Will AI be the dot-com bubble all over again?

This episode explores whether the current excitement around artificial intelligence (AI) might lead to a financial bubble similar to the dot-com crash.

1. The AI technology boom could be mirroring the early stages of the dot-com bubble, with significant investments and high expectations potentially leading to a market correction.
2. Nvidia's stock has soared due to its pivotal role in AI technology, highlighting the market's bullish outlook on AI infrastructure.
3. Experts warn of overestimating the speed of technological adoption while underestimating its long-term impact, drawing lessons from past tech bubbles.
4. There's a risk of smaller financial institutions facing crises similar to those in the dot-com era due to heavy investments in commercial real estate.
5. The episode underlines the transformative potential of AI, akin to the internet and railroads, but also cautions about the economic disruptions it might cause.

1: Introduction to AI Boom

Kai Risdahl opens the episode by comparing the current enthusiasm for AI to the dot-com era, setting the stage for a deep dive into whether AI is heading towards a bubble. Kai Risdahl: "This AI moment we're having is often compared to the birth of the internet—a transformational technology."

2: Historical Parallels

The episode examines historical tech bubbles like railroads and the internet to understand the potential trajectory of the AI boom. Brad DeLong: "There seemed to be a railroad bubble every decade or so, maybe one before the civil war and then one a decade after the civil war."

3: Economic Impact Analysis

Discussion on how AI might influence different sectors, including banking and commercial real estate, with specific focus on potential crises. Al Kesh Shah: "What I think most tech investors get wrong over time is you always overestimate how fast the change will happen."

1. Diversify investments to mitigate risks associated with potential AI bubble.
2. Stay informed about technological trends to better understand market dynamics.
3. Evaluate the historical impact of new technologies to anticipate possible economic shifts.
4. Monitor the health of financial institutions that might be affected by technological disruptions.
5. Consider the long-term implications of investing in AI and related technologies.

In the 1990s, companies that hoped to change the world using newfangled computer technology took off. Wall Street invested in some of them big time, and their stock market valuations ballooned before they showed evidence of delivering on their promises. Sound familiar? In this episode, a cautionary tale for the era of AI. Plus, film jobs leave L.A. and New York, Netflix doubles down on video game investments and small businesses’ pricing power is kinda lumpy.

People

Kai Risdahl, Al Kesh Shah, Brad DeLong

Companies

Nvidia, Bank of America

Books

None

Guest Name(s):

None

Content Warnings:

None

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We'll do some banking just cause the book that is colored beige, if you know, you know. And how do you feel about drive thrus from american public media? This is Marketplace in Los Angeles. I'm Kai Risdahl. It is Thursday today.

This one is the 18 April. Good as always to have you along, everybody. Two related notes with which to start the program today. Number one, this being Thursday, we got first time claims for unemployment benefits. This morning, 212,000 people made said claims, virtually the same number as have been filing for the past ten weeks.

And to the point, a quite low number. Labor market is still plenty strong is another way to think about that note, number two, and as I said, related, is that the head of the Federal Reserve bank of New York said this today. John Williams is his name. His quote goes like this. I definitely don't feel urgency to cut interest rates.

Keep that in your back pocket the next time interest rates come up in conversation, would you? Elsewhere in american capitalism, we've gotten more bank earnings this week. Not the biggies, but some of the smaller but still plenty big and quite important regional banks, all of them reporting profits down just a bit, in part because of those higher interest rates. Another issue for them, commercial real estate. Those banks have a lot of cre debt on their books, a sector that has been hit by the double whammy of high interest rates and high office vacancies.

And there was more evidence of trouble ahead on that front this week from atom. They track real estate data nationwide. Commercial property foreclosures are up more than 100%, 117% to be precise, from March 2023 to March 2024. Marketplaces Mitchell Hartman has more on that one. Commercial real estate, or CRE, includes four property types, industrial, retail, multifamily and office.

Mitchell Hartman
And it's clear which is the weakest link, says Suri Sharma at Morningstar. The real stress is in offices. There's absolutely no doubt about it how much stress commercial office space is in a significant recession. We're testing the extreme declines in the great financial crisis. Susan Wachter teaches real estate at Penn's Wharton School.

