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A warning has been issued about a potential โbubbleโ in US stocks driven by investor enthusiasm for artificial intelligence, drawing parallels to the dotcom era prior to the market crash around 2000. Billionaire investor Ray Dalio expressed concerns about inflated pricing levels alongside interest rate risks that could lead to a market correction.
Dalio noted that the current investment climate mirrors the period just before the turn of the millennium, where anticipation of a transformative technology coexisted with an overestimation of its immediate financial value. He cautioned that while groundbreaking technology promises significant change, it does not guarantee successful investments.
In the late 1990s, tech stocks soared, largely due to low interest rates and increased internet adoption, only to face a severe downturn following the Federal Reserveโs monetary policy tightening. The Nasdaq 100 index experienced a remarkable rise in 1999, but subsequently plummeted by approximately 80% by 2002. Recently, the index has doubled since the start of 2023, spurred by strong performances from AI-centric companies, notably Nvidia.
On Monday, US stocks declined after DeepSeek, a lesser-known Chinese AI firm connected to a small hedge fund, claimed its new AI model matches the performance of leading products from OpenAI and Meta Platforms, but is offered at a lower cost with less advanced hardware. This revelation prompted a significant loss in Nvidiaโs market valuation, totaling nearly $600 billion.
DeepSeekโs announcement raises questions about the substantial investments made by various Silicon Valley firms into AI infrastructure and whether Chinese companies can effectively compete despite restrictions on high-end chip imports from the US.
OpenAI, which has Microsoft as a backer, recently unveiled plans to invest up to $500 billion in AI infrastructure. Its ChatGPT app held the top position on the Apple app store until being replaced by DeepSeekโs AI assistant.
Having stepped down as chair of Bridgewater Associates in 2021 while remaining on the board, Dalio has historically been a proponent of engaging with China economically. He previously suggested that the critical issue is not if one should invest in China but to what extent. However, he indicated that the stakes in the AI sector are particularly significant.
He added that the competition between the US and China in technology transcends mere profitability, impacting both economic and military dominance. In his view, focusing solely on financial gains will not suffice in this high-stakes landscape.
This month, OpenAI founder Sam Altman reflected on the challenges of profitability, revealing on social media that the company is operating at a loss on its $200-per-month ChatGPT Pro subscription due to unexpectedly high usage levels.
As technology companies in the US make major investments, former President Donald Trump has committed to bolstering American AI initiatives in a prospective second term.
China has actively supported its AI sector by establishing funds aimed at rejuvenating its struggling semiconductor industry. Conversely, the US, under former President Biden, has allocated billions in subsidies for domestic chip manufacturing.
Dalio acknowledged that government intervention in the AI development landscape is likely a product of its critical importance, even if it diminishes profit margins. He commented that the current trend indicates a shift towards a more industrial-complex-oriented policy, characterized by increased governmental influence in economic activities, as profit motives alone may not lead to success in this particular race.
He concluded that capitalism, in and of itself, cannot ensure victory in the competitive arena of AI.
photo credit: www.ft.com