AI Frenzy 'Most Hated Bubble In History', Says Ruchir Sharma; Sees Four Red Flags

The current wave of enthusiasm from investors across domestic and global markets to invest in artificial intelligence is "the most hated bubble in history", according to Ruchir Sharma, chairperson of Rockefeller International.

He pointed to rising valuations, sharp and fast spikes in investment and increasing leverage as factors that were also observed before some of the most notable market crashes in history.

The founder and chief investment officer of Breakout Capital told Farid Zakaria of CNN that the four red flags for a bubble — overvaluation, over-investment, over-leverage and over-ownership — have showed up when it comes to AI.

Sharma was asked by Zakaria about Nobel laureate Robert Shiller's historical chart on market valuations and he had this to say, "Historically, the stock market valuation today is very expensive."

Zakaria noted that historically, the only comparable valuation rises were observed in 1929, before the market crash which heralded the Great Depression and the 1999 dot-com bubble crash.

"We have definitely overvaluation. So that's the one big O," Sharma said in response.

Sharma also spoke about the boom and speed in AI spending, which he called over-investment.

"Today, if you look at the amount of money going into AI, that tech spend, as a share of the economy today, that's already comparable to what you saw at the peak in the 2000 internet boom," he said.

He said that the acceleration in investments was much sharper than in the prior cycles, according to his observations. "There's such an arms race on to be the leading player in AI that the acceleration that you have seen in investment in AI has been huge," Shah said.

He noted that this phenomenon has led to wealthy tech giants in Silicon Valley to accrue debt, which he saw as a sign of over-leverage. "Meta has gone from having a net cash position to now being one of the big issuers of debt just to finance the AI boom."

Shah also said that the symptom of over-ownership has also got much more severe in recent times. "If you look at the bubble today, the amount that people have exposure towards the equity market, the over-ownership, the 4th O, is very high. This is now higher than what it used to be back in 2000.” 

When Zakaria noted that the only comparable period to this one was the dot-com peak; Sharma said, "We are in fact higher than that point now."

Shah said that calling the precise moment a bubble will burst is impossible, but the tell-tale trigger is when investors "run out of money" or when the US Federal Reserve makes more stringent policy.

"Typically, what bursts a bubble is when the US Federal Reserve decides to increase interest rates...That was the one common factor behind those bubbles bursting," he said.

He stated that the recent see-saw in US markets was due to speculations of delayed rate cuts.

"All it has taken is for the US Federal Reserve to say they may not cut interest rates in December. If by any chance next year, inflation goes up and the Fed is forced to increase interest rates, then I think that what you could be staring at is a big, big downturn," Shah said.

"Until then, everyone says the party is still on, the music is still running, and we've got to keep dancing," he added.

Zakaria asked Shah about a chart displaying comfort levels with new technology plummeting from 72% in the dot-com era to 31% in the present.

Sharma stated this discomfort defines the current sentiment. "This is the most hated bubble in history. People are really scared about what AI may bring."

He added that tech-optimists portray the future in distressing terms and conditions. "They are telling us that we're going to take your job away. And if you don't know how to use AI, you're going to be in big trouble," Shah said.

The noted investor said that there may be emotionally complicated times ahead if the AI bubble bursts.

"At one level, people will just be a bit relieved. On the other hand... that's going to be painful," he said.