Financial analysts are sounding alarms about a potential artificial intelligence (AI) bubble, though pinpointing the exact moment of its collapse remains elusive. Marko Papic, chief geopolitical strategist at BCA Research, guarantees a painful correction but admits timing the market is impossible. Historical parallels suggest triggers could include a massive IPO or a significant merger and acquisition deal, reminiscent of AOL’s acquisition of Time Warner during the dot-com boom. Alternatively, disillusionment with the practical applications of AI technology could also initiate a downturn.
Michael Burry, known for his prescient shorting of the US subprime housing market, has taken short positions against Nvidia and Palantir, two companies heavily invested in AI. Burry highlighted decelerating cloud revenue growth at major tech firms and the nature of deals between OpenAI and Nvidia as concerning signs. Meanwhile, OpenAI recently announced a $US38 billion deal with Amazon for computing power, and Microsoft revealed a $US9.7 billion agreement with Australian data centre operator Iren. Iren specialises in designing, constructing, and operating hyperscale data centres. OpenAI is a research and deployment company focused on artificial intelligence.
Despite these warnings, some remain bullish on the market in the short term. Papic anticipates decreasing interest rates in the US, which should lower borrowing costs. However, concerns linger regarding US debt levels and potential bond market reactions. Ray Dalio, a Wall Street icon, highlighted the Federal Reserve’s decision to end quantitative tightening. This may signal a return to stimulative quantitative easing, potentially fueling the AI bubble further.
Dalio suggests this could create a liquidity-driven melt-up, followed by a necessary tightening that ultimately pops the bubble. With a shortened investment horizon, experts advise caution despite the current market optimism. The complexity lies not in predicting the eventual downturn, but in accurately timing the market’s inflection point.
