The AI Bubble Is Widely Misunderstood | Steve Hou

**Steve Hou** (0:00)
I mean, of course, it's a bubble. I mean, it has been a bubble. It was always going to be a bubble, right? Just because something's a bubble doesn't mean that you couldn't have a very large sustained impact. The question is, how long is the bubble? How big could the bubble get? And at what stage are we? The AI bubble is very much adopted and used by everybody almost right away, unlike the dot-com bubble, where you actually had a lot of unused capacity that was at the end filled out. Now you have AI calling itself, right, which changes the magnitude of AI compute demand probably by 100-fold or potentially more. It depends on just how crazy you let the AI agents go. And that obviously changes the picture completely.
One reason why a lot of people underestimated the most recent acceleration is because...

**Felix** (0:47)
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All right, what's going on, everybody? Welcome back to another episode of Forward Guidance. And joining me today is Steve Hou, Senior Quant Researcher at Bloomberg, and one of Fintwit's finest prognosticators and commentators as well, whenever he has time. Steve, it was over to you to get you on Forward Guidance. Welcome.

**Steve Hou** (1:46)
Thank you so much for having me, and I've been looking forward to coming on.

**Felix** (1:51)
Yeah, appreciate it, appreciate it a lot. For those that don't know you, I would love to just hear a little bit about your background, your education, and a bit of what you do, because I do think it's useful for a conversation that we're going to have, where we're really going to be unpacking the intersection of actually AI and macro, and just understanding some of its impacts. So before we get into that, we'd just love to hear a bit about your background, how you got to where you are today, and what you mostly focus on.

**Steve Hou** (2:16)
Yeah, so I'm a quant researcher at Bloomberg Industries, which is, people think of Bloomberg either, they think of either the news business or the terminal data business, and there is actually an index business, where we create systematic investible indices, you know, those passive benchmarks or stuff that leverages data to create things that is a little bit more exotic away from the benchmarks.
And that is sort of what I do, more towards the letter. My training comes from academic, macroeconomics and asset pricing. I got my PhD in macro and financial econometrics in the University of Michigan in 2018, after which I joined a quant hedge fund called AQR Capital. I was there for a couple of years, and then I joined Bloomberg in 2020, since the split shaft has been working on leveraging the data that Bloomberg has, and their special angle, so which we can get around.

**Felix** (3:21)
Awesome.
Yeah, I really wanted to emphasize the background as being trained as an economist, because circling back to the topic of the show, talking about AI and the potential impact on macro. So you have been probably one of the few economists I feel like was fully bought into the idea quite early on and wasn't just like inherently dismissive of the whole thing and then kind of dragged into it. I was actually, I think you retweeted this the other day, but back in 2024, you said, November 29th, 2024, you said, AI is not hype, it's real. It's a distinct possibility that we are the last generation of humans for whom learning or the acquisition of knowledge still carries marketable value. So one almost has no choice but to hedge the risk of AI to human capital by going long stocks. If somebody wrote that today, I feel like that would be just a valid pressure take. But you wrote that in 2024 at the time where it felt like a lot of your cohort was quite dismissive of it. So I just wanted to get you on and really unpack this. So start us off with just unpack your AI thesis and how you think about it. Why were you so confident back in 2024 when it was just this random chat bot that seemed to hallucinate non-stop? What was the vision and how do you think about it as this academically trained economist?