Is It a Bubble?

In this memo, Howard Marks explores the possibility of an AI bubble, distinguishing between company behavior and investor behavior within the AI industry. He reflects on the nature of bubbles, drawing parallels to historical events like the railroad boom and the internet bubble, and discusses the potential benefits of "inflection bubbles" that drive technological progress versus "mean reversion bubbles" that destroy wealth. Marks assesses the current AI landscape, noting the uncertainties surrounding its future impact, profitability, and the potential for "circular deals." He also addresses the use of debt in financing AI infrastructure, cautioning against speculative behavior and the risk of a data center glut, and concludes by advising a moderate, selective, and prudent approach to investing in AI, acknowledging both its transformative potential and the risk of losses. In a postscript, Marks expresses concern about the societal impact of AI, particularly regarding job displacement and the potential for increased social and political division.