This is a crisis, but it's a contained crisis and a slow moving one. If we continue to have strong growth without an interest rate spike and without a recession, the pain will be under control for the overall economy, but not for building owners struggling with half empty office towers and maybe not enough rent coming in to pay their bank loans. Morningstar Suri Sharma says the biggest banks should be fine, but small local banks might have 40% to 50% of their portfolios in commercial real estate. So if things go bad, there's a very real chance some of these banks go down under. Now, remember, commercial real estate also includes industrial, which Ken Simonson at Associated general Contractors of America says is on a tear.

Very strong growth in data center and manufacturing plant infrastructure. And there's lots of renewable power projects, from solar to battery storage and maybe even some offshore wind. As for retail, Suri Sharma says it's in pretty good shape after a big shakeout in the Great Recession and a huge wave of new multifamily apartment buildings is about to hit the market. I'm Mitchell Hartman for Marketplace. We mentioned yesterday on the program that the Fed's latest beige book is out a summary anecdotal of what the twelve regional Federal Reserve banks have been hearing from people and businesses in their districts.

Kai Risdahl
And this line from the Atlanta the Fed caught our eye. Here's the quote pricing power was characterized as lumpy, with some firms maintaining the ability to pass through costs, while others, particularly retailers and restaurants, struggled to preserve margins. End quote. Marketplaces Stephanie Hughes volunteered to find out how businesses are handling those lumps. There's no formula that tells small businesses what to charge for their stuff.

A lot of it is art more than it is science. Charles Lieberman is chief investment officer for advisors Capital management. He says businesses can look at what their competitors are doing, maybe test out a price increase. But some retailers and restaurants are selling nice to haves, not must haves. So if a restaurant, say, tries to raise prices to cover the increased cost of ingredients, the buyer they have the.

Ability to say no, they're not going. To go out to the restaurant. And the way food prices have been going up isn't straightforward right now. Rick Watson owns Oak Grove Market, a butcher's shop in Delhi in Decatur, Georgia. He says in the past, if beef tenderloin was more expensive, marking up the price was no problem.

Mitchell Hartman
But now, you know, it's kind of a different way. Things have increased where it's like essential ingredients in a lot of our prepared items. The cost of fry oil, he says, has about doubled since before the pandemic. That affects a lot of items, including french fries. Watson says the margin on them has been cut in half.

Even though he's raised the price of fries some, he can't raise it too much because, he says it's important that his customers not think his prices for anything are too high. So I think, you know, one item can kind of have an effect on the way a person looks at your whole store. Restaurants and retailers don't necessarily have to raise prices to protect their profit margins, says Adrian Slack at the Atlanta Fed. They can also save money by cutting back. So that might be fewer servers to provide service, fewer operating hours.

And, she points out, businesses are customers, too, who have leverage with their suppliers. You can negotiate maybe fewer delivery times to your site. Or if you are a large volume purchaser, you can absolutely negotiate the price of some of the goods that you're purchasing. Like can we get a better deal on fry oil? I am Stephanie Hughes for Marketplace on Wall street today.

Kai Risdahl
You know, lumpy is a pretty good word to use there, too. We'll have the details when we do the numbers.

How do you feel about artificial intelligence? Wary. Interested, but watching. Deeply concerned, or perhaps full speed ahead? Well, I'll tell you where AI enthusiasm remains real, real high.

That'd be Wall street. Two years ago, Nvidia, the AI semiconductor design and manufacturer company, traded at about $160 a share. Then chat TPT comes out. Investors learn Nvidia is basically the only supplier the chips that powered. And today Nvidia trades just shy of 850 a share, which makes it a bit more than a $2 trillion company.

This AI moment we're having right now is not infrequently compared to the birth of the Internet, a transformational technology that could reshape just about every aspect of our lives. Thing is, back in the 1990s, Wall street was real enthusiastic about the Internet, too, and lost a ton of money because of it. Marketplaces Matt Levin has this one. What was the most obvious sign that the nineties.com boom was maybe a little bit unsustainable. Well, you could have looked at the Nasdaq going up about 500% in just five years.

Mitchell Hartman
Or if you were in New York City on Thanksgiving Day 1999, you could have also just looked up at the inflated four story high sock puppet dog. Sets.Com quote s program to celebrate and support people helping animals and animals helping people. Look, he's got a stuffed thing. I love stuff. Things.

