Are We in a New Tech Bubble?

Here’s a question that’s on my mind. Are we in a new tech bubble? Is this 1999 all over again?

I’m not saying that we are. I’m just raising the question. These days, we’re trying to be Adults in the Room, and find our Havens, in my little language. And so thinking clearly is job one. Especially when it comes to finance and the economy. Because Trump certainly isn’t.

Let’s begin with what’s basic. At the peak of the internet bubble, in 1999, the S&P traded at about 24 times forward earnings. Today, it’s at around 23. Feels a little…bubbly, doesn’t it? The Magnificent 7 are trading at 44 times earnings. By the way, even the Economist today called AI valuations “unhinged.”

That’s just math. Beyond that there are many, many lingering questions. Which are provoking a sense of unease, especially amongst sophisticated investors. There’s the feeling that all this isn’t quite right.

And that’s because if this is a tech bubble, it’s one smack in the middle of so much else going wrong. Trade wars, the decoupling of the American economy from the world, capital flight away from America, the dollar plummeting, Trump’s Mar-a-Lago plan, not to mention, America becoming an autocracy. This isn’t like 1999 in any of those senses. The world is emphatically not an optimistic place, and neither is America.

So here we may have something strange, that’s producing this eerie feeling. A burgeoning bubble in the middle of a general disintegration, a bubble amidst collapse. And that’s…creepily extra dystopian. Think of all the bad news the stock market’s shrugged off. A declining economy, a loss of confidence in America, poor earnings report after poor earning report, and so on. Capitalism is hardly in fine health—just like I predicted, it’s imploding. So maybe this is what the uncomfortable vibe is about: a bubble blowing like one last weird, toxic bloom in the desert.

So far, that’s the macro picture. The micro picture’s more complicated. There’s been tremendous investment into AI, of course, and yet returns have been slow to materialize. That’s not really my opinion, it’s just a general statement of fact, hence, the Economist calling valuations “unhinged.”

And it’s as true for tech giants as it is for large multinationals. Plenty of companies are betting their futures on AI, and so far, they don’t have much to show for it. Take the example, and this is a funny one, of Estee Lauder. Do women really want makeup and cosmetics…made by AI? I doubt it. What about ads? Ads already suck. So why is Madison Avenue betting that on AI ads? This sort of thing smacks of a fad, and yet it doesn’t seem that any adults in the boardroom are reality-checking strategy here. And boardroom fads, of course, are clear signs of bubbles.

It’s true that there’s been a takeoff in people using AI. For all kinds of things. And plenty of that raises questions. Relationships with chatbots in an age of crushing loneliness? Should people be turning to AI for therapy or financial advice or doctoring? Of course, in a society like America, without public goods or functioning systems, there’s little alternative, and so it’s easy to see just why. But that doesn’t mean that people will pay for it, as broke as they are, or more crucially, that much real social value will be created.

And that’s a crucial point to understand economically. Bubbles in that sense are when expectations of profit diverge from genuine economic value creation. That’s what happened during the dot com bubble. All kinds of foolish ideas were massively overvalued, invested in, and inflated to the point of hubris. But beneath that veneer, there was very little real value. Hence, the crash.

Of course, today, here we all are, using the internet, 24/7, on our phones, screens, streaming, etcetera. So it took time to discover what forms of value the internet would unlock as a new technology. And even then, today, we all know about the ills that came our way, from screen addiction, to dopamine overload, to the breakdown of social bonds, to radicalization. In a sane world, we’d tax internet companies for those ills, invest all that in public goods, and that would rebalance the equation in a saner direction.

Is this the winding, broken path that this wave of tech will take? Maybe. I don’t know. I’m not saying that I have the answer. Nobody does. But I am saying that it’s time to ask some tougher questions. Tougher now than merely buying into the hype. About “superintelligence” and so forth. Even if that’s the case, the value equation here is deeply…nonexistent. If AI’s doing everything, because it’s super intelligent, and the gains all go to Zuck and a handful of others, what’s the point? Then we’re back of course in neofeudalism.

So just as the internet itself accelerated all of today’s negative Macro Trends, inequality, democratic decline, isolation, radicalization, so too might this wave of AI-driven tech. Only harder, faster, and worse, to the point that any real value creation is itself questionable, unless you like living in a neofeudal society made of barons and beggars. Hey, did you get an invitation to Bezos’s wedding in Venice?

All of those are the questions bubbles ask of us. They’re emphatically not just about profit, of which there’s not nearly enough from this wave of tech so far, anyways. They’re about genuine economic value, who it accrues to, and what happens when it doesn’t arrive in the ways or at the times the masses think it will or could. They’re about why manias erupt, and when and how they do.

Bubbles, of course, are driven by manias. And I raise the questions above beacuse here we have something that looks very much like a mania. The questions above of genuine economic wealth are rarely asked, precisely because the flames of fandom for “tech” run so hot. Ask them, and you’ll tend to get shouted down. The only criticism so far, really, is “will AI kill us all?,” and that’s OK, but it’s a sign, too, of how little critical thinking is taking place. If it doesn’t kill us all, but it’s a bubble whose aftermath makes us neofeudal peasants? That’s also pretty bad.

And that’s what manias are. Everyone wants to buy in. Because there appears to be no downside. Risk is forgotten in the mad dash to acquire. It becomes a distant memory. A bandwagon effect takes hold. Groupthink happens. The consensus expectation becomes that of a rocket taking off, forever. Reality is thus left behind. None of this is wise. People get burned this way, joining manias.

When we see manias happening, that is probably the telltale sign of bubbles. Bubbles are hard to discern from fundamentals alone, and in a world like this, where fundamentals are in such deep flux, right down to the dollar itself, using them to try and pick bubbles from waves of growth is that much more difficult. In times like these, it’s manias that give me pause.

And there’s little doubt that the mania surrounding tech right now is off the charts. What can’t tech shrug off and defeat…and ignore? Nothing, apparently, from flatlining growth to trade wars to autocracy to global macroeconomic realignment to geopolitics to American collapse. That does not sound remotely rational to me. It sounds like a classic mania.

In all this, the feeling isn’t just healthy optimism, really, is it? There’s the whiff of despair about it. There’s the odor of greed wafting through it. Of sand slipping through grasping hands. There’s the sense of having to, trying to, make this happen. As if reality can be bent just if we only will it hard enough. This wave of tech will be worth this much! That’s the psychology at work, it seems to me. Headiness of the most fragile kind, laced with the edge of a desperate fear. Euphoria.

But we all know what happens after euphoria, don’t we?

The euphoria’s understandable, when you think about it. Americans need their stock portfolios to rise, because that’s how they retire now, though it shouldn’t be. And apart from tech, nothing else is really rising. That’s because the economy isn’t in good shape, and Trump’s madness is having real and devastating effects, on bonds, the dollar, property, the job market, everything else in the economy. And so it seems that if everyone settles on this particular mania, then at least there’s something to cling to. And so the whoosh of euphoria’s in the air. While so, so much else is going wrong? What does that tell you?

Like I said, I’m not saying there is a new tech bubble. I’m not saying it’s 1999 all over again. But I am saying that we’d be wise to at least consider the possibility of a bubble. To think carefully about manias and euphorias and fundamentals and reality. To understand the magnitude and severity of the risk, and ask ourselves if we want to take it. Making wise choices in times as troubled as these is about carefully managing the risks now drowning us—not walking blindly into oceans of it, arms wide open.

As always, if you need help or advice, just reach out.

Lots of love,

Umair (and Snowy!)