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So let's talk today about the great investor Jeremy Grantham and understand his analysis of today's AI driven market and the major threats that lie ahead. So the biggest question is that the stock market is touching the sky. But is this a new golden age or is history repeating itself? Meaning the same old pattern of rise and then huge fall ?
Well, if we look at the figures, SAP has gone up by more than 550% since 2022 and the reason for this is, yes, the tremendous craze that is there regarding Artificial Intelligence. But this is where Jeremy Grantham comes in, his warning is completely different and quite serious. He says this market is the weakest and most fragile market ever.
So what does Grantham make of this market boom? They call it the Super Bubble. A bubble that has been fueled by the AI story. Let us understand what it means? See, Grantham isn't just an investor. He is also a market historian, and when he looks at the current situation, he sees a familiar story. A story that has happened many times in history.
So look at this pattern. What does history teach us? Whenever a major technological revolution occurs, it is accompanied by a huge financial bubble that eventually bursts. Be it canals or railways or internet. Everyone changed the world and everyone's bubble burst. So the question is, is the story of AI the same ?
And this is very interesting. Every big bubble has a unique identity. What is that? The thought that this time everything is different. Even during the dot bubble in the year 2000, it was being said that the Internet would change everything. The old rules will not apply and today the same things are being said for AI.
What could be a better example to understand this ? After the crash of 2000, the stock of a revolutionary company like Amazon fell by 92%. Grantham says try holding a stock that falls this much and then you will understand what a bust or decline really means. Meaning even great companies ca n't escape the bubble.
So then the question arises, how do we identify the peak of a bubble? For this, let us look at a practical framework based on Grantham's analysis. You can also call it their bubble detection kit. A bubble, according to Grantham, is not a magic trick. This is a mathematical phenomenon. It forms when market prices move too far away from their long-term average.
Meaning, so far away that it becomes a statistical rarity. They call this a two sigma event. And Grandtham's checklist includes four major signs that the bubble is nearing its peak. First, the valuations are skyrocketing. Secondly, the behavior of investors is absolutely crazy. Like the craze for meme stocks.
Third, everyone should assume that the economy is perfect and will always remain so. And fourthly, the entire rally is being run on the strength of just a handful of big companies. And according to Grandtham, today's market is ticking all four of these boxes. This is the hallmark of a classic bubble.
But now we're going to take this whole conversation in a completely different direction. Till now we were talking about financial bubble. But now we'll focus on the real-world issues that Grantham believes the market is completely ignoring. And this is where the biggest twist comes. Grantham's work forces us to consider whether the AI bubble is really the biggest concern, or are we distracting ourselves from a much bigger threat ?
Look at this figure. This is a surprising truth of mathematics. If the world's population grows at just 1% for 3000 years, it will increase 7 trillion times. This is impossible. It just shows us that growth cannot continue forever on a finite planet. And this is another surprising statistic. Sperm counts have fallen by a staggering 60% in the developed world.
Grantham links this to chemical toxicity, i.e., chemicals spread in our environment. This is a threat that is quietly growing and its consequences could be far-reaching. Think about this comparison from Grantham. Because of CO2 emissions, our planet is absorbing the equivalent of a Hiroshima bomb every few seconds.
This is not just an environmental issue. This is a physical reality that we cannot ignore. So now we reach the last part of this analysis and here Grantham's question is whether our economic system, i.e. capitalism, can deal with these long-term threats or not. Grantham's entire argument rests on the economic theory of the Tragedy of the Commons.
In simple terms, it means that when something belongs to everyone, like air or water, no one cares about it. Everyone uses or pollutes it for their own benefit and in the end everyone suffers because there is no direct cost for polluting it and this statement by Grantham makes everything clear. He says that we cannot expect any corporation to automatically reduce its profits to save humanity.
The system is built for profit. Not to save mankind in the long term. So if we sum it all up, these are the real threats that are interconnected. According to Grantham, this is much bigger than any stock market bubble. These are not just financial threats but threats to our existence. So, this slide shows the battle that Grantham calls the race of our lives.
On one side is our ability to invent amazing new things and on the other side is the continuous damage caused by our system. So the real question is who will win this round? And we end this analysis with this profound and thought- provoking question from Grantham. Will our ability, our ingenuity, overcome the flaws in our system that it is designed to ignore? Only the future will tell the answer to this.
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