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¶ Learning from Financial History for AI
When you wanna figure out what financial markets are up to, what they're trying to tell us, the go-to way that professionals try and do that is by looking not at the future but at the past. So if you look at the AI boom in markets today, the big question is whether this is like the dot com boom and bust of twenty five years ago. This game is less about gazing into a crystal ball and more about being low key a bit of a history nerd. So today on the show why it pays to know your financial history.
This is Unhedged, the Markets and Finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at the FT in London, where we have a wobbly bond market and a local election coming up. What can possibly go wrong? Joining me today, I have a twofa, ladies and gents. Yes, I have that big Rob Armstrong over there in New York. Rob, say hi. Hello. Don't put on a funny English accent, Rob, because we also have
An actual funny English accent.
An actual funny English accent from Robin Wigglesworth, who's the editor of FT Alphaville and also a card carrying financial history nerd over there in Sonny Oslo. Robin, hello.
Hello. Should I do a Norwegian accent today though?
No need for that. No. No. No. So uh Robin, I know you are loath to indulge in shameless self promotion. But you've been deep in the weeds on financial history lately. The thing you're doing at the moment is this podcast uh also in the F T stable with Gillian Tet about the story of money which is about financial history. Why would you do such a thing? Who cares about the deep history of finance? Why is this important?
Well, I do it because I love it. I mean I am as you uh repeatedly point out a a massive nerd about these things. Uh so I just love it for its own sake. I just think it's fascinating. But like you say, we do learn a lot from the past. I you can choose the George Santayana ch quote or the the Winston Churchill quote, or even go back to Edmund Burke, but you know, those that Don't learn from the past usually kind of repeat some of the screw ups in the future.
I've always thought that this quote was absolutely true, but those who do know the past are also doomed to repeat it.
Well, that was, like, so... But um bringing this somewhat more up to date, like the thing that is really driving stock markets at the moment. Stock markets have decided that the Iran war is like old news and they are just like plowing on regardless. And one of the reasons they're plowing on regardless is that they are really tightly uh tightly glued to corporate earnings.
And really big companies, particularly kind of AI flavoured, tech flavoured companies, are just making money hand over fist. But that sort of links back to this sort of gnawing thing that people have in the back of their head, which is
Is this a little bit like the dot com boom and bust of sort of nineteen ninety nine, two thousand? Or worse, is this like the US Railroad boom and bust which happened sort of from the uh the late end of the nineteenth century and I guess y you can draw a thread from there through to the the proper Wall Street crash of of the thirties.
¶ The US Railroad Boom's Scale
You've been talking about this on on the pod lately. What like do you think there are well first of all, for people who don't know, what was the US railroad boom and bar?
Well essentially in the nineteenth century there was this garganton and I mean it you know that's I'm not exaggerating, it was a gargantuan buildup of railways around the world. It was You know, even the AI boom today, it looks like a tiny little gnat on the arse of an elephant compared to the railway boom. So, you know, I I saw some numbers from Morgan Stanley. They think that the hyperscalers are gonna spend maybe a trillion dollars on data centers by twenty twenty seven.
Uh but the railway boom just in the US just on the bondition. There was around five six billion dollars worth of bonds issued. And that doesn't sound like much, but if you scale it relative to the size of of GDP at the time, because the US was a small economy, uh that's the equivalent of ten trillion dollars today.
Whoo
Wow.
So the railway boom, the bond issuance and like some of this was financed by stocks and government grants and so on, but largely by bonds, was around ten times the size of today's AI.
Give us time, Robin.
No, no exactly. Fingers crossed we get there.
But like at the time was there much evidence of like, you know, the the olden times equivalent of miserable people like me saying, This all seems a bit ridiculous.
Well, you have to remember that that the railway was considered a a miraculous technology. When it first arrived in the UK, people were worried that people would essentially disintegrate at speeds over thirty miles an hour. Mm. People generally thought that like humans weren't built for those kind of unimaginable speeds. We'd just turn to dust or at the very least go mad at around twenty, twenty five miles per hour.
And it was it wasn't only considered miraculous technology, it eff effectively was I mean this was
Yeah.
Yeah.
Yeah, yeah. Absolutely amazing the things that changed.
Right. I mean the US was the epicentre of it. I mean there was people went railway gar gar everywhere in the world. Uh and there were railway uh booms and busts multiple uh over the the nineteenth century, but the US discovered because of its scale, right? Uh it was the biggest, it was you know where they went the most crazy for it. And it my I'd argue they literally made the United States. The United States were not united until the railways came.
