Episode summary
We Asked GMO’s Head of Asset Allocation Why This Bubble is Easy — But Investors Will Get it Wrong
Excess Returns
· · 1 hr 9 min · Guests: Ben Inker
Summary
Ben Inker argues that the AI boom looks like a bubble, but one investors may be able to navigate because it is centered in US stocks rather than every risk asset in the world. He contrasts today with 2000, 2007 and 2021: 2000 was mainly a valuation bubble, 2007 was a global risk-asset bubble, and 2021 was a duration bubble where both stocks and bonds were expensive. Today, he says the bigger concern may be earnings, not just valuations, because AI capital spending is boosting profits before depreciation catches up.
He also stresses that big technological shifts do not guarantee good returns for the builders. Railroads, electrification and the internet changed the world, but the profits often accrued elsewhere, while overinvestment eventually crushed returns. In the current AI cycle, he points to rising debt, circular financing, and increasingly complex deals as signs the capital cycle is getting dangerous.
The discussion then turns to GMO’s seven-year return forecasts, where Inker says the firm builds returns from income, growth and mean reversion toward fair value. Those forecasts favor non-US equities, cheaper currencies and value stocks over expensive US large-cap growth, though he notes the path can be uneven and client behavior often matters as much as the model.
Finally, Inker says private equity often leaves investors with an unintended bias toward small, lower-quality, more levered companies. His preferred response is to understand what you are actually being paid for, avoid assets with bad risk-reward tradeoffs, and use the public portfolio to offset private-market exposures.
Key takeaways
- Ben Inker says today’s AI setup is closer to an earnings bubble in US stocks than a broad global risk bubble.
- GMO thinks the easy way to handle the bubble is to own normal risk assets outside the US rather than hide entirely in cash.
- Inker warns that AI capex can lift profits now by delaying depreciation, even if the investment eventually proves uneconomic.
- He says the current cycle is increasingly funded with debt and structured financing, which raises the risk of a later unwind.
- GMO’s long-term outlook still favors non-US equities, value and cheaper currencies over expensive US large-cap growth.
- Inker argues private equity tends to load portfolios with small, lower-quality companies, so public portfolios may need a quality tilt to compensate.
Notable quotes
“A tricky thing about today is we worry that this may be an earnings bubble”
“just because something changes the world doesn't necessarily mean the profits acrew to the people who built it”
“one of the things we think about, we talk about super analyst”
“We are likely to be in a situation where over the next 12 months we see more supply come into the US stock market than has been the case in living memory”
“The tricky thing is just because something changes the world doesn't necessarily mean the profits acrew to the people who built it, right”
How the episode opens
A tricky thing about today is we worry that this may be an earnings bubble. Um 2000 was a little bit of that but mostly a valuation bubble. We saw earnings bubbles in Europe in you know in 2007208 where like the earnings had just gone up 100% over four years and even today they are struggling to make it back up on an index basis to those levels.
We are likely to be in a situation where over the next 12 months we see more supply come into the US stock market than has been the case in living memory. Understanding why you're getting paid for the activity you are doing is really crucial. Just because something changes the world doesn't necessarily mean the profits acrue to the people who built it.
Ben, welcome back to Excess Returns. Thank you for joining us. — Very happy to be here.
We were just talking it was 2021 the last time you were on the podcast. It's hard to believe it was that many years ago, but we always appreciate having you or the other folks at GMO on with us and our audience. Um, you know, you spend your time managing and portfolios and building investment strategies, but you and your team also think deeply, read extensively about markets, valuation, asset allocation, stock market history, and a num number of other uh investing topics.
And today what we thought we would do with you and we're excited to do this is kind of look at some of the recent research that you've put out, the firm has put out and sort of just work through those items with you. I think we're going to start with the AI sort of boom and you know possibly bubble that we're in and kind of talk about how that I guess correlates to you know past market bubbles and then we'll get into some of the research that you've done on private equity and some long-term return forecasting expectations.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- ai boom bubble
- earnings bubble vs valuation bubble
- ai capital spending
- ipo and market supply
- benchmark-free allocation
Companies and tickers mentioned
- GMO
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Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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