Dialogue. AI Bubbles, Reflexivity, and Where We are In the Cycle

**SPEAKER_2** (0:06)
Well, welcome to The Synopsis, a business and investing podcast. I am back again. I got another comment singing my praise, and that's all it takes for Drew to get me back on for another week. We'll see if I make it back next week, but I'm excited because guess what? Drew's making me talk about AI again.
Here we go, Drew, another AI video.

**Drew Cohen** (0:26)
His favorite topic, he's just always like, why can't we talk more about the same topic and also software a lot? But good news, no software today.

**SPEAKER_2** (0:35)
There is no software. I actually like this topic. So today we're talking about a recent YouTube video you made, which I think was a very honest take about the AI market. And so the kind of content of the videos is AI a bubble, which again, you hear about a lot. I know we talked about it last video briefly. I think I made some points around that, but I think what's compelling is your dual-sided take. And last time we brought up a little bit and I jogged my memory here, we talked about Jeremy Grantham as, I mean, I don't mean to pick on him. I like reading his stuff. I think he makes some compelling points. But we talk about kind of the value investing or quality investing community, however you want to put it, looking at tech companies that do well or these environments and kind of just like hoping for a bubble, like sitting there seething that they're cyclical four times, earning stocks aren't ripping like Micron is.
And there becomes kind of an emotional bitterness to it, which is hard. They're like, this is just like the.com bubble. Everything's going down 90%. Everyone's so dumb. I don't think that's a compelling way to look at things. Honestly, I think if you look at, and we can historically get into kind of each bubble, you brought up a few, but like all things in life, stocks aren't down for 70% for no reason. They're not up 70% for no reason. There aren't these manias or bubbles, however you want to call it, for no reason. I mean, going back to the.com bubble, you go to the back to the South Sea bubble, you can go back to the, I don't know, maybe the Tulip bubble.
That's when just Tulip's, you know, the flowers were very valuable. I don't know if I see that one.

**Drew Cohen** (2:07)
No, hold on.
You're just going all over the place. So there are two kinds of bubbles. There are financial bubbles, and then there are technological bubbles. So there are bubbles that form without any kind of underlying technology. If we think about what happened in mortgage-backed securities, the real estate bubble that happened in 2005 to 2007, that was very much a by-product of people just getting caught up in valuations and thinking they could flip homes and keep going up and up indefinitely. So there are bubbles that exist without a technological backing. Having said that, anytime there is a new and innovative technology, it has always, always led eventually to a bubble. So that is kind of the way I would frame that. And if we're thinking about AI and the reason why I think a lot of people think AI is a bubble, I honestly thought it was more of a bubble or we were further along in a bubble before I did this video because just simply the behavior we've seen of a lot of investors and the way a lot of stocks have moved, that felt kind of the most bubble-like to me. When you're saying that cyclical companies that have been cyclical for decades are never gonna be cyclical again, when you're seeing stocks move up 30% on, you know, a single earnings report, when you're saying companies like the memory companies go up, you know, 1000% in the order of 18 months, something like that, that to me was the primary sort of thing I was looking at that made it feel kind of bubble-like. Now, when I actually went through the video though, and was doing analysis for it, I realized there's a lot of things that are different about this current situation with AI, and what we saw happen in the last tech bubble, for instance.

**SPEAKER_2** (3:49)
I think the distinction is meaningful here, because again, there's usually reasons, and intelligent people can have strong opinions about outcomes that make sense and are grounded in reality. I think we go all the way back to, and I know you're saying I was a little off topic, but if we think about some of the East Indian trading company in the South Sea bubble and things that were happening in that nature, part of that hype, which again, famously, Isaac Newton was actually caught up in the South Sea bubble, for those who don't know. So very intelligent people are susceptible to these financial situations. But again, what was the excitement there? It was...