When Monopolies Go to War
Every so often, we come across a podcast that is worth sharing. The legendary Jeremy Grantham of GMO was interviewed on Bloomberg's Odd Lots podcast. Whether you agree with all of his conclusions or not, we would encourage you to spend an hour with the discussion. We found ourselves nodding along more than once.
One observation, in particular, stood out.
Looking backward, the so-called Magnificent Seven appear almost unstoppable. Each built a dominant position in a different corner of the economy. Search, software, social media, e-commerce, smartphones, electric vehicles, and semiconductors became highly profitable businesses with enviable competitive moats and tremendous free cash flow.
But Grantham argues that looking forward may be very different.
As he put it:
"You look back, they're idea-heavy and capital-light. You look forward, let's hope they're idea-heavy, but they are capital-heavy this time. It's like a watershed in almost everything that matters between the past and the future."
Artificial intelligence has created a new battlefield. Rather than occupying separate sandboxes, many of the world's most successful companies are now investing extraordinary amounts of capital to pursue the same opportunity. Competition is intensifying, costs are rising, and the eventual winners remain uncertain.
What we found particularly thought-provoking is that today's valuations seem to assume that everyone wins. Yet history suggests otherwise. Great technological revolutions create enormous benefits for society, but they often redistribute those benefits in ways few investors anticipate.
Grantham also reminded listeners that bubbles are rarely built around foolish ideas. In fact, they are usually built around transformative ones:
"The great bubbles are the biggest ideas for decades."
Railroads changed the world. The internet changed the world. Artificial intelligence almost certainly will as well.
That, however, does not tell us who the winners will be.
Whether Grantham ultimately proves right or wrong is almost beside the point. His observations challenge us to separate the excitement surrounding a transformative technology from the economics of investing in it. We would also add that the current environment bears many hallmarks of a bubble—built on a powerful and likely transformative idea, yet accompanied by valuations that leave little room for disappointment. That does not mean the underlying technology will fail, but it does suggest that investors should remain vigilant and disciplined as the story continues to unfold.
If you have the time, we believe the podcast is well worth a listen.