Latest / The Dutch Investors / #53 | The AI-bubble 🫧

Transcript

#53 | The AI-bubble 🫧 · The Dutch Investors

• 0:00
  SPEAKER_01: We just finished watching an outstanding piece from Dutch television on the global AI race and how it might play out, according to economist Andy Xi.
• 0:09
  SPEAKER_01: He worked at Morgan Stanley, has decades of experience in financial markets and the global economy, and he has a very good track record for calling major events, like the internet bubble around the turn of the century, the 2008 credit crisis, and the collapse of China's housing market.
• 0:28
  SPEAKER_01: Now he says the AI fantasy bubble is next.
• 0:32
  SPEAKER_02: Or, as he says it, America's idea of winning is to create a god.
• 0:37
  SPEAKER_02: And Dead God will live in San Francisco, and the Carter works for America.
• 0:41
  SPEAKER_01: Or as Braden Dennis from Fiscal AI told us on our podcast.
• 0:46
  SPEAKER_03: If you can create digital god, how much does that cost?
• 0:50
  SPEAKER_03: What is the number to spend?
• 0:52
  SPEAKER_03: And I think that you're seeing that right now.
• 0:54
  SPEAKER_03: It's just like as much as we can.
• 0:56
  SPEAKER_01: So let's talk about it in today's episode.
• 1:13
  SPEAKER_01: AI, or artificial intelligence, is and was the buzzword of 2024 and appears to be the buzzword for 2025 as well.
• 1:24
  SPEAKER_01: It is everywhere.
• 1:26
  SPEAKER_01: It's in the news, on your phone, in your workplace conversations.
• 1:31
  SPEAKER_01: Some call it the invention of a lifetime.
• 1:34
  SPEAKER_01: A few big tech CEOs say it will be bigger than the internet.
• 1:38
  SPEAKER_01: It seems like you can't spend enough on the next big thing.
• 1:42
  SPEAKER_01: But like everything in life, nothing lasts forever.
• 1:47
  SPEAKER_01: All signs point to us living inside a massive, ever-expanding balloon.
• 1:52
  SPEAKER_01: One that's been growing for a while and could keep growing for some time.
• 1:57
  SPEAKER_01: But sooner or later, it is going to burst.
• 2:01
  SPEAKER_01: So, American versus Chinese artificial intelligence.
• 2:06
  SPEAKER_01: This is what Brad Smith from Microsoft had to say about it.
• 2:10
  SPEAKER_00: The number one factor that will define whether the United States or China wins this race is whose technology is most broadly adopted in the rest of the world.
• 2:20
  SPEAKER_00: This is a global market, and it will be defined as technology markets typically are by network effects.
• 2:27
  SPEAKER_00: 18% of the people of the world live in China, 4% live in the United States, 78% live somewhere else.
• 2:35
  SPEAKER_01: And E Xi, the economist, says that the US and China are on very different paths.
• 2:40
  SPEAKER_01: And the West's AI strategy has gone off course, according to Xi.
• 2:45
  SPEAKER_01: In China, AI is focused on practical, real-world uses, such as improving manufacturing, mining and production.
• 2:55
  SPEAKER_01: The Chinese goal is to create technology that makes things work better, cheaper and faster.
• 3:03
  SPEAKER_01: The United States and the West has taken a different path.
• 3:08
  SPEAKER_01: In the United States specifically, the focus has been on large language models LLMs or AI software systems that can chat, write, and create images or stories.
• 3:20
  SPEAKER_01: They're impressive and entertaining, but the economic payoff is still unclear.
• 3:26
  SPEAKER_01: The US approach is very expensive and aimed at markets that can afford it, with the expectation of high returns.
• 3:34
  SPEAKER_01: It is built for high-paying markets, think of Canada, the United States, most countries in Europe, Australia, Japan, New Zealand.
• 3:44
  SPEAKER_01: China's vision isn't all about winning.