And this was a country that basically had a bit of like West Coast stuff, a big chunk of the middle that was just frontier country, and then north and it ran along a north to south axis. But after the railways, you could suddenly buy like main lobster in California. or Californian apples in New York. You could literally travel across the country. It's something that was unimaginable. It was like Apollo. Well, it was really like twenty or thirty Apollo programs, essentially.
¶ Busts, Lessons, and Productive Bubbles
So essentially people issued a third of GDP in debt, the equivalent of that. How did that all turn out?
Well it didn't turn out great for all the bondholders. Yeah. Spoiler alert though you can probably see it coming. Uh there were multiple bus along the way. There was an epic one. I just like a a Humdinger in eighteen seventy three. It was probably one of the first big global financial crises because it arguably was triggered by a crash in Austria. That ricocheted over to the US. Well, basically meant that lots of European investors lost a ton of money in Austria.
And they had to liquidate their bonds. There were massive investors in American railway bonds. So these were sort of Dutch burgers, German nobles, British merchants, and they started liquidating bonds in the US and then just everything just. Collapse of the U.
So this was a
W it was called the Great Depression until the actual Great Depression made this just known as the Long Depression.
Yeah. It's like how the the Great War the Great War became World War One after World War Two came along.
Yeah.
Yeah, exactly.
So like the it strikes me there's two like uh takeaways from there. One is that everything is connected and so Uh, you know, a sell-off in one particular asset in one particular country may not have any logical link to another asset class in another country, but once one thing starts selling off and people start taking losses, they end up having to sell
stuff elsewhere to to stay current on their bills and that that is still one of the defining features of of of global markets today. The other is Railroads are quite useful. They help you get your apples and your lobsters and all that sort of thing. The technology itself can be super, super, absolutely indisputable.
indisputably useful, but you can still end up losing a ton of money on it. And that I guess is the debate that's going on in in AI now. Did that feel a little bit kind of almost like a phresiant and un-spooky to you while you are reading up on all this.
It did because it's you know, sometimes you can go a little bit crazy seeing parallels in the past, but with AI they're slapping you in the face. It's it's very obvious. It's quite similar. Even though the technologies are different, you know, how people think they can be transformative or the the physical capex build up'cause some financial bubbles are almost purely financial. This was a a real one. I do think that, you know, bubbles and bursts get a bad rap.
The reality is that the s the optimal level of bubbles and busts is not zero. That i we almost need these. We need people to lose the senses. to do these big build outs. And yeah, people do lose money. And unfortunately sometimes, you know, there are individual tragedies or even societal tragedies among it. But that's sort of part and parcel how we move forward as well.
A terrific example of this, Robin, is the lesser known bubble of the early two thousands, which was the telecom bubble of the early two thousands. And people spent an epic amount of amount of money putting fiber optic cable in the ground. A lot of companies went bust. Every you know, most people involved got crushed one way or the other. But the result was we got this wonderful productive asset.
Which we're still using today, which is tons of fiber connections uh you know, and tons of telecom infrastructure. And there's m there's loads of real estate stories like this. There's the railroads, et cetera, et cetera, that these booms If if the money that goes bankrupt is spent on a long lasting productive asset
It can be a good thing in the long run for an economy. The question is are these AI data centers long lived productive assets? They're certainly going to be productive. How fast they depreciate all that stuff is is another question altogether.
I'm hopeful of the energy. related infrastructure build up is going to be helpful. Because obviously you can't just build a data center, you need to power it as well. And hopefully that maybe, you know, if if AI doesn't quite work out that it you know doesn't quite revolutionise the world. We don't need all these data centres. Well, we've built a lot of energy infrastructure and and renewable energy and new gas turbines and things like that. That you know will be useful.
So I I'm optimistic, though I I suspect, you know, people will lose an ungodly amount of money at some point. I hope still twenty years on we'll maybe say that maybe it was overall worth it for the world.
¶ AI Investing and Future Market Outlook
Well it's interesting, Robin. I'm writing right now uh a a piece about Apple, which is kind of the company that is taking the other side of the AI bet. Famously all all the other huge tech companies, all the other magnif most of the other Magnificent Seven tech companies are loading money into the AI data center build out. And Apple is saying, Hm, we'd rather rent than own and we're gonna see what happens here.
You know So there is somebody out there kinda I think looking at the example, you know, a big money player looking at the example of the railroads or similar examples and saying We're gonna take a little bit of a wait and see here. And uh it'll be interesting to see whether that's a good bet or not. But I think it's a big bet.
I mean, it could be a profitable one. Just look at how Apple works with with Google, right? I mean this deal came under regulatory pressure, but you know Goo Apple didn't build its own search engine. It did basically kind of got money from Google to make Google search the default. Maybe it'll do the same with Anthropic or OpenAI. I think there are many ways people can make money out of this, yeah.