That's Katie Couric and Al Roker introducing the pets.com Macy's Thanksgiving Day parade balloon. Former CEO Julie Wainwright says she doesn't know the balloon's current whereabouts. No, I don't. But, you know, the puppet was pretty awesome. And you can still find the commercials on television.

Pets.com is what it sounded like, a website that sold pet supplies, which in 1998, when the startup launched, was a radical idea. Every reporter was like, you can't ship dog food over the Internet profitably. It's like, of course you can. Pets.com got loads of venture capital investment, spent way more on sock puppet ads than it ever made in revenue, and went public on the Nasdaq in February 2000. Just nine months later, it collapsed.

When Wall street got tired of waiting on the e commerce revolution, the general idea was right. The timing, not so much. What I think most tech investors get wrong over time is you always overestimate how fast the change will happen, and you underestimate the magnitude of the change. Bank of America's Al Kesh Shah has analyzed tech stocks since the nineties, back when he had to fax clients. His reports.

Today, Shaw covers AI and sees similarities to the early days of the.com bubble, the extremely early days. So when people keep waiting for that.com implosion, today for AI, we don't even have the companies yet to implode. Right now, it's big tech that dominates AI, Google, Meta, Microsoft. Shah is waiting for AI companies that were born after chat, GPT, and those companies won't come until there's enough specialized servers and data centers and computer chips to support them. If you think about how much infrastructure will be necessary for AI, it will probably be even more than what the Internet was.

That's part of the reason Nvidia's stock has been soaring. It's the so called pick and shovels investment strategy, betting on the infrastructure that underlies a new technology rather than, say, a shiny new app. Sounds logical until you look at older tech bubbles, like back when they actually used picks and shovels. Brad Delong is an economic historian at UC Berkeley. There seemed to be a railroad bubble every decade or so, maybe one before the civil war and then one a decade after the civil war.

19th century investors rightly sensed that railroads were about to revolutionize the economy and still lost their shirts. But just like the telecom companies that laid Internet cable in the 1990s, many of which also went bankrupt, the failed railroad companies gifted the economy some helpful plumbing. In the aftermath of each railroad bubble, we were left with an awful lot of railroads that had been built by investors who had gone bankrupt. For her part, former pets.com CEO Julie Wainwright is experiencing some deja vu. Are we in an AI bubble?

Yes. Will there be a rush to move the technology forward and a company's funded that will fall by the wayside? Absolutely. But the technology's real. After the Internet grew up, Wainwright went on to lead a much more successful e commerce company, the realreal, and now she heads another startup.

I'm the current CEO and co founder of Ahara, which is an AI nutrition company. I'm betting you won't see an Ahara balloon this Thanksgiving. I'm Matt Levin for marketplace.

Kai Risdahl
Drive thrus are having a moment. McDonald's launched its drive thru only brand, Cosmix, last winter. Of the 271 locations that Chipotle opened last year, 238 of them had drive thrus. Kristen Schwab was telling us about Chipotle lanes the other day that said drive thrus are getting controversial, with some cities limiting or banning new drive thru construction. There was a piece in Vox the other day on this topic titled Mega Drive thrus explain everything wrong with american cities.

Marina Bullet Nikova wrote it. Thanks for coming on the program. Thank you. So happy to be here. That, that word mega drive thru in the headline to this piece, what exactly are we talking about here?

Sure. So a mega drive thru, it's a term of art that I sort of invented, and it refers to a drive through of more than one lane, basically two, three, four lanes, and those are proliferating across the country. And I talked to the Minneapolis planning director, Meg McMahon, who knows a lot about this, has confirmed that she thinks mega drive thru is an appropriate term. Well, congratulations on your coinage. One imagines that the places that are installing these, the franchises and chains that are installing these are doing it for scale, right?

Kai Risdahl
To be able to get more people, more bodies, more cars, technically through the line, and thus increase their bottom line. Yeah, I think that's certainly true. A problem that drive thrus have always faced is, you know, backing up onto roads when there are too many people and so as drive thrus have become increasingly popular since 2020, there's been a need for the fast food industry to add more volume. And, you know, and another reason is that mobile orders that are picked up through drive thrus have become very popular. You know, you can order from Chick fil A at home, on your phone through a drive thru and pick it up.

