Scenes from a bubble
Is the U.S. stock market currently in an AI-fueled bubble? I don’t think we're close to bubble territory. But it’s true that the probability of a bubble in the coming months and years is far higher than normal, thanks to the introduction of an exciting new technology.
How will you know that an AI bubble is occurring? Here are some hypothetical events that might take place. These are fictional scenarios and are not meant to predict actual events.
Your Uber driver is trading 0dte (zero days to expiry) options on Nvidia.1 In the 20 minutes it takes to complete your journey, he becomes $10,000 richer.
You talk to your professor from business school. She reports that many students are dropping out to join AI startups. Enrollment in finance electives is near zero, but students are fighting for spots in the course on AI entrepreneurship. She’s on the board of a hot AI startup and they’ve compensated her with shares which she's not allowed to sell. The stock price has quadrupled. You ask her whether she’s hedged out her enormous exposure to AI stocks, perhaps by shorting an ETF. She mumbles something about basis risk and changes the subject.
Following the massively successful IPO of Hugging Face,2 many other AI companies go public with idiotically whimsical names. Thus, we have Giggly Nerd, SkyNetButNice, and Mostly Non-homicidal Robotics Corp.
Your brother-in-law works in marketing at an AI firm. He owns some shares in his firm, and the stock has tripled in 9 months. You ask him whether he has sold any shares. He stares at you like you are an idiot. Why would he sell the shares? The company has a bright future and is obviously undervalued.
You go to the gym, which has four TVs on the wall. Previously, these TVs showed three news channels, plus one channel that only had Law & Order reruns. Now, the TVs are set to CNBC, Bloomberg Business, Fox Business, and CNN Business.
Your 19-year-old niece works at an AI startup during the summer. A year later, they do an IPO, and she becomes a millionaire thanks to the options they paid her with.
While attending your cousin’s wedding, you experience an unfamiliar level of popularity. When word gets out that you are an expert in finance, everyone wants to talk to you about trading strategies. A crowd gathers around you at the reception. When you mention the concept of diversification, the crowd grows restless. When you discuss the attractive yields on T-bills, the crowd dissipates, gathering instead around drunken Uncle Kevin who is explaining why he mortgaged his house to exploit the synergies between crypto and AI.
You recognize your DoorDash delivery guy: a college classmate who worked for a deep value manager.
Your sister’s boyfriend (who has an MFA in “Puppet Arts” from the University of Connecticut) gives you a tip to buy SoundHound due to its connection with Nvidia. You ignore him. A week later, SoundHound goes up 500% as it becomes the next meme stock.
The two most popular reality TV shows are AI-themed. The first, Turing Test Island, features contestants trying to guess which of their potential romantic partners are actually AI-generated deep fakes.The second, American Unicorn, features a group of Stanford sophomores who are dropped off on Sand Hill Road in Palo Alto. Each is given $100 and a laptop. The first one to secure Series A funding for their AI startup wins.
Your dumbest college friend is now your richest college friend.After squandering most of his savings speculating on microcap cannabis stocks, he switched strategies and bought deep out-of-the-money calls on QQQ two years ago.
When Nvidia’s price is at $1,500, a prominent sell-side analyst sets a price target of $3,000. When Nvidia’s price actually reaches $3,000 a month later, Nvidia decides to do a 2-1 split, putting the price back to $1,500. The analyst sets her new price target: $3,000.
The IT guy quits to go to an AI startup. Two months later you see him drive by in a Ferrari.
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