. There is a good case that labor-dependent international businesses have more opportunity to benefit from AI and robotics efficiencies than more already automated Western ones. I don’t know, so I bought the whole world casino in the VT etf, and it’s doing better than the S&P 500 this year so far. VT will adjust organically as the global public company valuations adjust.

2. Get (the hell) out of government bonds, due to accelerating money printing and central banks’ global reserve assets diversifying away from US treasuries to gold and other currencies, a long-term evolution that accelerated when the prior administration froze Russia’s dollar assets as political punishment for invading Ukraine. The dollar had not been weaponized like that before, and regimes around the world took note.

3. Load up on harder, scarcer gold and digital assets, whose spending power should melt more slowly than US dollars.

4. For the first time, hold a year’s worth of cash in a money market, which I find helps me sleep better through the growing turbulence of a tech-driven, multi-polar economy.

My views and according actions. YMMV.

 

[flyoverstate]

AI bubble? ... maybe, but the bigger concern to me is inflation and recession. AI is eliminating jobs in the short run; most notably entry SW engineers. This current bull market is entering its 4th yr; the average bull duration is 5.5 yrs. And its average end is right about the time of midterm elections where the state of the economy will be front and center on the minds of voters. So the end is nearing if you believe in historical averages. And there is only so much the Walmarts of the world can do to absorb/hide the impact of the tariffs. I'm still staying mostly at my 70/30 AA and will likely remain so forever. 14 mo from now I will finally start withdrawing from my IRA at age 59.5 yrs, and my bridge $ will be mostly depleted at that time. Sort of scary doing this entering a recession with SORR concerns and all, but FIRECalc says I'll survive. However ...sticking with historical averages, the resulting bear market will last about 14 mo before recovering ...and I'll be auto-reinvesting Divs and CGs throughout that time

Finally, someone with their eye on the real ball. Sure, there *will* be a shakeout in the AI companies, and valuations *will* drop, but the longer term issue will be that AI will genuinely cause job losses that will be tough for the economy to swallow. Everything from IT workers to customer service call centers to tradespeople to truck drivers to farmworkers will be affected. Tradespeople? Yes. There is still a shortage of good tradespeople, but the internet and YouTube have made DIY a lot easier. In a few years, instead of Googling "how to add an outlet" or finding a shaky YouTube video, you will take a video of your breaker box, and where you want the outlet, and AI will generate a custom parts list and a custom step-by-step video showing exactly what to do. Extrapolate this to any kind of repair or addition, and the raw labor becomes the only input.

The restaurant industry is already taking a beating because you can summon a recipe for any dish you like. We love Thai food, and we don't mind dining out as a treat, but our $50+ tip dinner can be replicated for about $10 with very little effort. So we do that.

Imagine that you can make a meal list for the week, and AI, already knowing what is in your fridge and pantry, creates a shopping list, queries all of the local stores for the best prices, clips the necessary digital coupons, and gives you a route to travel most efficiently to fill the list, suggesting the best time of day to avoid traffic and congestion in the store. AI places the orders for pickup, or sends a request to DoorDash, or whatever. And DoorDash will just be a self-driving taxi taking a small detour to have the order placed in the vehicle, and it notifies you when it is outside your door. This is where we are headed.

I have a relative who designs robots for warehouses and trucking companies. He believes within 10 years, a self-driving truck will back into a warehouse dock, robots will load the truck, it will drive to its various destinations where it will be unloaded by robots.

 

[Markola]

^^^100%. We have to think about AI-enabled robots. I was in Miami recently and there are already food delivery robots on sidewalks everywhere.

 

[JohnnyPHX]

^^^100%. We have to think about AI-enabled robots. I was in Miami recently and there are already food delivery robots on sidewalks everywhere.

