Power Up Wealth podcast – Episode 108 – From Tulips to AI: The Cyclical Nature of Market Bubbles
Jordan Hadfield 0:00
Are we currently living in another market bubble? Many think we are, and we want to discuss why that might be a good thing. I’m Jordan Hadfield, Vice President of Wealth Management at Smedley Financial, and I’m excited to talk with our investment expert, James Derrick.
Shane Thomas 0:18
Welcome to the SFS Power Up Wealth podcast where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
Jordan Hadfield 0:31
I’m excited to speak with you today, James.
James Derrick 0:36
Happy to be here, Jordan.
Jordan Hadfield 0:37
James is the President of Smedley Financial Services and the Chief Investment Strategist. He has the Chartered Financial Analyst and Behavioral Financial Advisor designations. James, I want to start here. What is a market bubble, and why do they form?
James Derrick 0:52
Well, think of a bubble as herd mentality. Everybody is getting behind an idea. In the case of the stock market or markets in general, there’s money behind it. So we’ve got money getting behind an idea and pushing it forward. The classic, classic example of a bubble is the tulip mania. Back in the Netherlands, 1636 to 1637, and back then, tulip bulbs were selling for an enormous amount, especially very specific kinds were going for 10 times the annual income of a skilled worker.
Jordan Hadfield 1:25
That is a big bubble.
James Derrick 1:28
And as you might guess, those prices collapsed. It’s no surprise. And so we’ve seen it with other companies and other ideas throughout all of history, and even in our lifetimes. We’ve gone through several and I don’t know if people have taken note of how many bubbles we’ve seen just in the last 30 years, but there have been many.
Jordan Hadfield 1:47
Can you give me an idea of one or two that we’ve lived through in the last 15-20 years?
James Derrick 1:51
Sure, we had the internet bubble, we had the fracking bubble, and we have the AI that’s going on right now.
Jordan Hadfield 1:56
Yeah, and the housing bubble of 2008, that was a big one. So are we currently in a bubble?
James Derrick 2:01
Yes, I would say yes. I mean, we’ve have a lot of excitement about artificial intelligence, and there’s a lot of money behind it. We’re talking hundreds of billions, probably even trillions of dollars, that are going to fund AI.
Jordan Hadfield 2:14
So in another article that you wrote, you said “many Americans are currently in a bad mood, and that inflation is at a generational high, confidence is approaching recessionary levels”, and yet, in the article that we’re talking about today, you mentioned bubbles are a good thing, and I’m really excited to kind of dive into this with you. Why and how are bubbles a good thing?
James Derrick 2:35
So the article you’re referencing was written a couple of years ago, and I think it still rings true, the bubble can be a good thing because of that focus propels innovation, and we can get 20 years or more of innovation done in just a couple of years. And so there’s just enormous progress. I mean, one example that I mentioned was fracking, and we don’t often think of this as a bubble, but back in 2005, 2006, 2007, 2008, the price of oil was unbelievable, and people were talking about peak oil, like, like, there wouldn’t be enough oil in the world to support the economies.
Jordan Hadfield 3:09
I remember this very well, yeah.
James Derrick 3:11
There were people working on this innovation called fracking, and those of us that were following it were left wondering, is it actually going to work? Is it going to happen? Is there really all this oil in America that we’re going to be able to get out of the ground with this new way of drilling, also known as horizontal drilling? And we’ve lived through all of that. We saw the full cycle where energy stocks were way, way, way up, and then by 2015 we were fracking here in the United States especially, and now we are the number one producers of oil in the world, and we have been for many years. I mean, we are producing more oil than Russia and even Saudi Arabia, and that helps get us lower prices and more stable prices when there’s commotion in the world. Fracking is a good example of where a lot of progress was made in a short amount of time, and we’ve reaped the benefits of it. We also saw it with the internet bubble. There was a lot of telecom fiber optic cable laid in the late 1990s. More than we ever needed. But then we had too much in the 2000s and so this led to the bubble popping. This is what everybody really worries about when it comes to a bubble. As the capability of the internet and the importance of it grew during the 2000s and 2010s, we already had all that cable that had been laid throughout the country that made it possible to get internet, fast internet to our homes.
