The Daily Planet #82: The AI Bubble, Part 7

We are now into the second week of the AI bubble. I am going to devote each week to one of three bubble forms I talked about in yesterday's Weekly Planet: the Financial Bubble, the Technical Bubble and the Cultural Bubble.

This week's Daily Planets are on the financial bubble. Let's start by noting the amazing run the Magnificent Seven (Apple, Microsoft, Alphabet, Meta, Nvidia, Amazon and Tesla) have had since 2012, 18x-ing their market cap from 1.14 Trillion in 2012 to 20.72 Trillion today. Collectively, they are a third of ALL U.S equities today.

When seven companies (and a few more at the same scale such as OpenAI) dominate the market in this way, they are too too big to fail, and in fact, are looking to consolidate their domination as much as possible, by embedding their products and their influence everywhere in society: in the economy of course, but also politics and in culture at a large.

Bezos buying the Washington Post or Musk buying Twitter are examples of the dominance of the tech giants in culture at large, but nothing beats the influence that AI brings. Note that almost all AI development has happened - and continues to happen - in one of these locations (plus a couple more such as Anthropic), and when we marvel at the massive investment in AI data centers etc, it's investment by these tech majors we are talking about.

The story of American AI is far and away the story of these tech giants. They have truly eaten the American world. Back in 2008, when the US bailed out AIG saying "it's too big to fail," AIG was coming down from a high of $170 billion in market cap. That's about 12% of the smallest of the Magnificent Seven (Tesla) today.

When you have that kind of money, you need to find ways to invest it that justifies the stratospheric valuations: AI is the perfect solution. Of course, it could be a colossal mistake, but that's the nature of risk in capitalism, isn't it?

Money quote:

In the third quarter, for instance, Nvidia was responsible for 1.2 percentage points of the Large-Mid Index's 8.1% return, while Apple accounted for 1.4 points. In the second quarter, four of the five largest companies in the index accounted for 5.6 points, nearly half of the index's total 11.4% return.