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AI Hype: Expert Warns of New Dot-Com Bubble

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Photo by Tara Winstead on Pexels.com

The current interest in artificial intelligence is reminiscent of the dot-com bubble in the late 1990s, according to a warning by James Ferguson, founding partner of UK-based macroeconomic research firm MicroStrategy Partnership. But Ferguson liked his cautionary note to ring out amid soaring investor enthusiasm and lofty promises for AI-driven innovations ranging from personal robot assistants to breakthrough cancer treatments.

Speaking recently on the Merryn Talks Money podcast, he warned, “These historically end badly.” He put the current AI fad side by side with the dot-com era, saying seasoned investors may fear another such outcome.

One of Ferguson’s main concerns is the problem of “hallucinations”, the tendency of LLMs to fabricate facts and sources. This could, he believes, dramatically reduce the number of viable applications for AI. “AI still remains, I would argue, completely unproven,” said Ferguson. “If AI cannot be trusted…then AI is effectively, in my mind, useless.”

Ferguson also mentioned the high energy consumption of AI technologies. He was supported by the study from the Amsterdam School of Business and Economics, which called for a scenario in which AI applications could use up as much power as the Netherlands by 2027. “Forget Nvidia charging more and more and more for its chips, you also have to pay more and more and more to run those chips on your servers,” he said, underlining the economic impracticality for many businesses.

He says, therefore, what he tells investors: that he thinks the current tech hype, driven by questionable promises, mirrors the period before the dot-com crash. He said both time frames saw a heavy concentration of market returns in technology stocks, which would trade-off of the optimistic earnings growth estimates furnished by Wall Street.

He says, therefore, he tells investors, that the current high valuations are eerily similar to those during the lead-up to the dot-com bust. In both scenarios, Ferguson noted, market returns were highly concentrated within technology stocks that traded off the optimistic earnings growth estimates furnished by Wall Street. This very uncertainty more or less forces the bearish investors to remain in the market, with the fear of losing a job in case of missing the short-term gains. “It’s certainly what was happening in the dot-com bubble, where almost anybody who wasn’t a retail punter was looking at these things and saying, ‘well, it can’t last, but if it lasts one more quarter and I’m not playing, I’ll lose my job,” he explained.

Ferguson, however, sees the silver lining. The current stock market bubble is so chlorinated with AI-linked stocks that there is still value elsewhere. He advised investors to consider U.S. small-cap equities currently undervalued and due for a rise should interest rates be cut. “There’s a lot of value to be found in the U.S. The trouble is that that value is to be found in good old-fashioned ways, trawling through small caps and looking for businesses that are growing in a good old-fashioned, steady way,” he said.

With the AI bubble still blowing, the insights given by Ferguson were well-timed observations for investors to keep their feet on the ground and seek value elsewhere.

More for you:

  • AI Hype Mirrors Dot-Com Bubble, Warns Veteran Analyst James Ferguson.
  • AI is effective ‘useless’-and it’s created a ‘fake it till you make its bubble that could end in disaster, veteran market watcher warns.

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