And many chick fil A locations have added an additional lane just for those types of orders. So take me back to that city planner in Minneapolis, or swing down by Atlanta, where they've also done some limitation on drive thrus. What are the city's options, and do you think they're going to do them, or are they going to bow to the commercial pressure? I think that the fast food outlets, they see their growth in the suburbs anyway, where the zoning and the planning is more amenable to drive thrus. So big cities that are banning them in the grand scheme of things may not have that much of an impact.

And it leaves cities, suburban cities, with difficult choices to make about whether they want to see more and more of these things and also banning things as a concept. It doesn't sound that nice. Right. And I think that a more helpful way to think about it is to think about how to fundamentally change the way american communities do urban planning, rather than a band aid of banning drive thrus, if that makes sense. Yeah, it does.

Kai Risdahl
I guess my question is, we have to deal with the built environment that we've got and what's the alternative? Right? I think that things can be. It can be a lot easier than you might think. American suburbs aren't going to become Amsterdam anytime soon.

Most car trips in the US are under 5 miles. Many, many car trips are 3 miles or less. In a context where it is safe and welcoming to get around, not in a car. Those are distances that are eminently walkable and bikeable. But people need to have places to go, and a place only meant to be accessed by car, like a drive through, directly conflicts with the progress that places have been making.

Kai Risdahl
Marina Bloodnikova at Vox. Marina, thanks so much for your time. I appreciate it, and thanks for the piece. Yeah, thank you so much.

Coming up, there were constant auditions. I mean, constant auditions. Try, try and try again. But first, let's do the numbers. Dow industrial is up 22 points today.

Kai Risdahl
Less than a 10th percent. Finished at 37,775. The Nasdaq down 81 points, about a half percent. 15,601. The S and P 500 down eleven, 210 percent.

5011. We heard from Stephanie Hughes about lumpy pricing. As the beige book put it. This month's book also noted that freight forwarding companies reported overall declines as consumers worked through bloated inventories in freight stocks. Land star system lost a half percent.

Old dominion freight line fell off 1.4% today. Bond prices fell as well. The yield on the ten year treasury note rose to 4.64%. Oh, hello. John Williams in New York.

Fed. You're listening to Marketplace.

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Kai Risdahl
I'm Kai Risdahl. Well, well, well. Netflix. Netflix. Netflix.

The streaming giant announced quarterly earnings this afternoon after the bell. Net income, that is, profit of $2.3 billion on 9.3 billion in total revenue, 9.3 million new subscribers last quarter, thanks in part to yes, content, but also the company's crackdown on password sharing. But there are only so many freedom freeloaders left to convert, and one of the company's longer term strategies to drive growth is the video game business that it jumped into late in 2021. Marketplaces Megan McCarty Corino has more on where that stands. If you haven't logged on to the Netflix app on a mobile device.

Megan McCarty Corino
Lately, you might not even know there are games, more than 80 of them now, and many are what you'd expect of a free mobile game, says freelance writer Ian Campbell, who's tested a bunch of them. There was a game called Nittens where you're matching yarn to make hats for cats. Not super serious or super highfalutin stuff. There are some games based on Netflix series like Stranger Things and some licensed third party games, including Grand Theft Auto and one called Kentucky Route Zero. Sort of like a magical realist road trip through the United States.

Mitchell Hartman
But the story is very emotional and serious in a way that a lot of those early Netflix games are not. The expansion of higher profile games last year helped drive an increase in downloads, according to data from Aptopia. But only a small fraction of Netflix subscribers are playing, says analyst David Cole at DFC Intelligence. I don't think it would be fair to at this point really assess it based on that, he says. Three years in the video game world is nothing.

Megan McCarty Corino
It often takes longer to develop an original project. Netflix has bought several game studios, hired some big names, and is piloting cloud gaming on tv and pc. But it'll need more than that to go up against competitors like Sony, Microsoft, and Apple, says Jost Van Droynen, who teaches the business of video games at NYU. This is always going to be a high stakes table. What that's going to cost to compete.

Mitchell Hartman
With these companies is tons of money, he says. Netflix is used to writing big checks for content to grow its audience. I'm Megan McCarty, Corino for marketplace.