We were just in a pizza and pasta restaurant and a robo-server came out behind the actual human server. The robo-waiter was just a fancy I-food looking white cart that had several orders on it and it followed the human server around to the appropriate tables. It lined up correctly at the table so the human server could access the plates and set the food in front of the correct customer. That's a great load off the human servers having to carry all the dishes around. If it stops there great but I wonder how long before Robo-server 2.0 comes out and has arms added and can replace the human servers. I wonder if the wait staff feel like they might be training their eventual replacements. It looked something like this?

Wow it could probably be used for multitasking. Incorporate a Roomba for the base and it could vacuum at the same time...LOL

 

[Markola]

Here’s a video of one of the Miami food delivery ones in traffic in Brickell. I’m gonna guess they’ll have short lifespans until all automobiles are also robots with crash avoidance tech.

https://www.reddit.com/r/Miami/s/OTxqQ1fCfX

 

[Theophrastus Bombastus]

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?

I think it may.

But more importantly, an Actual Intelligence deficit seems to affect many people already!
There is nothing new under the sun. Only the names, faces and circumstances change.

 

[GoodLife59]

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?

I talked with my Vanguard advisor a few days ago. He said my mutual funds are about 12% invested in AI. So no concerns from my end. If you work with Vanguard you could ask the specifics of your investments. I don’t think it’s in a bubble as much as it’s gearing up to consolidate.

 

[dobig]

I don't remember so much yammering about the dot com bubble before it burst.

It seems to me if it's on the tip of everyone's tongue, it's nothing to be afraid of; nobody will be caught off guard. There are probably worse things out there that could trigger a debt crisis or something.

As history has shown, when the majority of people think the market will do one thing what does the market usually do?

 

[skipro33]

I'm currently heavy into FXAIX, an S&P Index fund at 94%, the rest in cash. I don't take draws, I have a pension and SS. Not counting RMD's in 3 years, my math shows these scenarios in the next 10 months,
If AI bubble pops;
28% drop. It will take from 4 to 7 years to recover.
If AI keeps booming;
19% growth first year. Continued compounding, it will double in 4 years

If I diversify with this target allocation:
FXAIX (S&P 500) 40%
FSSNX (Small Cap) 10%
FSPSX (International) 15%
FXNAX (Bond Index) 25%
FSRNX (Real Estate) 5%
Cash 5%

And the AI bubble pops:
22% drop. It will take 2 years to recover.
If AI keeps booming;
Year 1; missed 12% growth
Year 2; missed 20% growth
Year 3; missed 40% growth
Year 4; missed 60% growth
Year 5-7 missed 80%growth

If there is a moderate market and I leave my allocation as-is, there's very little difference between the diversified allocation and my current allocation, about 1% difference.

Basically, I can potentially recover in 2 years if AI bubble pops but potentially miss around 50% growth by the time I start taking RMD's in a bit over 3 years if it keeps booming.
I basically stay the same if the market is moderate, neither an AI bubble pop or boom with either allocation.

That is a big, BIG loss IF the AI bubble keeps booming.

It comes down to how much risk I'm comfortable with going forward. On the one hand, I don't need the growth, and on the other hand, I miss out leaving a large inheritance, as I'm not likely to spend much of the IRA other than for long term care needs. Hmmm....

I have already realized 16% growth each year for the past 3 years. I'm ahead right now more than I thought I would be in 3 more years. Perhaps it's time to either protect some of that or spend some of it?

 

[JBTX]

My current guess is it is a bubble, somewhat like dot.com, but also the internet/cable/fiber boom and bust that followed.

I hear a lot of back of the napkin calculations that the amount of investment that is going on right now can’t possibly pay off. Plus, you now have chips that have a lifecycle of 1.5-2 years, being depreciated over 5-6 years, and be financed over 30 years, with some of the debt in collateroized securities (sound familiar?)

No idea how it all plays out. I haven’ t really changed anything. I’m 40% bonds, about half of that TIPS and ibonds, and 40% of my stocks are ex US, and my US is slightly tilted away from mega cap tech. But I suspect a bust will sink all ships for at least a short while. I wouldn’t be surprised at another “lost decade”.

