AI and bubbles, a repeat of history?
"A correction in current stock valuations is likely". This is the warning from economists at the European Central Bank (ECB) through the monetary institution's blog on the evolution of artificial intelligence (AI), one of the stock market drivers in recent times. Just look at an example: Nvidia, the world leader in the AI market thanks to its powerful graphics processing units (GPUs), with a value of over five trillion dollars (with "b), above Germany's GDP.
All technological advances have caused stages of euphoria, followed by periods of panic, from the moment it is found that the initial bet was too optimistic or that it was advancing too far ahead of the potential of the new invention or innovation. One only needs to review history. This tendency towards market exaggeration is explained by Charles Kindleberger together with Robert Z. Aliber in a classic titled "Quirks, panics, and cracks (Ariel, Barcelona, 2012), a complete analysis of financial crises and bubbles throughout history. Published in 1978, it has had to be updated to include everything from the bursting of the bubble of the puntcom (internet-related companies) in 2000 until the 2008 mortgage crisis.
The authors of this analysis, whose opinions do not necessarily represent those of the ECB, warn that the evolution of AI in markets may show patterns similar to other moments of technological disruption. One was the bursting of the internet bubble, which led to the disappearance of companies that seemed poised to dominate the world. Worldcom or Terra in Spain, which wiped out the savings of many small investors in Spain, after soaring from around 11 euros at its stock market debut to over 150 euros per share, falling more than 95% and finally being absorbed by Telefónica in 2005 for 5.25 euros per share, are examples.
These processes are characterized by "excessive optimism" from investors in an initial stage, which drives up valuations and prices, even if they incur losses. It is the euphoria stage, generally based more on expectations than facts. Then comes the crash.
Currently, in addition to giants like Nvidia, Alphabet, Apple, or Amazon, an example of an initial euphoria stage and the beginning of value adjustment is Elon Musk's technology company SpaceX. In any case, as financial history demonstrates, a significant correction or the bursting of the bubble do not necessarily mean a failure of the technology. If it is truly a transformative technology, there will be a time when it rises again.
In any case, it is not a danger for European stock markets, as there are no large indigenous listed groups specializing in AI, but rather for European Union (EU) investors due to their high exposure to large US tech companies. These economists calculate that they concentrate about 440 billion euros in investment in these companies. Insurers and pension funds also do, with about 200 billion. It is, therefore, also a financial stability problem for the eurozone and with less room to cut interest rates or use fiscal policy than in previous crises. Let's hope history does not repeat itself.