• 3:47
  SPEAKER_01: Deep Seek is open source.
• 3:49
  SPEAKER_01: Anyone can download it, and it costs far less to run than OpenAI, about 10 times less.
• 3:56
  SPEAKER_01: China takes the opposite route.
• 3:58
  SPEAKER_01: Make products just as good, but at a fraction of the cost.
• 4:03
  SPEAKER_01: A model that fits emerging economies where people have little money, which is basically the rest of the world besides the countries I just mentioned.
• 4:12
  SPEAKER_01: Think of South America, Mexico, Latin America, Africa, maybe the Middle East, India, China, the rest of Asia.
• 4:21
  SPEAKER_01: This difference will have broad consequences.
• 4:25
  SPEAKER_01: The West will remain behind a wall of high costs.
• 4:29
  SPEAKER_01: Not just in AI, but in many sectors.
• 4:32
  SPEAKER_01: Just look at the car industry, for example.
• 4:35
  SPEAKER_01: Over the next decade, the global south will integrate while the global north stays behind that wall.
• 4:42
  SPEAKER_01: This is what NDX said on money in the United States.
• 4:47
  SPEAKER_02: In the United States, like money is means nothing, right?
• 4:50
  SPEAKER_02: So uh because there's so much money flowing around.
• 4:53
  SPEAKER_02: Uh it's like a company is worth a trillion dollars, you know, uh, open air gets a hundred billion dollars to burn, you know.
• 5:01
  SPEAKER_02: You know, open air doesn't make money, but uh it's worth like uh uh hundreds of billions of dollars.
• 5:07
  SPEAKER_02: So the US money means something very different in the United States.
• 5:11
  SPEAKER_01: So why is there so much money in the United States, you might ask?
• 5:16
  SPEAKER_01: It all started in 2008 when the United States started quantitative easing.
• 5:22
  SPEAKER_05: What exactly is quantitative easing?
• 5:24
  SPEAKER_05: Take printer out of box and place on table with the out tray facing the window.
• 5:28
  SPEAKER_05: Load paper into the paper receptacle and place currency on glass tray F.
• 5:33
  SPEAKER_05: Check alignment by printing out a test page.
• 5:36
  SPEAKER_05: Go into copy settings and select double-sided and the number of copies you require.
• 5:41
  SPEAKER_05: Two weeks ago.
• 5:45
  SPEAKER_04: Covered in what?
• 5:46
  SPEAKER_04: Pretend money.
• 5:47
  SPEAKER_05: No, this is not pretend money, this is real currency we're creating.
• 5:49
  SPEAKER_05: But aren't you just printing it off?
• 5:50
  SPEAKER_05: I mean, these are photocopies, aren't they?
• 5:52
  SPEAKER_05: Excuse me.
• 5:52
  SPEAKER_05: Dave, this is not gonna work.
• 5:55
  SPEAKER_05: Because I've just explained it to a bloke and he saw through it straight away.
• 5:58
  SPEAKER_05: Are you in banking?
• 5:59
  SPEAKER_05: No.
• 5:59
  SPEAKER_05: No, he's not even in the banking racket.
• 6:02
  SPEAKER_01: QE is when a central bank creates new money to buy financial assets, like government bonds, to stimulate the economy.
• 6:10
  SPEAKER_01: 2008 was an extremely tough year for central banks, banks specifically, and the economy.
• 6:17
  SPEAKER_01: Twelve years later, the COVID-19 pandemic hit, and QE doubled under the Biden administration to stimulate the economy even further.
• 6:27
  SPEAKER_01: People, investors, were worried about staying alive.
• 6:32
  SPEAKER_01: Yet software stocks specifically and the stock market went through the roof.
• 6:37
  SPEAKER_01: So, how is this a problem?
• 6:39
  SPEAKER_01: What is going on?
• 6:40
  SPEAKER_01: NDXC explains it like this.
