The AI tree marries dangerous elements of the Internet mania and credit bubble of the mid-2000s, raising the specter of financial catastrophe, says Erik Gordon.
“The next crash will look like the love child of the dot-com crash and the Great Financial Crisis,” the entrepreneurship professor told Business Insider by email.
Gordon, who teaches at the University of Michigan’s Ross School of Business, said the AI boom “inherited the hype and overvaluations of the dot-com bubble.”
While emerging technology will likely create more value than the Internet, he says, company valuations will so extreme that “most investors will be killed, just like most dot-com investors.”
Gordon, who researches topics such as technology commercialization and AI, says the ‘losers’ of an AI crash will extend further driving investors directly to buyers of index funds and exchange-traded funds, since tech giants make up such a large part of the market.
The five largest US companies by market capitalization – Nvidia, Apple, Alphabet, Microsoft and Amazon – are collectively valued at more than $20 trillion, not least because investors expect them to be huge. winners of the AI trend.
Borrowing binge
Gordon also raised the alarm about the size of AI companies’ debts. They have “a few trillion dollars worth of… debt obligations on and off their balance sheetsand they’re not done borrowing yet,” he said.
If they cannot repay even part of their obligations, the “financial damage” will spread beyond shareholders and burn “banks, investment funds and even insurance companies that have made loans,” he continued.
“The contagion in financial markets will remind us of the GFC,” he added.
The dotcom crash wiped thousands of startups, and even future world beaters like Amazon saw their stock prices drop by more than 90%.
The collapse During the mid-2000s housing bubble and subsequent financial crisis, Lehman Brothers went bankrupt, AIG and Bear Stearns were bailed out, and the global economy plunged into recession.
Gordon has been an outspoken skeptic about the AI boom for years. He told Business Insider said in April that the market had “manufactured its own universe” in which AI buzz trumps threats like war or inflation.
He said last summer that the enormous amount of money involved in the AI theme meant that more investors would suffer than in the dot-com crash, and that “their suffering will be more painful.”
“This isn’t a fake corporate bubble, it’s an order of magnitude overvaluation bubble,” Gordon said. said in January 2022.
The S&P 500 fell about 18% over the next eight months, dipping below 3,600 points in September of that year. But it has more than doubled since then, reaching an all-time high of more than 7,800 points this year.
Gordon isn’t the only one who expects the AI boom to end in tears. Michael Burry of “The Big Short” has become particularly famous raise the alarm about AI companies’ overinvestment, circular finance, aggressive accounting and hidden debt.
However, technology leaders like Nvidia CEO Jensen Huang and Tesla and SpaceX CEO Elon Musk have done just that said The valuations are more than justified given AI’s potential to boost productivity, corporate profits and economic growth.
