I've been trying to grok this idea of - when does a bubble pop. Like in theory if everyone knows it's a bubble, that should cause it to pop, because people should be making their way to the exists, playing music chairs to get their money out early.

But as I try to sort of narrative the ideas behind bubbles and bursts, one thing I realize, is that I think in order for a bubble to burst, people essentially have to want it to burst(or the opposite have to want to not keep it going).

But like Bernie Madoff got caught because he couldn't keep paying dividends in his ponzi scheme, and people started withdrawing money. But in theory, even if everyone knew, if no one withdrew their money (and told the FCC) and he was able to use the current deposits to pay dividends a few years. The ponzi scheme didn't _have_ to end, the bubble didn't have to pop.

So I've been wondering, like if everyone knows AI is a bubble, what has to happen to have it collapse? Like if a price is what people are willing to pay, in order for Tesla to collapse, people have to decide they no longer want to pay $400 for Tesla shares. If they keep paying $400 for tesla shares, then it will continue to be worth $400.

So I've been trying to think, in the most simple terms, what would have to happen to have the AI bubble pop, and basically, as long as people perceive AI companies to have the biggest returns, and they don't want to move their money to another place with higher returns (similar to TSLA bulls) then the bubble won't pop.

And I guess that can keep happening as long as the economy keeps growing. And if circular deals are causing the stock market to keep rising, can they just go on like this forever?

The downside of course being, the starvation of investments in other parts of the economy, and giving up what may be better gains. It's game theory, as long as no one decides to stop playing the game, and say pull out all their money and put it into I dunno, bonds or GME, the music keeps playing?

It's important to keep in mind the difference between the stock market and the economy.

Economically, AI is a bubble, and lots of startups whose current business model is "UI in front of the OpenAI API" are likely doomed. That's just economic reality - you can't run on investor money forever. Eventually you need actual revenue, and many of these companies aren't generating very much of it.

That being said, most of these companies aren't publicly traded right now, and their demise would currently be unlikely to significantly affect the stock market. Conversely, the publicly traded companies who are currently investing a lot in AI (Google, Apple, Microsoft, etc) aren't dependent on AI, and certainly wouldn't go out of business over it.

The problem with the dotcom bubble was that there were a lot of publicly traded companies that went bankrupt. This wiped out trillions of dollars in value from regular investors. Doesn't matter how much you may irrationally want a bubble to continue - you simply can't stay invested in a company that doesn't exist anymore.

On the other hand, the AI bubble bursting is probably going to cost private equity a lot of money, but not so much regular investors unless/until AI startups (startups dependent on AI for their core business model) start to go public in large numbers.

Eventually money to invest will run out. If earnings of the companies doesn't catch up we'll reach a situation where stock prices reach a peak, have limited future expected returns, and then it'll pop when there's a better opportunity for the money

Imagine if interest rates go up and you can get 5% from a savings account. One big player pulls out cash triggering a minor drop in AI stocks. Panic sells happen trying to not be the last one out of the door, margin calls etc.

You're assuming cash will never stop flowing in driving up prices. It will. The only way it goes on forever is if the companies end up being wildly profitable

> when does a bubble pop

This one? When China commits to subsidising and releasing cutting-edge open-source models. What BYD did to Tesla's FSD fee dreams, Beijing could do to American AI's export ambitions.