• 6:52
  SPEAKER_02: Not many people are really doing useful work.
• 6:55
  SPEAKER_02: You know, you go to the United States, you ask people what do you do for a living?
• 6:59
  SPEAKER_02: Not many people can tell you that they're doing something useful.
• 7:02
  SPEAKER_02: Everybody is a consultant, everybody is a lawyer, a social activist, and uh something now, but everybody is well paid.
• 7:09
  SPEAKER_02: Uh something like this will never happen in China.
• 7:12
  SPEAKER_02: Everybody has to work very hard for a little bit of money.
• 7:15
  SPEAKER_02: The US has become a fantasy land.
• 7:17
  SPEAKER_02: I think that the US is gonna face some difficulties.
• 7:21
  SPEAKER_01: So let's talk about this resilient AI bubble.
• 7:24
  SPEAKER_02: The United States bubble has become extremely resilient because for structural reasons.
• 7:29
  SPEAKER_02: For structural reasons, so it takes a lot to knock this thing off.
• 7:33
  SPEAKER_01: There are three giant asset managers BlackRock, State Street, and Vanguard.
• 7:41
  SPEAKER_01: And they control roughly 80% of the US capital market.
• 7:46
  SPEAKER_01: And their combined influence can stabilize declines and keep the bubble alive.
• 7:52
  SPEAKER_01: They have so much money that when the stock market goes down, they'll just buy a little more.
• 7:58
  SPEAKER_01: They just have so much capital around.
• 8:01
  SPEAKER_01: It's worrying because when so much market power is concentrated in few hands, hype-driven bubbles can inflate far beyond reality.
• 8:12
  SPEAKER_01: And when they pop, the fallout will be massive and widespread.
• 8:18
  SPEAKER_01: It's a very fragile system.
• 8:20
  SPEAKER_01: AI today has many similarities to the dot-com bubble.
• 8:24
  SPEAKER_01: The moment investors hear AI, money starts pouring in.
• 8:29
  SPEAKER_01: Think about Palantir, for example, which might be the most overvalued company of all time.
• 8:35
  SPEAKER_01: Nvidia is another one of the biggest winners in this hype cycle.
• 8:39
  SPEAKER_01: Big technology companies buy its chips to build cloud infrastructure, while startups use them to train AI models.
• 8:47
  SPEAKER_01: These startups raise huge sums for investors and venture capital, promising they'll own the future.
• 8:54
  SPEAKER_01: Whether the business model makes any sense doesn't really matter.
• 8:58
  SPEAKER_01: The goal is to ride the hype until they can sell to a bigger buyer at a higher price.
• 9:04
  SPEAKER_02: It's all based on a dream.
• 9:06
  SPEAKER_02: And ultimately, all that investment, would that work out?
• 9:10
  SPEAKER_02: Actually, the people who invest don't care.
• 9:12
  SPEAKER_02: They think that uh all I need is for this shop to get listed in the stock market.
• 9:18
  SPEAKER_02: They're big fools down the road.
• 9:20
  SPEAKER_02: So I have I don't care if AI works or not.
• 9:24
  SPEAKER_02: All I need is for this thing to stay this path for another year or so I'll get out and rich.
• 9:32
  SPEAKER_01: In practice, many entrepreneurs are simply raising money to build yet another AI model with Nvidia's chips.
• 9:40
  SPEAKER_01: The cash flowing into these startups is what fuels Nvidia's profits.
• 9:45
  SPEAKER_01: Its earnings come directly from other people's investments.
• 9:49
  SPEAKER_01: Whether those investments ever pay off is irrelevant for the time being, and especially for most backers right now.
• 9:58
  SPEAKER_01: So how does the AI bubble, or any bubble for that matter, pop?
• 10:04
  SPEAKER_01: Xi thinks this bubble will eventually burst through two possible triggers.
