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IN AN INTERVIEW a little while back, the technology investor Peter Thiel drew an uncomfortable comparison. Today’s frenzy around artificial intelligence, he said, parallels the tech stock bubble of the 1990s. To illustrate his point, Thiel pointed to Amazon.
By any measure, it’s been an extraordinary success. But, Thiel points out, it hasn’t been a straight line. At one point early on, Amazon shares lost more than 90% of their value.
“My suspicion is that that’s roughly where we are in AI. It’s correct as a technology, but extremely bubbly and crazed…”
Thiel explained that he doesn’t doubt the importance of artificial intelligence as a technology. What he’s questioning is how these technologies are being financed.
Of particular concern are financing deals in the AI ecosystem that are seemingly circular. Nvidia, for example, has invested as much as $100 billion into ChatGPT maker OpenAI, at the same time that OpenAI has committed to spending billions on Nvidia’s chips. Similarly, OpenAI signed an agreement with AMD, another chip maker, to buy tens of billions of dollars of its chips while also buying a stake in the company. Transactions like this call into question whether these companies can continue to generate earnings at the same rapid pace.
Compounding this concern, market valuations are elevated. On a price-to-earnings (P/E) basis, the S&P 500 is trading at 21 times estimated earnings. That’s quite a bit above the long-term average of 16 and thus represents a risk. If investors cool on AI, both earnings estimates and P/E multiples would likely drop at the same time, causing share prices to take two steps down.
How unusual is this situation, and how concerned should we be about it? It turns out these are questions economists have been studying—and struggling with—for years.
Probably the most well known research on the topic dates to the 1970s, when economist Hyman Minsky developed what he called the Financial Instability Hypothesis.
This is how Minsky described it: “A fundamental characteristic of our economy is that the financial system swings between robustness and fragility and these swings are an integral part of the process that generates business cycles.”
Booms and busts, in other words, are inevitable. Why? Paradoxically, Minsky said, financial stability causes financial instability. That’s because periods of financial stability lead people to become overconfident and to assume that the good times will last forever. But that overconfidence leads to complacence and to a lack of financial discipline, especially among lenders. That then causes debt levels to rise.
What happens next? Writing in Manias, Panics and Crashes, Charles Kindleberger explains that there’s typically a canary in the coal mine that causes investor sentiment to shift. Often, it’s the unexpected failure of a bank or other institution. That’s why it caught people’s attention in February when Blue Owl Capital, which operates private credit funds and has helped finance AI data centers, announced that it was halting redemptions from one of its funds.
Looking at more recent research, economist Bill Janeway agrees with Minsky on the causes of bubbles but argues that they’re not all bad. He talks about “productive bubbles.” As an example, he points to the market bubbles surrounding the development of the British railway system in the 1830s and 1840s. Much like the 1990s tech bubble in the United States, investors piled into railway stocks, causing prices to spike to irrational levels. Overbuilding ensued, and that led to a number of bankruptcies.
Despite the financial losses, Janeway believes the railway bubble was productive. That’s for the simple reason that, at the end of the day, the tracks were laid. Yes, there were excesses, but Janeway sees no alternative. Investor enthusiasm acts as a sort of subsidy for early-stage, uncertain technologies that the market wouldn’t otherwise finance. The evidence certainly supports Janeway’s argument. The market does a very poor job picking winners.
Janeway notes that essentially the same thing happened in the 1920s, when investors piled into companies working to build out the electricity grid in the U.S. There was massive over-investment, which led to bankruptcies. But in the end, electrification projects were completed much more quickly than they might have been otherwise.
The key lesson: When market bubbles roll around, we shouldn’t be surprised. They’re inevitable. And over the long term, they’re arguably a good thing, enabling technology to move forward. Nevertheless, when bubbles burst, it’s unnerving. And indeed, in Janeway’s view, the same thing will likely happen with AI stocks.
If Janeway is right, how can you prepare?
The solution, in my view, is straightforward: Instead of trying to guess when the AI—or any other—bubble might burst, investors should take the view that the market could drop at any time. Then structure your portfolio accordingly.
There’s more than one way to approach this, but in my view, it’s a simple two-step process: First, make sure you’re diversified at the asset class level, with enough stowed in short-term bonds or cash to carry you through a multi-year market downturn. Then go one level deeper, auditing your stock holdings for individual stocks or funds overly exposed to any one corner of the market.
And if you’re in a private fund—especially a private credit fund—I’d identify the nearest exit.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
Unfortunately, I have read a lot of stuff over the years and l don’t see strong solutions.
Most Americans don’t have big portfolios and/or a pension to cover all their retirement expenses.
Most private companies don’t offer a pension anymore, only Gov/State/Education offer it.
Diversification sounds good but what does it mean?
Bogle and Buffett believe in the SP500. That index lost money for 10 years from 01/2000 to 01/2010.
On the other hand, it did great for 15 years from 2010 to 2015. If you were diversified with international you made less money with higher volatility.
When a bear market, at least 20% loss shows up, correlation goes higher and everything losses money.
The US bond index, BND, had a miserable performance of about 2% annually during 2010-2025.
Other experts like William Bernstein don’t have a real solution either. If your portfolio isn’t big enough you can never retire, unless you work forever.
This is why I created a simple model that is based on
1. Invest in what works lately. 2-3 times annually use wide range indexes and own 3 of them.
Exceptions: if the SP500 leads, only use this index. If not , select the other top indexes.
2. Use core and explore. Use 70% for core and follow 1 above.
3. For explore use 3 managed unique great risk-adjusted returns funds.
I followed the above, retired years later, and my portfolio had a much better Sharpe ratio.
I hardly even got bonuses, never stock options or profit share, never inherited anything and no pension. It was all based on saving consistently, making better choices when market changes and doing much better during meltdowns.
Later, I learned how to avoid the biggest meltdowns instead of losing a lot of money.
I found plenty of research proving that missing the best 10, 20 days over 20 years is costly. This is correct, but hardly anyone discuss that missing the 20 worst days is a lot better and most of both happen at the same periods.
http://redirect.viglink.com/?key=71fe2139a887ad501313cd8cce3053c5&subId=7235782&u=https%3A//www.cambriainvestments.com/wp-content/uploads/2018/01/Where-the-Black-Swans-Hide-the-10-Best-Days-Myth.pdf
I know, most of you would not agree.
I have long thought that markets always overshoot on both the upside and downside. This is how the correct value for an asset is determined. Fear and greed are the drivers. So stay diversified and relax.
Bill
Peter Thiel In a series of 2025 lectures, discussed “Antichrist-like systems” that could emerge to control global payments and remove financial privacy.
i would not pay much attention to what he has to say.
Perhaps he was tipping his hand.
Perhaps it was the human growth hormone. Thiel is a known proponent of transhumanism and life-extension technologies. He has stated, “Death is kind of a bad thing, in [and] of itself, so even if I was adrift and had no sense of what I was doing at all, I would still all else being equal, hopefully prefer to live a lot longer.” He has taken human growth hormone (HGH) to combat aging and famously noted his desire to live forever.
This is a great post, or would be if other problems were not brewing simultaneously. Specifically, the enormous growth of federal borrowing, real threats to democracy and accountability of financial regulations, and war that threatens the energy markets and historical alliances and international markets. It’s a lot at once.
In terms of the advice about asset class distributions, it may.be the best we can do.
Great article Adam. It does certainly feel like there are cracks in the financial foundation. We have private credit funds failing, individual margin debt at its highest, energy prices increasing rapidly, and inflation possibly on the comeback trail. It feels like a storm may be coming and the diversified will be much better off.