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Speaker 1: Welcome to Fear and Greed, summer series brought to you

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Speaker 1: by Montgomery Investment Management.

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Speaker 2: I'm Sean Aylmer.

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Speaker 1: Perhaps the most oft asked question in recent months on

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Speaker 1: global markets is are we in the middle of an

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Speaker 1: AI bubble?

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Speaker 2: What's the answer?

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Speaker 1: Roger Montgomery is the founder and chief investment officer of

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Speaker 1: Montgomery Investment Management.

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Speaker 2: Roger, welcome back to Fear and Greed.

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Speaker 3: Great to be with you, Sean.

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Speaker 2: Upfront, Are we in an AI bubble or not?

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Speaker 3: Well, I don't think we're in the middle of one.

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Speaker 3: I think we're heading towards the end of one. And

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Speaker 3: there's a number of reasons for that, but primarily it's

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Speaker 3: this idea that history teaches us how these bubbles evolve

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Speaker 3: and how they burst, and so what we've seen is

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Speaker 3: typical of all previous what we call general purpose technology bubbles,

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Speaker 3: and AI is a general purpose technology. The idea that

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Speaker 3: technology a technology that's going to be in everyone's hands

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Speaker 3: and it's going to change the course of human history.

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Speaker 3: I agree with that sentiment, but what we've seen in

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Speaker 3: the past with these general purpose technology technologies rather is

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Speaker 3: that there's a lot of excitement around them. There's a

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Speaker 3: lot of hype, and the government gets in on that

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Speaker 3: hype too. Lenders get in on the hype, equity investors

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Speaker 3: get in on the hype, and consequently, what happens is

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Speaker 3: not only do share prices go up, for example, but

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Speaker 3: the cost of capital comes down. And as a result

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Speaker 3: of that cost of capital coming down as a result

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Speaker 3: of the money being free and easy to obtain for

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Speaker 3: that kind of project, and it happens because of the

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Speaker 3: excitement around this new technology that's going to change the world.

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Speaker 3: Then the companies at the epicenter of the bubble, what

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Speaker 3: they tend to do is they get as much money

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Speaker 3: as they can and then it's a race to scale

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Speaker 3: the technology in order to get it in everyone's hands.

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Speaker 3: And that's facilitated by this low cost of capital, and

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Speaker 3: so share prices go up. They all start to self

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Speaker 3: serve in the sense that they say, look, we're convinced

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Speaker 3: that this is going to change the world. It's going

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Speaker 3: to be great. You should get on board, and that

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Speaker 3: drives more people to jump to that theme. The problem

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Speaker 3: is that the theme is perceived to be structural. Now

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Speaker 3: what I mean by that is it's perceived to be

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Speaker 3: a smooth, forty five degree northeasterly line, and from invention

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Speaker 3: to adoption by everyone in the world, there will be

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Speaker 3: no interruption. The problem is that the customers, us and

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Speaker 3: businesses aren't structural. We're cyclical, and consequently we go through

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Speaker 3: the normal ups and downs of the business cycle. You know,

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Speaker 3: money's cheap, money is expensive, we've brought ours, we haven't

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Speaker 3: brought ours, we can't afford it, it's too expensive, or in

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Speaker 3: the case of building data centers, there's not enough wader,

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Speaker 3: or the electricity is too expensive, or council blocks it

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Speaker 3: because you know, the locals are up in arms about

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Speaker 3: this happening to their community. There will be oracle, for example,

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Speaker 3: finds that blue ourl it's funder, just as we saw recently,

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Speaker 3: decides no, no, we're going to raise the cost of

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Speaker 3: our funding to you. We're not own a fund that

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Speaker 3: you'll have to find someone else. And so these business cyclicalities,

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Speaker 3: these consumer cyclicalities, when they meet up with a theme

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Speaker 3: that is perceived to be structural, then what happens is

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Speaker 3: the whole thing starts to unwind. Now it can come

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Speaker 3: out gradually and prices could drop gradually, and we don't

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Speaker 3: see many much more in terms of gains for AI stocks,

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Speaker 3: or there could be a race for the exit and

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Speaker 3: we see prices drop precipitously. I think we're very close

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Speaker 3: to the end of that boom phase where people are

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Speaker 3: now starting to look at the numbers around the adoption

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Speaker 3: and the cost of implementation for AI.

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Speaker 1: Okay, so do you think there'll be a run for

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Speaker 1: the exits.

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Speaker 3: It's possible. Look, no one can predict these things. You

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Speaker 3: don't know if it was a bubble until you're on

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Speaker 3: the other side of it. But it's quite possible that

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Speaker 3: we do see a rush for the exits. Having said that, though,

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Speaker 3: the caveat is that some of these stocks are already

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Speaker 3: down a lot. In Videos off fifteen sixteen seventeen percent

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Speaker 3: from its highs, Oracles off fifty percent almost from its highs.

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Speaker 3: You know, if we look in Australia at some of

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Speaker 3: the small cap stocks that are in the space, you know,

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Speaker 3: the megaports of the world, they're off quite substantially from

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Speaker 3: their highs as well. So it could be that that

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Speaker 3: rush for the exit has already happened, and so we

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Speaker 3: see the rest of the year from the bubble come

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Speaker 3: out more slowly. We'll have to wait and see we

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Speaker 3: don't know.

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Speaker 1: So for investors out there, how should they think about

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Speaker 1: putting AI into their portfolios?

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Speaker 3: Well, I actually think and we've been advocating for this

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Speaker 3: most of the year because there were signs that we

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Speaker 3: were in a bubble, and because there were signs that

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Speaker 3: prices were very expensive, we were advocating for rebalancing portfolios.

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Speaker 3: So it's not about putting AI into portfolios as much

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Speaker 3: as it is is maybe taking profits from that AI

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Speaker 3: thematic and stocks that are exposed to that AI sentiment

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Speaker 3: and redistributing those across different assets classes or different stocks

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Speaker 3: so that you've got less exposure to that theme. Because

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Speaker 3: I think the best part of it's run its course.

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Speaker 2: Roger, thank you for talking to Fear and Greed summer series.

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Speaker 3: Always a pleasure, Sean.

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Speaker 1: That was Roger Montgomery from Montgomery Investment Management. To learn more,

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Speaker 1: visit mont invest m O N T I n V

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Speaker 1: E S T WNT invest dot com and you can

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Speaker 1: sign up for Rogers Insights at Roger Montgomery dot com.

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Speaker 1: FNG is not a financial advice podcast. If you want

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Speaker 1: to invest, we recommend you visit a financial advisor who

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Speaker 1: can tailor investments to your needs.

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Speaker 2: So don't forget tip follow on the podcast. I'm sure

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Speaker 2: I omor.

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Speaker 1: And this is Fear and Greed, brought to you by

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Speaker 1: Montgomery Investment Management,