I should say I’ve felt this way for more than 5 years, so to date I’ve been wrong.

 

[joejetski]

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 think the effect really depends on the magnitude and length of the drop. Is it more like a 2007-2008 GFC down 50-60% and took 5 years for S&P to recover to baseline, or is it more V shaped? If the bubble has second order effects, like unemployment, then the length of depression could last awhile. If AI use cases are more limited than expected, investors will take it in the shorts, but it may be a deeper drop but little less widespread impact, like COVID or dotcom bubble.

 

[joejetski]

I'm currently heavy into FXAIX, an S&P Index fund at 94%, the rest in cash. I don't take draws, I have a pension and SS. Not counting RMD's in 3 years, my math shows these scenarios in the next 10 months,
If AI bubble pops;
28% drop. It will take from 4 to 7 years to recover.
If AI keeps booming;
19% growth first year. Continued compounding, it will double in 4 years

If I diversify with this target allocation:
FXAIX (S&P 500) 40%
FSSNX (Small Cap) 10%
FSPSX (International) 15%
FXNAX (Bond Index) 25%
FSRNX (Real Estate) 5%
Cash 5%

And the AI bubble pops:
22% drop. It will take 2 years to recover.
If AI keeps booming;
Year 1; missed 12% growth
Year 2; missed 20% growth
Year 3; missed 40% growth
Year 4; missed 60% growth
Year 5-7 missed 80%growth

If there is a moderate market and I leave my allocation as-is, there's very little difference between the diversified allocation and my current allocation, about 1% difference.

Basically, I can potentially recover in 2 years if AI bubble pops but potentially miss around 50% growth by the time I start taking RMD's in a bit over 3 years if it keeps booming.
I basically stay the same if the market is moderate, neither an AI bubble pop or boom with either allocation.

That is a big, BIG loss IF the AI bubble keeps booming.

It comes down to how much risk I'm comfortable with going forward. On the one hand, I don't need the growth, and on the other hand, I miss out leaving a large inheritance, as I'm not likely to spend much of the IRA other than for long term care needs. Hmmm....

I have already realized 16% growth each year for the past 3 years. I'm ahead right now more than I thought I would be in 3 more years. Perhaps it's time to either protect some of that or spend some of it?

I would say spend. You can’t buy time or health. Everything else, yup.

 

[RetiredHappy]

I am not worried about the "AI bubble". It may or may not be a bubble. I am more concerned about US deficit/debt.

 

[skipro33]

I would say spend. You can’t buy time or health. Everything else, yup.

I've come to that conclusion as well. Starting next year, I start drawing the same rate as I would if I were 73, RMD amounts. Based on my AI app, it would reduce my original RMD draw that starts in 4 years by $3,000 per year; which is less than 10% of the full draw at 73. What helps is reducing the account amount and the taxes by drawing it down now.

 

[HappilyRetired]

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?

I have owned GOOG, AMZN, MSFT, AAPL for years, way before the Ai boom...and in the last year or two, have purchased NVDA, TSLA, CRWD, AVGO....all have done stellar....The bubble is people chasing prices after they have risen so high .... Any reset in the Nasdaq would only allow others to jump in at a more reasonable price. Like you, I also own a S&P 500 Index Fund, but if you looked at the top 10 holdings that make up 37% of the entire Index, you will see that they are all those stocks I mentioned plus META. It's crazy, but buy the Best at the best price, and just turn out all the noise....

 

[Cognito]

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.

Please list the benefits for us/you/your family from the coming AI. I can only think of a health care robot. I thought pharma/biotech/us would benefit, but Kennedy is suppressing that.

 

[skipro33]

It's crazy, but buy the Best at the best price, and just turn out all the noise....

And that's all there is to it! Ha! Like telling a drug addict all you have to do is just say no. Or something like that....

I have learned that if I do the opposite of what the forecasters and 'experts' say regarding investment market, I end up ahead of the game. I have learned that by ignoring the noise, I have quit being my own worst enemy when it came to investment growth.