The report that rattled Wall Street

Stock markets have got a case of the collywobbles, and it all starts, of course, with big tech. A few months ago the received wisdom was Yay, AI, it's all gonna make people and businesses so efficient, and so stocks went up. And now the vibe is, oh no, AI, it's all going to make people and businesses so efficient that maybe we don't need them all.

And so certain stocks at least are heading down. It's all a bit of a mess to be honest, and we're in the zone where pretty random reports on it are enough to whack the market around. We're here to try at least and guide you through this zone of uncertainty. So today on the show, AI Doom or AI Boom.

This is Unhedged, the Markets and Finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist here at FT Towers in London, where there is an unidentified glowing orb in the sky and it's not rained for at least an hour. I'm joined down the line all the way from over there in snowy New York City by the big fella Robert Armstrong off of the Unhedged Newsletter. Rob are you wearing like

Seal skin and like It's funny she meant that I am just back from harpooning a seal. Yes, and uh wearing it I'm wearing it as a scarf. That's true. You lot need to stay warm. Now, listeners, before we get into the meat of today's podcast, I must inform you there has been subterfuge and misdirection on this very podcast. No. I had a birthday with a big hole in it, and Mr Martin took a break from making dishwasher tablets to arrange a surprise weekend away for me.

Didn't know where I was going until I got to Heathrow Airport and my mum and my sister and her husband turned up in stars and stripes hats and we all went away to New York. So this was all very exciting and I thought Should I drop Rob a line, see if he's around? And then I thought, Nah. And then there he was in a bar waiting for me. He'd been in cahoots with mister Martin and we had many, many

Surprise, birthday drinks, many drinks. I mean this was further proof of the reason they make us work on opposite sides of an ocean, Katie. Because when we're in when we're in physical proximity, a terrible hangover generally results. So uh it's best it's best we keep our distance. Let's talk about serious things. Enough of your birthday hij. Shuffle my paper and talk about serious things. So there's a lot of flip flopping going on.

Tech was good and now it's bad. This is apparently how the world works now. We've seen some kind of spasms in like software stocks and other things over the past few weeks. There's this idea that AI will eat us all and will take away a lot of functions in other businesses that don't need to exist anymore. But it took a kind of a lurch this week, didn't it? Like the market is quite unhappy.

Yeah, it did seem like things picked up. I don't want to undersell how weird the previous two weeks have been. There was the day when trucking stocks All sold off. Because somebody decided that trucking would be taken over by AI, which for all I know it might be.

But the market sort of skitters m from sector to sector, trying to decide which businesses will be AI robust and which will be AI fragile. But we had a particularly big one yesterday that weirdly was triggered by a speculative blog post. Which uh is a new high or possibly a new low, depending on your perspective on the uh the whole situation. So we've had like a bunch of reports that have like spooked the market over the past few months. There was that one, you remember the one from MIT saying

There's like loads of companies have tried out AI. Almost all of them think that it's useless. And so this was the you know cast a bit of a chill through AI stocks. I I'm gonna say last summer of the yeah. But then yeah, the latest thing to give the market a bit of a bolt, if you like, was from a company called Citrini Research.

Now Rob, I've been hanging around markets a long time. Who the hell is Citrini Research? Why wh what's this? Yeah, I don't know what they are. They are a macro shop that I think a macro research shop that some people follow. And they released this longish blog post yesterday, which was written from the point of view of the future, twenty twenty eight or nine or something like that. Yeah. Yeah. Looking back on the recession and market crisis.

created by AI starting in twenty twenty seven. Already I'm out. This sounds rubbish. Why why did they Now the general picture they draw Goes something like this. AI displaces a massive amount of white collar employment. But real incomes for the people with the money or who had the money fall. Consumption falls.

The market goes into recession and then various other nasty things which you can easily imagine happen in the financial markets. A lot of bonds default because the companies aren't making any money anymore and et cetera, et cetera. Perhaps I can read to you a little bit. from the s the the Citrini sermon, if you will. This is looking back from twenty twenty nine or something. The owners of compute saw their wealth explode as labor costs vanished. Meanwhile real wage growth collapsed.

White collar workers lost jobs to machines and were forced into lower paying roles. When cracks began appearing in the consumer economy, economic pundits popularized the phrase ghost GDP, output that shows up in the national accounts but never circulates to the real economy. It goes on and on like this and uh

It's all very scary. And the market really responded. And everybody, all the finance nerds on Twitter, all they were doing yesterday was arguing about this post. And meanwhile tech stocks and things like bank and asset managers were selling off merrily once again.

