This is what a bubble looks like 🫧

The AI bubble continues - but under the surface, signs of strain are beginning to show.

The Bank for International Settlements – basically the central bank of central banks – has just released a report calling the AI boom a bubble (without actually using that word). The report warns that overexuberant investment in AI risks ending in a bust, as investors pull back once their enthusiasm for the technology wanes. If investment falls sharply, asset values will fall, which could trigger a credit crunch given that the investment boom is increasingly being funded through debt.

Right now, much of the global economy – and the entire stock market – is being propped up by AI spending. The five biggest hyperscalers are on track to spend more than $1tn on AI between 2025 and the end of 2026. Tech firms have piled into the credit markets to fund their spending spree, and investors have been only too happy to oblige - which has made it very easy (perhaps too easy) for all sorts of AI-related companies to borrow vast sums of money.

I’ve been saying for a while that this kind of hype-fuelled investment spree mirrors the railway boom of the 1840s, and the dot-com boom of the 1990s. The BIS agrees. The authors write that each of these bubbles involved a “genuine technological breakthrough that attracted capital in excess of what commercial returns could ultimately justify.” The tech was useful, and the bubble still burst, causing significant economic pain.