And and I have to admit the big difference, of course, even with the railway boom of the of the nineteenth century, is that, you know, there is an awful lot of debt issuance happening, but by vastly profitable companies. I mean these tech companies still print money. So even if like they lose every single dollar they are now putting into AI.
these companies aren't for the most part gonna go busts, which makes me slightly less worried than maybe I would have been if I'd been a financial journalist in eighteen seventy two looking at the railway boom.
The moral of the story is Things that seem to be forces of nature and make perfect sense today might not make perfect sense tomorrow and and ways that look like, you know, you're shooting fish in a barrel, this is a dead easy way to make money. You look back on it in a few years' time and you think, What the hell was everybody So it's thinking of, you know, on Hedge Podcast.
in the year twenty fifty, right? It's all done by, you know, people who haven't been born yet or AI or some other thing. And they're looking back at this moment in time that we're living in right now in twenty twenty six. And what are they gonna call this this period that we're going through now?'Cause there's a lot of stuff going on. There is this AI boom, whether it busts or not, n none of us know uh uh uh and we should be we should be honest about that.
There's the situation in Iran. There is what clearly uh seems to me to be like an unraveling of the global geopolitical order. Multilateral organisations are falling apart. The post war order is falling apart. Things like NATO and the UN are under huge amounts of pressure, things that we've all grown up with that we think are just sort of natural phenomena that come out of the ground. They are all actually quite complex or organisations that that are
under strain. And I know that like Rob will disagree on this, but there is this push among global investors to think differently about the dollar, differently about the rate profile of US government bonds, differently about the US Stock market. Like what do we think is going to be the thing in the Unhedged podcast of twenty fifty that actually sticks and turns out to be a meaningful moment? Or or or is it none of them? I don't know. Like Rob, you can go.
I think much depends on whether we have another serious inflationary incident. So we had this big burst right after COVID of inflation. And inflation is like You know, Robin might disagree, but I think inflation is so often the defining factor of a financial era. And if if that was just the first tremor in what turns into a higher inflation uh higher interest rate era. That is what we will be remembered for, is when inflation returned after fifty years in the wake of the crisis.
What do you say, Robin?
I'm tempted to answer like Ryan Cohen did, GameStop CEO yesterday in the interview where he said that we will see was his answer to all.
This is not allowed on the Unhedged Podcast.
No, unfortunately we are unhedged here. The Iran war feels like it's now on the cusp to be sort of an epochal thing. If we do basically large parts of the world run out of oil Then suddenly I'm willing to say this will go from something that was a defining thing for twenty twenty six as being something that might define a a longer time period. AI I think definitely is
I mean that's that's if AI turns out to be what some people say it's gonna be This era will be remembered as the foothills of AI.
I think either way.
Completely. Yeah.
Whether whether AI is is is is a disaster or whether it's a a a huge benefit for the world, e either way we're at the the foothills of it right now. What I'm hearing here is that we all need to understand history, but that doesn't necessarily help. Help us to figure out what's gonna happen next. Nonetheless, an interesting intellectual exercise. Listeners, we're gonna be back in just one sec.
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¶ Long/Short: GameStop and Ice Cream
Okie doke, it is time for long short that part of the show where we go long a thing we love or short a thing we hate. Robin, since you came along today to help us out, what you sayin'?
Uh I'm gonna be short uh GME's deal to try and take over eBay.
Oh that's a good thing.
That is the mouse eating the lion and it is not gonna work.
The game stop, Yahoo stock.
It is a mouse pumped full of medical cocaine trying to eat a massive elephant with a highly confident letter from a Canadian investment bank.
Yeah.
This deal is not going to happen, but it's going to be highly entertaining for us to follow it.
Yeah.
is going to be entertaining, so yeah that is definitely in its favour. Um well I am long tiny tiny ice creams. So shares in Magnum ice cream rose quite a lot last week after it said it was shifting to bite size portion controlled ice creams. For all those people on on the weight loss drugs who don't want large ice creams. So now we can all enjoy tiny ice creams instead. I kind of like that.
Little tiny ice creams to keep us happy through the course of the day. Listeners, we're gonna be back in your ears on Thursday, so listener.
On Hedge Disney. Producer is Jake.
Carol Brumley is the first one.
Global head of audio. Special thanks to Laura
FT Premium subscribers can get the Unhedged newsletter for free, and a 30-day free trial is available to everyone else. Just go to FT.com/slash premium.com. I'm Katie Martin. Thanks for listening.
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