Artificial intelligence is "obviously" experiencing a historic bubble akin to the internet and railroad booms and is very likely to bust, Jeremy Grantham forecasts.
The investment strategist and co-founder of Grantham Mayo Van Otterloo & Co., in an interview on Bloomberg's "Merryn Talks Money" podcast posted Monday, also predicted that Nvidia would lead AI stocks down when the crash occurs.
“I think the probabilities that AI will not bust are slim to none. It meets every condition of the railroads and the internet. It’s a powerful idea that’s attracted everybody’s money. No one has any doubts. They had no doubts about the railroads and the internet. Why would they? They were brilliant ideas," said Grantham, who called the 2000 dot-com bubble.
AI capital spending has kept the economy going, according to the strategist, who said that the technology appeared set for a crash in 2021 until ChatGPT came along late that year and interfered with a "nice bear market."
“I think it’s obviously a bubble and I think it’s quite a simple story. Bubbles don’t occur when there’s some crummy idea that gets touted. … All the bubbles are associated with serious things. And the more serious, the bigger the bubble," Grantham said.
"And if it’s important, really important, perhaps more important than anything else, and if it’s obvious, then you’re dealing with the handful like the railroads … everybody lost their money and the bubble broke and it brought the economy to its knees for a year or two," he said.
Amazon shares soared in 1999, then dropped over 90% in the dot-com bust, Grantham noted.
“My guess is Nvidia will lead it down and all the others will follow for a while and then out of the ashes several of them will once again inherit the earth like Amazon did," he said.
Grantham expects a broad and significant market downturn.
“If you want to have the highest market in history you will have the lowest returns in history going forward, and that is just a simple mathematical relationship. And it will happen this time and my guess is that after a while sooner or later the market will become a whole lot cheaper," he said.
“It may not become as cheap as it was in 1974. It may not even get back to the trend from 1900 to 2000, but it will get a whole lot cheaper than it is today. I don’t think we’re willing to settle for the embedded return at these levels.”
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