Apparently because of this piece of speculative fiction, which is quite striking. Extremely weird. And I don't mean to throw any shade at Citrini Research. I've never come across them before. But it's not like this was a big report from like Goldman Sachs or like Black Rock or You know, I I think it tells us something quite odd about the mood in markets at the moment that an obscure shop like this can wobble the market around so much.

The market is looking for reasons to go down right now. That's the mood it's in. You know, it's casting about, there's very high uncertainty about certain sectors of the market. And if anybody says a word that rhymes with sell. People sell.

And and I I agree with you. That is the most important thing about this blog post, is not the content of the blog post, but the fact that the markets responded the way they did and what that says about market moves. I know I'm a bit of a broken record on this, but one thing I will point out is that the thing that people want to sell

is US stocks. You know, the thing that has made America great again, ironically, is like the tech miracle. And so you've got this huge stock market that's incredibly reliant on the tech miracle. working out great and being easily monetizable and not consuming humanity. The rest of the world has got stock markets that are more based on other things. So like UK's doing fine, Europe's doing fine, record inflows into European stocks.

This is quite a controlled explosion on your side of the Atlantic, I'm afraid. And you know, you guys can handle it. But like the S P is like last time I looked a tiny bit negative on the year so far. And the stocks in the S P just to push your point a little further. The stocks in the S and P that are not in tech and bits and certain bits of finance and trucking on a random day.

Those stocks are doing fine. So the S P is flattish, as you point out, with a bunch of really big stocks down stocks the big tech stocks that were until very recently up, but a bunch of other little stocks in non techie sectors up. However, to bring it back to Citrini, they make the point that if AI causes mass unemployment or

subemployment and there is a massive demand shock, it will not be confined to tech stocks, right? Everybody who sell anybody who sells anything is gonna be caught up in a kind of deflationary wave. And the the question and this is one of those I had actually bothered to get a formal education in macroeconomics, which I did not I somehow forgot to do. In any case, you know

Centrini envisions a world where there's massive production, right? There's all these computers and robots making all this stuff that is wonderfully inexpensive but very, very abundant. And yet there is less money for people to buy all this stuff with. And it may be, depending on how you look at it the economy. that that is impossible. Right? In other words, the economic logic here might not stand up. Think of it this way.

If GDP is going up, and remember that phrase I read about ghost GDP, output that shows up in the national accounts they put, if that's going up, there's a lot of output somebody's gotta be buying. Of course, there's also a question here about distribution. So I just made an a point about the aggregate economy. That doesn't rule out the possibility that there's some fairly nasty distributional side effects to the AI revolution. In other words who gets the money

is not everyone but just a few people and then the government has to intervene and there's riots and it's the Luddites and et cetera, et cetera. This seems to me to be one of the possibilities. One thing that's interesting to me here is like we spent a large part of last year discussing whether AI is a bubble and whether a lot of this spending that companies are doing on it AI is a total waste of time and money and this whole thing's gonna end in tears and AI is basically crap.

Now the debate has flipped in the completely other direction, but is also about AI, which is what if it's too good? What if we don't need people anymore? And I do just find that quite an interesting shift in in dynamic. And I agree, like unless robots gain like proper agency and

money that they can spend themselves. I don't get who is going to buy all the stuff that they're making. So It just feels like this doesn't make sense. But again, as you were saying just earlier and in your newsletter, the fact that the market is willing to latch on to stuff like this day to day does tell you I think that look valuations are pretty high by historical standards. A lot of stocks out there that are related to AI

that have been trading super, super well for a long time, it just feels like the mood is, let's just take some profits. Let's just close out some of these bets on on shiny tech things that have worked so brilliantly for so long. So maybe this is a healthy correction. Could be. But let me say this, Katie. Part of the reason for the flip flop that you just described so well from is AI crap to is AI too good is based on reality.

It's not just an irrational or or kind of uh multiple personality problem. We've all seen recently what the technology can do. In other words, to a degree, the technology has proved out. Right. And everybody's talking about it because everybody, either in a professional or a non professional context, is seeing these machines do more than make cat Right. So it's kind of happening. You know, we can debate the degree to which it's happening but there is a little bit of a little bit of a little

An anchor in reality. And given what these tools can now do in terms of allowing people to vibe code or make their own tools, which our colleagues are doing and et cetera. It is legitimate to wonder what are these really quite old established large software and related company franchises I d I don't dismiss the possibility that those businesses might be Under pressure. Well on that point, one of the companies that that really like puked earlier this week was IBM, whose stock loss

Double digits yesterday, right? Like I think it was thirteen percent at the at the worst point. I'll just interject that that's only partly Citrini. There was also some kind of announcement yesterday from an AI company that released a tool that writes code in one of these very ancient programming languages that's basically written in like hieroglyphics that IBM is a specialist in because they've been doing this for so long. So that that's a bit of a mixed story.

