A leading market watcher has warned that A.I. stocks are in bubble territory and have created a ‘fake it till you make it’ bubble that is heading for disaster.

You might not remember the Tulip Bubble in Holland. But maybe the dot-com bubble of the early 1990’s rings a bell or the US housing market bubble in the 2000’s. Let’s not mention Cryptocurrencies either.

James Ferguson, one of the founding partners of UK based macroeconomic research firm, MacroStrategy Partnership, has warned that pressure on companies to emphasise their A.I. credentials to all and sundry is paving the way for a spectacular collapse of A.I stocks.

Speaking with Bloomberg’s Merryn Somerset Webb in the latest episode of the Merryn Talks Money podcast, Ferguson said that, “AI still remains, I would argue, completely unproven. And fake it till you make it may work in Silicon Valley, but for the rest of us, I think once bitten twice shy may be more appropriate for AI … If AI cannot be trusted…then AI is effectively, in my mind, useless.”

To be fair, the man does have a point. Much A.I. at the moment is neither ‘thinking’ nor ‘innovating’ but relying on large datasets to analyse patterns. In a way, A.I. at the moment is more akin to a historical genius that can spot historical patterns and apply them to the future. But will have constitutional difficulties in coming up with their own innovative patterns for the future.

Ferguson made the point that Large Language Models (LLM’s) have a tendency to invent facts and sources and this may prove an even bigger problems which would lead to A.I. having far fewer uses in the future.

The cost of A.I. was another consideration of Ferguson’s. Massive processing power and data storage is required for anything resembling (faking) it as A.I. at the moment. He said that AI applications alone could use as much power as the Netherlands by 2027 (At least tulips were good for the environment).

“Forget Nvidia charging more and more and more for its chips, you also have to pay more and more and more to run those chips on your servers. And therefore you end up with something that is very expensive and has yet to prove anywhere really, outside of some narrow applications, that it’s paying for this,” he said.

Making the point that all this contributes to excessive tech hype, he compared it to the hype before the dot-com market crash. In this period, market returns were driven by Wall Street’s expectations for explosive earnings growth rather than fundamental company earnings. Darlings of that era, Cisco and Intel, have failed to have anywhere near the explosive growth that was predicted during that era.

Nvidia, making the news lately for becoming one of the world’s most valuable companies, making a price tag of 40 times sales, could be in line for a similar fate. It’s stock has risen an eye-watering 700% since the start of last year and the company is now worth more than $3 trillion.

“What multiple of sales is Nvidia a good deal on if you think that it might only have—no matter how stratospheric the growth rate at the moment—if you think that it’s probably not going to be a player in a decade’s time?” he asked.

Essentially what he’s saying is that stocks traded on valuations that are rising faster than earnings are a risky investment – that there may be no basis to the valuation other than someones estimate of where it’ll end up.

Making the point that nobody can really say when the bubble will end, he singled out short sellers who may be eyeing up tech stocks. “I mean, it’s certainly what was happening in the dotcom [bubble], for example, where almost anybody who wasn’t a retail punter was looking at these things and saying, ‘well, it can’t last, but having said that, if it lasts one more quarter and I’m not playing, I’ll lose my job.’”

If Cisco and Intel were big players in the 2000’s, and they’re really not featuring this time around with the A.I. bubble, then in ten years time would Nvidia be a player in the next bubble?

But all is not lost. If you subscribe to the Warren Buffet school of investing, there is still value to be had, but it’s going to take some work to find it.

“There’s a lot of value to be found in the U.S. The trouble is that that value is to be found in good old fashioned ways, trawling through small caps and looking for businesses that are growing in a good old fashioned, steady way, he said.