We could have a really large negative wealth effect if the AI bubble pops, says Jared Bernstein

AI Bubble Assessment - The report suggests the current AI investment environment may be a bubble, characterized by rapidly rising asset prices and extreme valuations [2][3] - A key concern is the potential negative wealth effect on regular investors should the AI bubble burst, potentially impacting consumer spending [13][14][15] - The share of the economy devoted to AI investment is nearly a third greater than the share devoted to internet investment during the dot-com bubble [3] - Open AI reportedly needs $1 trillion in investment this year with AI revenue of $13 billion, indicating a divergence between investment and plausible future earnings [18] Company Specific Analysis - Nvidia's valuation is discussed, with its price-to-earnings ratio around 55 times earnings, but with an EPS growth rate of 88% in the last three years and almost 60% in the last year [3][10] - Some argue that Nvidia's chips directly contribute to AI, justifying its valuation, while other Mag 7 companies derive profits from ads, clouds, and other sectors, making their AI investments a smaller share [8][9] - Meta's investment in the metaverse is mentioned as an example of speculation that didn't pan out as expected [16] Economic Commentary - The wealth effect from a potential AI bubble burst is a concern, as it could negatively impact consumer spending and exacerbate existing fragilities in the real economy [13][14][15] - The report contrasts the current situation with the dot-com bubble, noting that while some AI companies are profitable, the level of speculation and investment may exceed reasonable expectations of future profits [5][6][7]