Another thing that is bubbling along in the background of markets that says that maybe everything is not Super hunky dory. So basically private markets are having a bit of a wobble, particularly private credit. There's a story around a company in this space called Blue Owl, which has been trying to make private credit funds more accessible for retail investors.

So far so good ish. I have my doubts about whether it's a good idea to get retail money into this market, but I'm overruled it's happening. And they've made it more difficult to get money out of these things effectively. And again, this has just sort of lit a little fire under the idea that Huh. Is there something rotten going on in private credit and huh?

Private credit's got an awful lot of money put to work in software companies and you can see where I'm going with this, right? I mean there there is Is there a world in which she you know, you get a sort of human centipede kind of phenomenon where these things start feeding off each other. I think that's right. And I think there's a couple of things to kind of tease apart here. One, private equity and private credit have both leapt hard into software.

And the fact that they are private, you don't have full visibility into what's going on into those companies that are under ownership by these private funds. It allows the mind to speculate a little bit about what might really be going on. This is kind of the dark side.

Of being private, right? You know, if I'm running a tech fund and I'm a private equity, this is something that our sometime guest Antoine Gara pointed out to me the other day. We should get him back on soon. Yeah, we should. Uh he pointed out to me if I'm running a private equity fund. And I have a bunch of software companies.

Maybe some of them like triple because of AI because they become much more efficient and you know, they they can do a new thing or whatever, or sell a better product. Those triple. I have three others that are killed by AI. But on balance I come out okay. Private credit. If half your company goes bankrupt, you don't get the upside of the equity investor. You just go out of business. In other words, a private credit is worse positioned for a kind of economic revolution than private equity is.

So maybe there's a bit of reaching here, right? That since a little kind of wobble, few company failures in sort of August, September last year, there's been this simmering concern about private credit. Now we've got this simmering concern about AI will consume us all and kill software companies. Maybe there's a little bit of, you know, we're just sort of grasping for reasons to knit those two things together. Correct. But I do still think it's like reasonable to think

you know, these are things that we've had disparate worries about for quite a long time. Might there be a moment where this all comes together or could these be separate things that end up spooking markets? I just don't feel like investors

are nervous generally speaking. I think you can see from the performance in stocks outside the US that investors are feeling pretty happy about the state of the world. But I do think there's a bit of a question mark hanging over the US market in particular, where people are thinking, this thing has It's delivered for me over the years. There's a bunch of reasons why I don't want to be so exposed to it now, and I'm gonna take a pause. So

I don't know. Katie your ability to turn any intellectual theme into an attack on the United States. Yes. Never ceases to amaze. So I congratulate you. Well, your ceaseless optimism about the States similarly never ceases to amaze me. Readers, tell us who's right and who's wrong. Listeners. Listeners. They're listeners, Katie. Keep keep up with the technology.

Listeners, tell us who's right or who's wrong. Drop us an email, unhedged at ft.com. We're gonna be back in just one second with long short.

Okie dokie, 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. What you saying, Rob? I'm going to admit that one of my earlier longs was wrong. I think earlier on this show I said I was long New York in the snow. Well, three snowstorms later I think New York in the snow is a disaster and I wish to see the back of it. Very short snow at this point. Market sentiment has changed on snow, Katie. Just too much of it.

I am short. Shrinkflation. So I just want to let my the the company whose chewing gum I buy, I have noticed that your little packets have gone from ten pieces down to nine pieces. Yes we notice and yes it pisses us off. But I notice you're not saying the brand. Do you do you want to just say what's the first one? They know who they are, Rob. They know who they are and what they've done. So annoying. They shouldn't be allowed to do that.

So listeners, do feel free to complain to Chewing Gong Companies on my behalf. Uh failing that, we'll be back in your ears on Thursday. We thank you for your attention to this matter. Unhedged is produced by Jake Harper and edited by Brian Erstadt. Our executive producer is Jacob Goldstein. We had additional help from

Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. 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 unhedged offer. I'm Katie Martin, thanks for listening.