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My professional interest in Bubbles started in 1996 at a lecture at Chatham House. One speaker identified the dotcom bubble, and the logic seemed impeccable, but I watched as the irrational exuberance took over anyway. We entered the Millennium with some of my colleagues and friends apparently paper millionaires. A few were able to cash out but the mirage of wealth soon evaporated for most.

In 2005, just after the election I heard another speaker warning of a finance bubble in the next two years. The credit crunch felt very different to me than the dotcom bubble had been. I was asked to input into a series of workshops in 2007-8 which were looking at the lessons learned from the tech bubble. To my surprise the scenarios developed were quite similar to the dotcom thinking.

My suspicions were confirmed around 2011 when a group of us were recalled for a day by a client. They had come to the conclusion that the outturn of the credit crunch was worse than the most pessimistic scenario that they had been prepared to consider and wanted a discussion on their blindspots. This then turned to what the next bubble might look like. Unfortunately, it was, or at least seemed to be too far in the future to be taken seriously enough for action to be taken.

Some of the ideas discussed then seem rather prescient, even though AI did not appear in the mix as far as I can remember. The principle thinking, was that we had experienced a tech bubble and a separate financial bubble, but the next one could be both at the same time. The rise of bitcoin/blockchain and fintech, for instance, suggested a growing interdependence between finance and technology. AI has added to that thinking since.

I wrote some previous posts here on Bubbles and Change which may be helpful and can be found below.

When Is A Bubble Not A Bubble? - Long Finance

Misreading Change - Long Finance

Part of one conversation back then was how large a P/E ratio would have to be before anyone could defend it and argue that it was normal. We struggled at around 200. Today TESLA stands at 350!

So, I’m not foolish enough to call timing on the bubble, but I think there are some insights from those experiences that might help navigate the other side of the bursting.

The principle one, for me at least, is that you shouldn’t look at the technology first, look at the business models to see who can survive the clear out. Noticeably, I can’t remember any discussion about a small outfit called NETFLIX. They were 'clearly' old world and the future was streaming. Guess what? They had the clients already, so a switch to the new model was easy once the infrastructure was in place.

The second is to look for the long lead time items. Broadband infrastructure is covered in my NETFLIX example, but another paradigm can be found in the 3G licensing round and spectrum bidding. The business models required to make sense of the costs didn’t appear to add up at the time. For example, it was assumed that people in areas of poor coverage, Norfolk for instance, would buy 3G devices a full twelve months in advance of the infrastructure being rolled out.

Other than infrastructure, skills is a good area to focus on. The value of e-learning companies required the up-skilling of around 50,000 existing education professionals a year. Yet only 10000 were being created per annum (The postgraduate target for secondary has not been met since 2012-13 ed.). Add to that a lack of consensus on what those skills and suitable qualifications were and it should have been clear that something was amiss.

Finally, although the dotcom bubble hit those directly engaged far harder than the general population, the finance bubble was systemic, and we are still living with the consequences.

All significant change carries both cyclical and systemic components. The tech bubble was largely cyclical. Looking back, the scenarios I saw developed in the aftermath of the credit crunch, were also largely cyclical. One comment I remember well was that the actions after the credit crunch were to put a sticking plaster on Humpty Dumpty, but next time it wouldn’t be enough.

Adding a pandemic, multiple wars and an energy crunch along with climate instability and AI makes this a heady mix.

In the Tech industries it is fair to say that “Hype springs eternal”.

So, am I pessimistic? No.

One set of valuable insights for me from that period was discovering the economist Carlota Perez. Her book 'Technological Revolutions and Financial Capital' I found to be useful as a source of ideas and mental models to understand how past waves of change had occurred and the timescales for new systems to emerge.

I think we may see an 'everything bubble' burst, but don’t ask me when. For me, the irrational exuberance around AI makes dotcom look like a minor molehill, but we came through it and will do so again. See you on the other side!