• 10:09
  SPEAKER_01: One, foreign investors stop buying US debt, which would send interest rates much higher, or two, persistent inflation, making it impossible to keep printing money without major consequences.
• 10:25
  SPEAKER_01: If the bubble bursts, it won't just be an American problem.
• 10:30
  SPEAKER_01: Housing prices around the world could drop, living costs in rich countries would get cheaper, but asset values, your home, stocks, investments would shrink.
• 10:42
  SPEAKER_01: Politically, things could also get ugly, with some countries looking for someone to blame, and China could easily be the scapegoat.
• 10:50
  SPEAKER_01: So let me give you our thoughts on AI and the inquantation marks bubble.
• 10:57
  SPEAKER_01: The US economy has some real issues.
• 11:00
  SPEAKER_01: They have a federal deficit growing by a trillion dollars every 100 days.
• 11:07
  SPEAKER_01: 60% of people barely getting by, and 20% buying groceries on credit or using buy now pay later schemes.
• 11:17
  SPEAKER_01: That is not a good thing.
• 11:18
  SPEAKER_01: Yet the stock market and the broader economy keep humming along, thanks to in part the financial system designed to keep the party going.
• 11:29
  SPEAKER_01: We think AI will be massive.
• 11:32
  SPEAKER_01: It's going to make companies more efficient, it's going to create new jobs and make others obsolete.
• 11:38
  SPEAKER_01: That's just how technological shifts work.
• 11:41
  SPEAKER_01: We also think the US debt deficit is becoming a bigger and bigger problem, and one that will eventually have to be addressed.
• 11:50
  SPEAKER_01: And yes, the AI hype has pushed some companies to ridiculous valuations.
• 11:56
  SPEAKER_01: But it always happens in mania, and it often creates even better opportunities elsewhere.
• 12:03
  SPEAKER_01: Even if NDX turns out to be right about how this all plays out, the world will recover.
• 12:10
  SPEAKER_01: It always does, it always will.
• 12:13
  SPEAKER_01: We're cautiously optimistic about the future and about the capitalist system's ability to survive.
• 12:20
  SPEAKER_01: That said, we also believe we're in dangerous bubble territory.
• 12:24
  SPEAKER_01: You can call it an AI bubble, you can call it a monetary bubble, but at the end of the day, it is a bubble.
• 12:31
  SPEAKER_01: And bubbles by definition pop.
• 12:34
  SPEAKER_01: History shows they form when there's too much money chasing the next shiny thing.
• 12:40
  SPEAKER_01: It could be the internet, could be internet, it could be autonomous driving, could be AI, it could be robotics, it could be DNA, it could be anything.
• 12:50
  SPEAKER_01: Right now that shiny thing is AI.
• 12:53
  SPEAKER_01: That's why we stick to what we can actually control.
• 12:57
  SPEAKER_01: Our circle of influence and our circle of competence.
• 13:01
  SPEAKER_01: We can change how much capital BlackRock moves or how much debt the US racks up, but we can decide where to put our money, which risks to take, and which noise to ignore.
• 13:14
  SPEAKER_01: In markets like this, discipline matters more than predictions.
• 13:18
  SPEAKER_01: We focus on businesses we understand, leaders and management we trust, and valuations that make sense, even if that means setting out the hottest trades of the moment.
• 13:31
  SPEAKER_01: In bubbles, the easy money is made by the bold, but the lasting wealth is built by the patient.
• 13:39
  SPEAKER_01: Let's be clear, we are not rooting for a crash.
• 13:42
  SPEAKER_01: But the longer a bubble inflates, the bigger the mass will be when it bursts, and when it does, we'll be ready with our watch list of high quality companies that we believe will survive the storm and come out stronger on the other side.
• 13:57
  SPEAKER_01: You can download our watch list for free of high quality companies.
• 14:01
  SPEAKER_01: I'll put the link in the episode description.
• 14:05
  SPEAKER_01: As always, stay curious, keep learning, and happy investing.