The lifecycle of a tech bubble
When I first posted this link on social media, quite a few people made a note of the disparity between what they’re hearing online – the bubble is popping" – and what they’re hearing from co-workers and others in their lives.
I responded to one of these posts with something along the following lines
It’s a little bit too early to say the bubble is bursting.
The “cash out” stage is not the “bubble bursting” stage. “Cashing out” happens once some investors start to think the bubble might be peaking.
Usually tech bubbles burst once investors have finished unloading and cashing out to “greater fools” who in turn tend to be the ones who end up panicking when something unexpected happens, popping the bubble.
Though, not all bubbles are usual.
Later on as I began to think more about this, I think it’s important to note that tech bubbles don’t behave exactly like your run-of-the-mill financial bubble.
In terms of financial bubbles, we’ve been in one long consecutive tech financial bubble pretty much constantly since the US dropped its interest rates to effectively zero after the the 2008 crash, with all of the traditional characteristics of an economic bubble:
- Overinflated asset prices. Tech stocks are priced much higher than their economic fundamentals or prospects warrant.
- Irrational optimism. The belief that tech will fix everything and do everything is practically standard among those involved in tech investment.
- Extrapolation. Tech executives and managers always believe they can extrapolate current trends infinitely into the future. Every exec in the industry believed the COVID boom would continue indefinitely. They really are this foolish.
- Moral hazard. The people who invest in tech are completely insulated from the harms of tech. There are no financial consequences whatsoever. This is slightly different from the usual moral hazard in a financial bubble but since regulatory bodies will come knocking either way, the end result is the same.
- Greater fools. There’s always somebody willing to buy tech stocks or acquire a startup no matter how dodgy it is. Cryptocoins made this even easier.
Within that longer financial tech bubbles we’ve had a series of tech bubbles keeping the “tech will grow forever” story alive and the bubble inflated:
- App stores.
- The gig economy.
- Various “cloud” fads.
- Cryptocoins.
- And I’m sure there are a few I’m forgetting.
Then COVID added even more air into the bubble by letting the industry convince itself that the economy had permanently transitioned into remote working. Tech genuinely believed that the entire economy would be mediated by big tech companies forever and ever and that they’d be able to – effectively – enforce a private tax on the world economy.
This didn’t happen. Once the reality of their delusion hit, executives were lucky enough to have “AI” handed to them as a method to plausibly keep the bubble inflated.
Like I wrote in February 2023 (about 17 months ago) in an entry titled Generative AI is the tech industry’s Hail Mary pass:
The core problem the industry faces isn’t waste but the possibility that their growth and economic value will revert to the mean: that tech will be seen as a stable, mature industry whose days of endless growth are behind it.
Tech executives have known this was coming for a long while now. It’s the reason for a lot of the so-called waste. These costly experiments were supposed to be it—the innovation that would keep the industry growing for another decade.
And…
What is important for you, and anybody who works in tech, to know, is that this move is desperate, even if the tech ends up doing what it promises. Tech is all in on generative AI because nothing else looks even remotely convincing.
Because the larger tech bubble is fundamentally built on irrational optimism – the belief that exponential growth will continue forever – and not financial shenanigans (although there is that too) the dynamics that might cause it to pop are different.
True financial bubbles tend to cause intrinsic structural fragility where one unexpected event can cause cascading failures that reverberate throughout the economy – think Bear Stearns just before the 2008 collapse.
Tech is driven by faith. The game will continue as long as there are enough people with money who keep the faith.
That’s another reason why the religious overtones of the AI Bubble aren’t a coincidence.
What this means to the rest of us is that the bubble is unlikely to pop until the core investment demographic loses faith. That the general public thinks “AI” is synonymous with garbage won’t matter because, compared to the investment class, we’re poor as dirt and only growing poorer. The moneyed classes have faith in tech and that’s what drives the bubble.
Faith is hard to budge.
Thankfully, some of the executives running tech’s biggest companies are doing their damnedest to convince even the most dedicated believer that their companies might not be on the steadiest footing.
Microsoft compounded their existing trust problem by working on Recall – a surveillance product wrapped in a poorly thought out memory aid features – in secret, releasing a test version that was both opt-out by default and incredibly insecure as implemented, and then walking that plan back in such a way that it left many of their customers convinced Microsoft is going to betray them at the first available opportunity.
Google sacrificed what little trust people had in them with a botched attempt to replace search with bullshit chatbot replies.
OpenAI seems intent on convincing the world they have no plan and that Sam Altman does just whatever comes into his mind each morning.
Elon Musk is, well, Elon Musk.
Facebook is doing their own version of a botched chatbot rollout across their social network.
None of these are bubble-popping errors on their own but cumulatively they make it hard for true believers to keep their faith.
Investment types, themselves predators of sorts, have noticed the blood in the water and some of them are preparing to bet against tech.
As the investor Jeremy Grantham wrote the other day:
But a new bubble within a bubble like this, even one limited to a handful of stocks, is totally unprecedented, so looking at history books may have its limits. But even though, I admit, there is no clear historical analogy to this strange new beast, the best guess is still that this second investment bubble – in AI – will at least temporarily deflate and probably facilitate a more normal ending to the original bubble, which we paused in December 2022 to admire the AI stocks. It also seems likely that the after-effects of interest rate rises and the ridiculous speculation of 2020-2021 and now (November 2023 through today) will eventually end in a recession
Before the moneyed classes can bet against tech, they first need to cash out. I doubt we’ll see the bubble truly burst until we’ve seen more of the divestment of the kind I linked to at the top of the post.
None of them want to trigger the pop prematurely with a too aggressive sell-off and some of them still clearly believe the bubble hasn’t finished inflating. Those who are betting with other people’s money will continue to bet until the moment everything falls apart.
There’s always the possibility that sheer incompetence on part of either investors or the tech industry will pop the bubble prematurely, but it’s likelier, in my opinion, that the AI Bubble will be with us for a little while longer.
Your guess is as good as mine as to how much longer.