Is America's Biggest Bet About to Backfire?

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Picture this: You're at a poker table, and one player has pushed all their chips into the center on a single hand. That's essentially what the US economy is doing right now with artificial intelligence.

In a fascinating conversation between Nicolai Tangen (who runs Norway's massive sovereign wealth fund) and renowned investor Ruchir Sharma, some startling truths emerged about where we stand today. Let's break it down.

Here's something that might surprise you: 60% of America's economic growth right now is tied to AI.

Let that sink in.

About 40% comes from companies spending billions building AI infrastructure—the data centers, the chips, the servers. Another chunk comes from the "wealth effect"—when stock prices go up, rich people feel richer and spend more. And guess what's driving 80% of stock market gains? You guessed it: AI.

This isn't diversification. This is concentration on a scale we haven't seen before.

Sharma has a simple framework to spot bubbles. He calls them the "Four O's," and AI is checking every single box:

1. Overinvestment

Tech investment as a share of the economy has hit 5%. The last time we saw this number? The year 2000, right before the dot-com crash wiped out trillions in wealth.

2. Overvaluation

Yes, you might have heard that stock prices aren't at record highs compared to earnings. But dig deeper. Look at "price to free cash flow"—what companies actually generate in real money—and the picture gets scary. Stocks are expensive, really expensive.

3. Over-ownership

Americans now have 52% of their financial wealth sitting in stocks. That's higher than during the 2000 bubble. When everyone is already in the pool, who's left to buy and push prices higher?

4. Over-leverage

Here's something many people miss: Meta, Amazon, and Microsoft are borrowing massive amounts of money to fund their AI ambitions. Why? Because they're terrified of falling behind. It's an arms race, and everyone is taking on debt to stay in the game.

Remember the 1990s internet boom? People were excited. The future seemed bright. New possibilities seemed endless.

This time feels different.

Sharma calls AI "the most hated tech revolution" in history. People aren't dreaming about how AI will improve their lives. They're worried about losing their jobs. They're anxious about machines replacing them.

And here's the twist: the actual productivity gains from AI? They're still barely visible. Experts say we might not see the real benefits for another two to three years. We're spending trillions on something that hasn't proven itself yet.

Beyond AI, there's a deeper issue brewing in capitalism itself.

Sharma points out something troubling: when things go well, individuals keep the profits. When things go badly, the government steps in to save everyone.

Think about it. Every time markets wobble, the Federal Reserve cuts interest rates. Every time a big company struggles, there's talk of bailouts. This creates a strange incentive—take huge risks because someone will catch you if you fall.

This pattern is making rich people richer while everyone else bears the burden when things go wrong. It's not how capitalism is supposed to work.

What's more concerning: business leaders in America are becoming afraid to criticize the government. Sharma says he used to see this only in countries like India. Now it's happening in the land of free speech.

Here's something the headlines missed: in 2024, European and Chinese stocks actually beat America.

How? The US market got too crowded. America now makes up nearly 70% of global stock indices. When everyone piles into the same trade, eventually it stops working.

Meanwhile, something interesting happened in China. The government realized it needed to support private companies to compete with America in AI. And Chinese AI models are now nearly as good as American ones—while spending just one-fifth of the money.

Let that comparison sit with you. America is pouring hundreds of billions into AI. China is getting similar results for a fraction of the cost. Who's being smarter here?

Every party ends. The question is when.

Sharma believes the trigger will be interest rates staying high or going higher.

Here's the puzzle: the Federal Reserve recently cut rates even though inflation is still above their 2% target. They've missed that target for five straight years. If all this AI spending keeps the economy running hot, inflation might stay stubborn. And stubborn inflation eventually forces rates higher.

Higher rates make all that borrowed money more expensive. Companies that loaded up on debt to fund their AI dreams suddenly face real pain. The bubble pops.

Sharma offers some predictions worth noting:

Quality stocks will come back. These are companies with high returns, steady growth, and low debt—the opposite of the debt-fueled AI racers. They've been ignored for years. That's about to change.

International markets will keep winning. The trend of non-US stocks outperforming isn't a fluke. It might continue.

The AI mania will cool. Not because AI is worthless—it's genuinely transformative. But the speculation, the frenzy, the over-the-top valuations? Those are likely to fade.

If you're invested heavily in US tech stocks, this is a moment for honest reflection. Not panic—reflection.

Diversification isn't just a fancy word financial advisors throw around. It's protection against scenarios like this. When 60% of economic growth depends on one theme, that's concentration risk, plain and simple.

Consider looking beyond US borders. Europe and emerging markets might not have the same exciting stories, but they also don't have the same bubble warning signs.

And pay attention to quality. Companies that make real money, have clean balance sheets, and don't need to borrow billions to stay competitive—these are the ones that survive when the music stops.

AI is real. The technology is transformative. But so was the internet in 2000, and that didn't stop the bubble from bursting painfully.

America has gone all-in on a single hand. The chips are in the center of the table. The question isn't whether AI will change the world—it will. The question is whether today's prices already assume a future that's still years away.

History suggests caution. The Four O's suggest caution. The borrowed money funding this boom suggests caution.

Stay curious. Stay diversified. And never forget: the most dangerous words in investing are "this time is different."

See you tomorrow.