Kai Risdahl
I think you file this one under the heading art imitates life because you know how a lot of people, white collar workers mostly moved during and since the pandemic, something similar has been happening in film and television over the past couple of years. A lot of the jobs those industries create have moved from the traditional centers in Los Angeles and New York to Atlanta and New Orleans, New Mexico, and beyond. Data from the Bureau of Labor statistics that was crunched by the APM Research lab shows that employment in motion to picture and sound recording is up nationally, but that the share of workers doing it in LA or New York has gone from just under half at the beginning of 2023 to just a third earlier this year. Marketplace's Henry Epp has the rest of that one. Janie Haddad Tompkins has been piecing together a career in Hollywood for over 20 years.

Im what you would describe as a journeyman actor. She lives in LA, where shes landed lots of small roles in tv shows over the years, mostly comedies, the new night court, Brooklyn nine Nine, Modern Family, and shes booked some commercials. Getting those roles means auditioning, and prior to the beginning of last year, she was doing a lot of it. There were constant auditions, I mean, constant auditions. Hollywood was in something of a production bubble.

Mitchell Hartman
Tons of new streaming services set up shop, banking on demand from subscribers and to entice them, filled their platforms with new shows and movies. In 2022, there were 600 scripted shows in production, according to the network FX. That gave lots of opportunities to writers, crew members, caterers, everyone who makes a film shoot run, including actors like Haddad Tompkins. And then when the beginning of 2023 happened, it seemed like there was this chill on production and making things and buying things. Studios started to pull back for a couple of reasons, says Patrick Adler, head of the consulting firm Westwood, which issued a recent report on the film industry workforce first, investors started feeling the effects of rising interest rates.

Wall street just got significantly less patient with the spending by the studios on streaming platforms. As soon as money started to be more expensive and studios realized that there was maybe not as much capacity for consumers for subscriptions to all these streaming platforms as they might have anticipated. Then the writers and actors unions went on strike last year, and Hollywood pretty much ground to a halt for six months. A lot of people in the industry expected production would pick back up after those ended, maybe not to the level of the streaming bubble, but an uptick. But in LA and New York, that just hasnt happened.

Actor Janey Haddad Tompkins says when studios were pumping out shows, she'd get one or two auditions a week. Now it's like I've had maybe one a month. So it's been bleak. But while work opportunities have cratered in LA and New York, the workforce in the rest of the country has actually grown a bit since the end of 2022. Travis Knox, a longtime movie producer who teaches at Chapman University, thinks a long term industry trend might be at play here.

Generous state tax credits for film production if the state's going to give you 30% of your budget back, it's kind of a no brainer. You have to go. This goes back a few decades. Louisiana began offering film studios significant payouts to shoot there, and then a bunch of states followed suit. According to the National Conference of State legislatures, at least 18 states have created or expanded film incentive programs since 2021.

A lot of them offer cheaper gas, food and housing than California and New York. So from the studio perspective, Knox said, as you cut back on the overall number of productions. The first thing you're going to do is stop making them in the place that's expensive. So tough luck for California and New York. Case in point, he says.

I've got a movie right now at a major studio at Sony, and it takes place in central California in the 1940s, and we're going to shoot it in Oklahoma. Some parts of the industry are unlikely to leave its traditional capitals. Tv writers rooms, for one. And the post bubble cutback is making life hard for writers trying to get work in those rooms. Everyones trying to go after the same job, essentially.

Jackie Penn is a tv writer with a few staff writing credits to her name, which puts her at a level of experience that she says just isnt in high demand right now. A lot of the shows are only looking for upper level writers, or they. Want writers working on their very first show. Which means, she says, the next generation of showrunners and creators isnt getting the opportunities they need to lead the industry into the future. I'm Henry Epp for marketplace.

Kai Risdahl
This final note on the way out today, not to get all wonky on you, but here is why. Foreign exchange currency trading matters saw this one in Nikkei, Asia, that in March Japan had more than 3 million monthly foreign visitors. For the first time ever, you can get about 154 ish japanese yen for your dollar. At the moment, that is the weakest the yen has been since the mid 1980s. John Gordon, John Buckley, Noya Carr, Diantha Parker, Amanda Petra, and Stephanie Siek are the marketplace editing staff.

Amir Babawe is the managing editor. I'm Kai Rysdal. We will see you tomorrow, everybody.

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Megan McCarty Corino
New episodes of sold a story are available now.

Mitchell Hartman
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