This column was posted hours before the quarterly earnings call for Nvidia Corporation reporting its earnings for the third quarter of this year after markets closed on Wednesday. The company could once again wow market watchers with rising revenues and exceed Wall Street expectations. Or it can be disappointed by a small or a large margin.
The premise of what follows does not hinge on Nvidia’s quarterly results and whether they will create more euphoria around the ‘AI business’ or signal a sell-off in that sector so sharp that it could impact other sectors. Key point: the fact of an ‘AI bubble’ is real. No one knows when it will pop. No one knows the consequences. But it’s impossible to miss its massive presence in the investment world and the political ramifications downstream when it emerges.
David Bahnsen has been a friend and long-time investment professional for more than twenty years. We both lived in Orange County, California, and we both moved to the East Coast.
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David’s company is The Bahnsen Group, and he writes and podcasts at ‘The Dividend Cafe’. (Neither David nor his firm have ever been clients of mine, and neither have I been theirs. We’re just friends who spent many years in the same small area of Southern California.)
Recently, the Wall Street Journal posted a story on its landing page about the tough week that stocks had suffered, but recovered somewhat on Friday. The report quoted David very high up in the story, warning that because of his perception of an ‘AI bubble’, one day buyers would not ‘come back on the dip’ and there would be pain. David is followed by smart people, and when I saw his quote I started digging. (Imagine a familiar astronomer studying meteors as he steps back from his super telescope and says, “Uh-oh.”)
After I posted Bahnsen’s comments to
I’m not an investment professional and didn’t stay at a Holiday Inn this weekend, but I understand the compelling logic. I do understand “math,” as David put it. I currently do not own any individual stocks and invest primarily in cash and cash equivalents simply because my age dictates an aversion to risk. What I appreciated about David’s explanation on his podcast is that he made a concerted effort to warn investors about a potential danger to their overall financial health. He warned against investing based on “euphoria,” and he had the detailed history of “bubbles” to back up his caution.
Bahnsen is not a short-seller, but a very reasonable, very careful analyst of the financial markets. He is also an experienced political commentator. David has been a guest on my program many times and is known in center-right circles for his seriousness and fact-based analysis. So he has earned my attention and trust.
Whatever you think of Bahnsen’s fear of an “AI bubble” that might burst and then from its ruins witness the emergence of true AI “winners” and “losers,” his immediate concern led me to a secondary, political concern.
President Donald Trump and the Republican majority are not responsible for the staggering investments in the AI pick-and-shovel buildout of data centers and related infrastructure. The Chips Act, which passed with bipartisan support in 2022 and was signed into law by President Joe Biden, earmarked $250 billion in taxpayer dollars to boost U.S. semiconductor manufacturing and innovation, but even that hefty sum is dwarfed by the more than $400 billion in private investment estimated to be spent on building that infrastructure by 2025. When there is a ‘bubble’, it attracts capital from all directions for its expansion.
If that bubble bursts, like the housing/subprime mortgage bubble of 2007-2008, and the Internet bubble at the turn of the century, the political costs will be paid by the party in power: the Republican Party. The political consequences of any disaster rarely involve rational analysis, and almost always involve voters looking for someone to blame for the economic pain. President George W. Bush did not create the housing bubble that toppled the dominoes in 2007-2008, and in fact attempted to reform Fannie Mae and Freddie Mac years before both contributed to the reckless lending that fueled the bubble that burst. It doesn’t matter. W was blamed. It wasn’t fair that he was blamed, but politics isn’t fair. History will absolve W of complicity in the Great Recession, but voters did not, and the Republican Party was punished in the 2008 elections.
That law of the political consequences of economic growth turning into failure is established. That means Republican incumbents will pay a political price if the AI boom fails before next fall’s elections, and especially if a failure drags down the value of other assets as the revaluation of AI companies progresses.
That certainty of negative political consequences from an AI crisis should also increase among Trump supporters and the Republican Party, a common concern that opponents of President Trump will welcome (if not actually push through) a major market correction. It is unclear to me that even the largest investors can move the markets in a negative direction and thus hurt incumbents. But if it were ever possible, leftists with Trump Derangement Syndrome would do everything they could to burst Trump’s bubble.
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‘Forewarned has two arms’ is an old and useful saying, but ‘forewarned’ certainly does not mean ‘immunized’. What President Trump and House Speaker Mike Johnson and Senate Majority Leader John Thune should consider now is to be cautious about the pace of AI expansion while redoubling the need for America’s commitment to winning the AI and related quantum computing races with the People’s Republic of China. The country must win both races, because this will defend it against the ‘alliance of tyrants’ led by Xi Jinping.
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What the president and his Republican allies must note again and again along the way, however, is the danger of individuals investing all or even most of their wealth in companies engaged in the AI arms race. Politicians generally should never give investment advice. But elected officials living with the memory of the fallout from the Great Recession and before that of the Dot Com bubble should do their best to make it clear to voters that past performance of the markets is no guarantee of future results.
That kind of caution may be a weak immunity against political suffering, but better a weak immunity than no immunity at all.
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