So are we in an AI bubble? Here are clues to look for.
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Are we currently in an AI bubble?
This is Planet Money from NPR. All right, Jeff, you have summoned me here today because I understand you have a question for me about the economy.
Yes, it's the million dollar question right now. What do you got? Are we in a bubble? That's like a several trillion dollar question, I think. Okay, but look at the stock market right now. The S&P 500 is up almost 50% over the last two years. Yes, it is absolutely bonkers. Bonkers! And what is even more wild is that if you look at what companies are mostly responsible for that growth, it's just a handful of them. It's the companies doing AI stuff. Yeah! Yes, all this AI stuff, like Microsoft and Amazon and Meta. People are calling them the Magnificent Seven.
Yes, and we would be remiss if we did not mention NVIDIA. NVIDIA, of course, is the microchip company that's powering all this stuff, and its stock price, I think it has almost quadrupled over the past two years. It's wild.
It's so wild.
It's the most valuable company in the world.
Yeah. Yeah. All of that, it kind of makes you nervous, right? Because if this AI stuff turns out to be a bubble, it's like the biggest bubble our economy has seen in years. Sure. And we all know what happens eventually to bubbles. Or do we? Ooh, intriguing. Hello and welcome to Planet Money. I'm Nick Fountain. And I'm Jeff Guo. Today on the show, are we in a bubble right now? Is it even possible to tell if you're in a bubble? And if you are in a bubble, what does that mean for the rest of the economy?
Right. We're going to look at some cutting edge research on bubble detection. And we're also going to talk about this provocative theory, which says that maybe some bubbles are not as scary as they seem to be. All right, before we can talk about whether we're in a big AI bubble or not, we've got to start with some definitions. What is a bubble?
Bubble is... I'm trying to answer your question without using the word asset, which is probably my favorite word in finance.
Robin Greenwood is a professor of finance at Harvard Business School, where for years he has been studying bubbles, especially bubble indicators, like how you tell if something is a bubble.
Like at the gym at Harvard Business School, there's the saying... Our gym is called Shad, and there used to be a running joke that if you'd hear lots of talk about an industry and Shad in the gym... You know, that's a good bubble indicator.
Now, the textbook definition of a bubble is that it's when people start buying and selling something at prices way above what it's actually worth. When the price is so high, it just doesn't make any sense at all.
So a bubble is something that we can point to as being irrationally valued relative to the value that it delivers.
It's something where you're like, why are people paying so much money for this thing? That's a bubble. That's a bubble. And with a bubble, that price just keeps going up and up and up until one day it pops. The price comes crashing down to reality and a lot of people lose their money or lose their jobs.
Now, bubbles have always kind of puzzled economists because how could people be so delusional? But the thing about bubbles is that they usually involve something new, something exciting or unknown. The kind of thing that gets people buzzing about at the gym at Harvard Business School. You almost never see bubbles forming in boring or familiar industries. You're never going to see bubbles in, say, ankle socks.
Yeah, it's pretty hard to get irrationally exuberant about ankle socks. Whereas AI, on the other hand, AI is new and exciting and no one really knows how big of a deal it's going to be. There's all this uncertainty.
That is what creates this fertile ground for the formation of a bubble.
And that uncertainty also makes it genuinely hard to tell if we're in a bubble or not. Right now, investors think NVIDIA is worth $4.6 trillion. That is 22 Disneys or five JP Morgan chases.
But is that a sign of a bubble? Is a company like NVIDIA ridiculously overvalued? It's hard to say what the company should be worth.
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