Bubbles provide the capital for foundational technological shifts. Inflated valuations allow companies like OpenAI to raise and spend astronomical sums on R&D for things like model training, creating advances that wouldn't happen otherwise. The key for investors is to survive the crash and back the durable winners that emerge.
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Similar to the dot-com era, the current AI investment cycle is expected to produce a high number of company failures alongside a few generational winners that create more value than ever before in venture capital history.
According to author Bernd Hobart, bubbles aren't just irrational speculation. Sky-high valuations signal to all players—from power plants to chip fabs to software developers—that the "time is now." This encourages massive, parallel investments that might otherwise be too risky, effectively manufacturing the future just in time.
The current AI spending spree by tech giants is historically reminiscent of the railroad and fiber-optic bubbles. These eras saw massive, redundant capital investment based on technological promise, which ultimately led to a crash when it became clear customers weren't willing to pay for the resulting products.
Blinder asserts that while AI is a genuine technological revolution, historical parallels (autos, PCs) show such transformations are always accompanied by speculative bubbles. He argues it would be contrary to history if this wasn't the case, suggesting a major market correction and corporate shakeout is inevitable.
The memo argues that the "hysteria of the bubble" compresses the timeline for building out new technologies from decades into just a few years. Patient, value-focused investing would never fund the massive, parallel, and often wasteful experimentation required to jump-start a new technological paradigm at such a rapid pace.
Current AI investment patterns mirror the "round-tripping" seen in the late '90s tech bubble. For example, NVIDIA invests billions in a startup like OpenAI, which then uses that capital to purchase NVIDIA chips. This creates an illusion of demand and inflated valuations, masking the lack of real, external customer revenue.
Innovation doesn't happen without risk-taking. What we call speculation is the essential fuel that allows groundbreaking ideas, like those of Elon Musk, to get funded and developed. While dangerous, attempting to eliminate speculative bubbles entirely would also stifle world-changing progress.
A genuine technological wave, like AI, creates rapid wealth, which inherently attracts speculators. Therefore, bubble-like behavior is a predictable side effect of a real revolution, not proof that the underlying technology is fake. The two phenomena come together as a pair.
Current AI spending appears bubble-like, but it's not propping up unprofitable operations. Inference is already profitable. The immense cash burn is a deliberate, forward-looking investment in developing future, more powerful models, not a sign of a failing business model. This re-frames the financial risk.
Howard Marks distinguishes between two bubble types. "Mean reversion" bubbles (e.g., subprime mortgages) create no lasting value. In contrast, "inflection bubbles" (e.g., railroads, internet, AI) fund the necessary, often money-losing, infrastructure that accelerates technological progress for society, even as they destroy investor wealth.