Legendary investor Jeremy Grantham, co-founder of GMO, believes there is a "slim to none" chance that the current artificial intelligence bubble will not burst. He has a long-standing reputation for identifying and betting against major investment manias, including the Japanese bubble of the late 1980s, the dot-com boom of the late 1990s, and the 2007-2008 housing crisis preceding the Global Financial Crisis. Grantham sees strong parallels between the current AI-driven market and previous bubbles, such as the internet bubble and the railroad mania, noting the rapid increase in investment and speculative behavior.
Grantham stated that the AI investment became so strong it pulled the economy back from sliding into a recession. He points to unprecedented capital expenditure (CAPEX) in the AI sector, with companies seemingly willing to spend $200 billion or more to achieve breakthroughs. This intense competition, described as a "fight to the death" among Big Tech firms, is driving significant spending to be the first to develop next-generation AI.
He argues that while AI is a truly powerful and transformative technology, investors may be underestimating the impact of competition on future profitability. Unlike the past decade where major tech companies often held dominant positions, the AI landscape is marked by direct competition, which could make it difficult for any single entity to maintain the long-term, "fat profits" associated with a monopoly. Grantham also questioned the assumption that increased productivity from AI will automatically lead to higher profits for everyone, suggesting that if everyone has a brilliant new machine, no one will necessarily make exceptionally good money.
Grantham contends that the market fulfills all the indicators of a "super bubble" that began forming in late 2021 and broke into 2022. He specifically highlighted record-breaking speculation, with Tesla's market capitalization exceeding $1.25 million per car sold annually, compared to $9,000 per car for GM, as an example of "really crazy investor behavior." He warns that this bubble will burst regardless of the Federal Reserve's attempts to support it with low interest rates, suggesting it could be the most significant event in most investors' lives.
