Stocks and Trading Thread - Channeling your inner Mono

[Admiral Yi]

Cash savings will increase in value in a stock market crash or deflation.

[DGuller]

To the people believing we're in a huge bubble, do you think we're in a bubble because AI is total waste (so it's a tulip bubble), or do you believe that it's a legitimately transformative technology that nevertheless people are vastly overvaluing in the short term, possibly due to engaging in momentum trading rather than doing fundamental calculations (i.e. dot-com bubble)?

[Tamas]

Dot-com bubble.

But I am thinking the fact that even high profile investment bank people and such are saying it's a bubble means the burst is some time away. If they are telling people to sell it's probably because they want to buy.

[Josquius]

Yes, it seems like the .com bubble. People getting super excited much too early.
True AI would indeed absolutely transform society.
LLMs aren't that.

[crazy canuck]

To the people believing we're in a huge bubble, do you think we're in a bubble because AI is total waste (so it's a tulip bubble), or do you believe that it's a legitimately transformative technology that nevertheless people are vastly overvaluing in the short term, possibly due to engaging in momentum trading rather than doing fundamental calculations (i.e. dot-com bubble)?

It would have to be a transformative technology to justify these valuations.

[The Minsky Moment]

Even a transformative technology can be a bust financially.  The railroad was a truly transformative technology, and people did make money off of it, but a lot of investors in lots of different places lost their shirts building railroads.  The full benefits of transformative tech don't necessarily flow to private investors, and even when they do, much of the gains may go to a small group, with others losing $.

I'm also skeptical that LLMs are truly transformative in the way that say truly scalable commercial nuclear fusion could be. The history of AI development has been cycles of AI booms followed by AI winters, with the hype of new advances fading as inherent limitations in the new models became more clear. I'm not convinced LLMs will avoid this fate.

[Valmy]

Yeah the railroads led to the longest and most protracted depression in the modern era.

So just because AI might end up being a very important tech doesn't mean this bubble might not lead to a catastrophic economic disaster.

I just wish people had just chilled out after the 2008 crisis and Covid, but it seems like finance bros just cannot help themselves but to crash the economy over and over again.

[Admiral Yi]

I don't think it's a bubble.  When I compare AI to historical bubbles, I notice some differences.  Most (all?) historical bubbles came and went relatively quickly.  Speculators are not patient.  Well, at least they used to not be until wallstreetbets invented the ridiculous HODL and diamond hands memes.  Most (all?) historical bubbles were driven by retail investors, not "finance bros."

Is it possible AI stocks are overvalued?  Of course.  That's not specific to AI.  Every stock has a bull case and a bear case.  That's not what a bubble is.

[crazy canuck]

I am surprised, you are about the right age to remember the first tech bubble. It did not develop quickly, was not driven by retail investors but was based on an unreasonable assumption of the transformative nature of the technology being developed, and the profits that would surely flow from those who were early adaptors.

So a lot like this tech bubble.

What is different this time around, is that in the 90s there was a race amongst institutional investors to get in on the ground floor of the startups. There is no such thing this time around. The bubble is being created by established companies who are betting heavily that their investments, and expenditure of resources, into this tech will pay off. And that is the thing that will be most damaging when the bubble bursts. Last time it didn't really matter that a bunch of start ups went under.  The only thing that was lost was the capital invested into those companies.  But this time it is the biggest companies in the US at stake.

[grumbler]

I absolutely believe that this is a bubble (annual expenditures more than 15 times annual revenue and no business model to increase revenue) and is unsustainable.

That doesn't mean that there won't be some winners whose investments pay off, but they will be a tiny fraction of the losers. However, the losers are mostly smaller companies with few employees and lots of shiny toys quickly depreciating to junk, and some larger corporations that can afford to take a hit.

[crazy canuck]

I absolutely believe that this is a bubble (annual expenditures more than 15 times annual revenue and no business model to increase revenue) and is unsustainable.

That doesn't mean that there won't be some winners whose investments pay off, but they will be a tiny fraction of the losers. However, the losers are mostly smaller companies with few employees and lots of shiny toys quickly depreciating to junk, and some larger corporations that can afford to take a hit.

There will certainly be smaller companies that tried to cash in on the craze that will fail, but the big difference this time around is the people/companies and institutional investors who hyped the stocks are staying in.  They have believed their own press clippings and are going to experience the bubble bursting along with and perhaps more than the late investors.

[The Minsky Moment]

Most (all?) historical bubbles came and went relatively quickly. 

Alan Greenspan's famous "irrational exuberance" speech was given in December 1996. With reason: earnings ratios had hit levels last seen in 1929.  Jeffrey VInik sold off half the technology stocks in the Magellan Fund, and got fired as a result. It took about four more years for the bubble to burst.

[Admiral Yi]

Point taken.

[The Minsky Moment]

The question for stock trading is whether AI is in the December 1996 stage, with a few more years of gain to go before the crash, or whether its 2000.

[Admiral Yi]

So you are certain it's a bubble?