A contrarian investor who accurately called the Japanese stock market peak, the dot-com bubble and the 2008 housing market collapse is sounding the alarm on the AI trade.
In a new Bloomberg Podcasts interview, GMO co-founder Jeremy Grantham says AI is no different from any other tech cycle in the past, as investors pile in and capture the potential upside of a life-changing innovation.
“I think it’s obviously a bubble, and I think it’s quite a simple story. Bubbles don’t occur when there’s some crummy idea that gets touted… All the bubbles are associated with serious things, and the more serious, the bigger the bubble. And if it’s important, really important, perhaps more important than anything else, and if it’s obvious, then you’re dealing with a handful like the railroads. Everyone knew the railroads would change the world for the better. Everyone knew it was the most powerful idea they’d come across in their life. And it was. And everyone put their money in, and so you had multiple tracks, and everybody lost their money, and the bubble broke. And it brought the economy to its knees for a year or two.”
Grantham also says he witnessed the same story playing out during the internet era, specifically naming Amazon, which lost more than 90% of its value before mounting a recovery.
“And then the internet, the same. Amazon went up six or seven times in 1999. And then in the break, it came down 92%.”
As for the AI trade, Grantham says early investors are making a lot of money now, but believes that returns will begin to diminish. The contrarian investor also believes that AI will not escape the fate seen by the railroad and the internet bubbles.
“It’s a perfectly good game, and a lot of people get rich in the stock market for the time being. It doesn’t change the laws of nature. The higher the market, the lower the returns will be. And I think the probabilities that AI will not bust are slim to none. It meets every condition of the railroads and the internet. It’s a powerful idea that’s attracted everybody’s money. No one has any doubts. They had no doubts about the railroads and the internet.”
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