Jordan Hadfield 4:39
So if I’m going to reiterate what you’re saying, it’s that bubbles create progress at a much faster speed than we’re used to seeing. Is that accurate?
James Derrick 4:48
That is very accurate. There’s one of the best examples that I could give, would be railroads. And there’s a book about this. It’s called “Boom and Bust” by William Quinn and John Turner, if anybody’s interested. And we saw it with railroads in the 1800s. We saw it with bicycles in the 1880s, 1890s, which is what I wrote about a couple of years ago. You can find that on our blog on our website. It’s fascinating how much can be accomplished. In my most recent article, I talk about it with General Electric. Thomas Edison invents the light bulb, and it’s a huge, huge breakthrough. But you know what? There were no power stations. There were no electrical lines to take electricity from a power station to a home, and there was no electricity lines in the home. So a lot of work had to be done in order for people to enjoy the electricity that we have today.
Jordan Hadfield 5:37
So a new technology is discovered or invented, and there’s enthusiasm throughout society. And people pile into this idea with their money, and as they put more and more money into this incredible idea, it creates opportunity for growth and progression at rapid speeds. But such a huge inflow of money inflates the opportunity, the financial opportunity, and eventually it bursts. Is that accurate?
James Derrick 6:03
I think that’s accurate. And it’s not really the innovation that bursts, but it’s really the debt financing. And so that’s the area that you want to watch out for, is the debt I mean, where is the money coming from that’s funding the innovation, that’s funding the progress that we are all enjoying, or we are all about to enjoy, that’s the thing to watch out for. You know, if there’s too much debt and it’s surviving only on debt, and there’s no profit, then eventually that bubble is going to burst.
Jordan Hadfield 6:30
So you’ve talked about how you think we’re currently in an AI bubble. Can you give me some examples of how maybe some of these companies in the AI space, maybe some of these companies in the AI space are leveraging themselves and debt in order to reach this progress that you’re speaking of.
James Derrick 6:47
Well, there’s a lot of large companies in the United States with great cash flows, and sometimes we refer to these as the MAG 7 or the MAG 8 and and they’re trillion dollar companies with great cash flow, and they’ve been using a lot of that excess cash to build out data centers and explore opportunities in artificial intelligence, and that’s been a very good thing, and we’ve all seen some benefits. I mean, when you do a search on the internet nowadays, you often get an AI answer that can be quite helpful. It can be helpful with answering questions. It can be helpful with apps and programs and software that do very specific things for very specific industries, and so it can be extremely beneficial. But when the continued innovation requires more money than companies have, then they start looking to take out debt, and we’re already past this point, and there’s hundreds of billions of dollars being taken out in debt, and that becomes a very dangerous thing for those companies.
Jordan Hadfield 7:52
So excitement around a certain technology definitely creates opportunity. As a portfolio manager, how do you manage the opportunity versus the risk of a financial bubble bursting?
James Derrick 8:03
Well, one of the questions you want to ask is, Is it a good bubble? And that’s a hard one to answer, because you’ll always think in society, society always will think that it is a good bubble. And you won’t really know until after it’s over, what innovation is left. Did AI, for example, really take off? Did it fulfill all the dreams that we had for it? You know, in the case of the internet, I think we’ve seen, wow, it’s been amazing. And the case of fracking, we see that, at least financially, when it comes to the price of oil and gasoline, like it’s been very beneficial. And so with AI, we don’t know exactly where we’re headed. And as a financial advisor, you know, it’s my job to think about risk, and that’s where I’m different from an individual who might be doing it on their own that may or may not be thinking about risk. I’m paid to think about the risk, and I’m going to look at the possibility that it could go up and the possibility that it could go down. I like to look at the numbers, calculate the statistics, and have a computer program that basically helps me compare it to things that have happened in the past. As I mentioned, there’s lots of examples of bubbles that have taken place, and we can take a look at it and look at the probabilities and pick the best places we think to invest.
