A client of mine asked me this question and I thought many of my readers might have the same question.

What Happened to the Dot-com Bubble?

When the dot-com bubble popped in March of 2000, the Nasdaq lost nearly 80% of its value over a two-year bear market stretch, and it took 15 years, that is, until 2015, for the Nasdaq to regain its previous high. As you can imagine, that was financially devastating for investors fully invested in the Nasdaq. 

Are We in a Similar Bubble, Only Now Driven by AI?

It’s highly likely. As I write now, NVDIA’s market cap is over $5T. In other words, a company with + 36,000 employees is now valued higher than the entire GDP of Japan, an advanced country with a population of 140 million. If that’s not a sign of a bubble, what is?

Will It Pop Like the Dot-com Bubble and Wipe Out 80% of Its Value?

I may not have perfect foresight, but I do have a few observations.

1. Since the 2008 subprime crisis, the Fed (the central bank of the US) has added a powerful new tool to its arsenal called Quantitative Easing (QE). This tool did not exist during the 2000 Dot-com burst. During the Covid crisis, the Fed signaled to the market that it would print an unlimited amount of money to backstop the market fall. In the end, it printed $8T. This amount of liquidity not only stopped the fall, but also fueled a massive bull market.. It’s reasonable to imagine that the Fed would not hesitate to deploy the tool again if the AI bubble pops.
2. The GENIUS Act that was passed this year and signed into law by President Trump, gives private companies the power to create USD stablecoins, the crypto equivalent of printing money. How these private companies might behave during the AI crash is anyone’s guess. But I would bet they would create money to help themselves through.
3. Since 2000, the Wall Street financial elites have gained significantly more political power. Given that their fortunes are tied with AI,  if an AI crash were to come to pass, expect them to do whatever they can to rescue the situation. 
4. Since 2000, market valuation has been  driven more and more by narratives, so much so that Robert Shiller, a Nobel Laureate, wrote a book called “Narrative Economics.” In today’s environment, as long as the media keeps telling us a compelling story, who is to say a bubble has to pop? Bitcoin is a great example of this.  It doesn’t seem to have a practical use, but as long as the story persists, its valuation keeps going up. 
5. The total Nasdaq market cap is now $49T. If Nasdaq stocks were to lose 80% of their values, trillions of dollars would flow to other asset classes, lifting the valuation of those assets instead. 

From observation 1) to 4), I judge that an 80% crash in Nasdaq is unlikely.  Still, it doesn’t hurt to take precautions. Observation 5) suggests the best precaution is to diversify across asset classes. 

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