Jordan Hadfield 9:22
So as you’re managing the portfolios with these bubbles in mind, how do you recognize when the bubble is forming? And most importantly, how do you recognize when the bubble is ending?
James Derrick 9:31
Well, it’s hard to know real-time what’s happening again. That’s why we look for some clues in history for what we think is happening, what could happen, what might be likely to happen. I mean, if we get to a 75% probability of a good outcome on a trade, that’s that’s a good probability. As far as bursting this is the thing you worry about most. I mean, we saw with Cisco, a company that helped provide the hardware to build out the internet, they’ve been making billions, hundreds of billions of dollars for the last 25 years, but the stock actually, just like GE did back in after it went public in the 1800s, GE lost 90% of its value, and then, of course, over the next 135 years, I mean, GE has gone on to make tons of money, but it was a rough ride in the beginning, all the excitement and then the popping of the bubble. With Cisco, we saw all the excitement and then a popping of the bubble. And it wasn’t until late 2025 that the share price actually exceeded its 2000 level. So they’re making tons of money, but the investors that may have bought, let’s say, in January of 2000 and held on, if it weren’t for the dividends that that stock were paying and they wouldn’t have made anything for 25 years.
Jordan Hadfield 10:44
That’s crazy.
James Derrick 10:45
It is absolutely crazy. So the thing to watch for, if you’re thinking about a bubble or the possibility of a bubble bursting, is one lots and lots of debt, and we’re seeing that. Another is less and less enthusiasm. You know, a company comes out and they say, Hey, we’ve got this brand new project, and we’re so excited, and we’re going to make tons and to make tons and tons of money, and the next day, the stock goes down, and you’re like, wait a minute. They just said last night how excited they are about the opportunity. Investors got the news that they really, really wanted, but they didn’t respond favorably to it. So there’s diminished enthusiasm for the trade. That, in combination with the debt, two big warning signs. And I think you know, we may see that 2026 is totally different than 2025 in terms of market leadership and in terms of the bubble.
Jordan Hadfield 11:33
You’ve mentioned, the enthusiasm around bubbles. And I think this can’t be overstated. People get really, really excited when there is an investment opportunity as big as AI, and we see that in the investment world today. It’s almost as if investors can’t afford to sit out when one of these bubbles is is growing, but they also can’t afford to be in it when they burst, because they can be financially so devastating. What advice would you give investors today. How do they walk that line? Because that’s really tricky.
James Derrick 12:03
We have a system to balance the allocations and the amount of risk and where we’re putting the money in order to control for this. If somebody’s trying to do it on their own, it’s going to be really difficult.
Jordan Hadfield 12:17
Impossible. I mean, it is impossible to time the market and bubbles in with that kind of accuracy.
James Derrick 12:23
The best advice I can give is don’t get too caught up in the speculation. There’s a lot of margin debt out there. People are borrowing to invest. They think they can double their money in one year, two years, you know, or three years. And this is not historically normal. Keep your expectations reasonable. Watch out for debt, especially margin debt, if borrowing to invest in speculative assets. These are some good things to avoid, and I think if you can steer clear of those, then you’re more likely to be on a good path. And by the way, that margin debt has been at record highs. I mean, even if you control for the amount of money that the US government has put out there, they call it m2, the money supply, even if you control for that, the amount of money borrowed to invest in the stock market is really, really high right now. So at a personal level, like, don’t get too caught up in that speculation, and you’re probably going to be okay.
Jordan Hadfield 13:23
I think that’s great advice. Thank you so much, James for your words of wisdom, and we look forward to speaking with you again.
Shane Thomas 13:25
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn. The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Osaic Wealth, Inc., member FINRA/SIPC. Investment advisory services offered through Smedley Financial Services, Inc.® Osaic Wealth is separately owned, and other entities and/or marketing names, products, or services referenced here are independent of Osaic Wealth.
