It was an upside-down week of darkly comic theatre, which began with a standing ovation, and ended with a gloomily empty stage.
The coming together of an alleged war criminal and alleged sex offender did nothing to advance the cause of peace. The former is content to do nothing in a hurry, the latter has the attention span of a soap bubble, and both are focussed on legacy. Improvised comedy is great at the Edinburgh Festival, skilful and funny. But impro geopolitics is seldom sensible, and never funny – it is the unscripted and dangerous theatre of badly prepared and reckless politicians.
Nonetheless, on the whole the financial markets were unmoved by this theatre. What did move markets was the idea dawning on some people that US tech stocks, whose valuations are stratospheric, might be a bit overdone. Readers of this note know this already. It is hardly a secret On the one hand the scale of over-valuation screams bubble. On the other hand, history informs us with some precision what happens when the bubble bursts – losses of only 50% would be modest.
Throughout history investors have always over-committed to new technologies, from canals and railways, to electricity and cars, and in more recent decades the internet and AI. All were transformative for wider society. All of them also lost fortunes for most investors… with AI in the pending tray.
Headlines this week were variations on “$1 trillion wiped off AI stocks” and “AI Bubble Is About To Burst!”. The trigger was a report from MIT warning that although Big Tech was investing vast sums into AI, returns to date were limited. This has been reported many times over the last year, but manic investors believed, as they always do at this stage in bubbles, that this time is different.
Big Tech is spending these extraordinary sums because they believe that there can only be one big winner. It is war. Yet the Chinese DeepSeek launch earlier this year showed that big budgets might not define the winners, and that the barriers to entry are low, at least to create widespread real world solutions – where US AI development is about showing how clever they are and inward looking, China is focussing on more practical solutions with the widest applications. (Out of interest, when I put this point to US-owned ChatGPT it said this was a “fair” point – perhaps I was just damned by faint praise!).
Our own experience with AI over recent months has been a big eye-opener to me (and apologies to readers already way ahead of me on this). One of the team was conducting some research which we regularly update, but is a bit long winded. On this occasion he was assisted by AI, and it took him less than 2 weeks. He worked out that the volume of work he completed would have taken us more than 3 years without AI’s help. Similarly marketing tasks which might have taken us weeks, a lot of management time, and cost a few thousand pounds, have been largely completed at negligible cost in under 1 minute. The problem for Big Tech is that the AI we use is free, and there are a large and growing number of choices, as illustrated by DeepSeek – these are either free or have a very small subscription.
Despite Big Tech’s problem monetising its massive investment in the scale they require, this week’s share price wobbles are unlikely to be the start of the bubble and bust. It was merely a rehearsal for the real thing, and not even a dress rehearsal. If my sense is wrong, we will know soon enough – fear spreads very fast.
More likely is that these are relatively early doubts, as some nervous and better-informed investors will sell into the hands of some very late Johny-com-lately’s. As mentioned back on the 25th July, a small Summer correction of about 5% is a decent expectation, followed by another rally which we will be watching with great care.
Beyond tech wobbles, the US is not in a great place. Las Vegas might just be the canary in the coal mine. As one news report put it, the Vegas tourism industry is “American consumerism in its purest form”, and activity has not been this bad since 2008. Ordinarily such growing signs of weakness would mean cuts in US rates. But the Federal Reserve remains concerned about inflation rising later in the year.
It’s that stagflation problem again, also highlighted by the latest UK inflation numbers. Do you cut rates to boost growth, and take risks with inflation? Or hike rates to deal with inflation, but trigger a recession? Much should depend on whether the central banks believe the inflation rise is a blip and/or would not be aided by higher interest rates e.g. if the inflation is caused by global supply problems with some commodity outside UK control.
Sadly, it isn’t that straightforward. To keep the lights on, over-spending governments have mountains of debt which they need to sell to investors. As countries compete for global investors to buy their bonds, they need to be clear that such investors are focussed on inflation (which eats into their returns) and don’t care about a recession (which doesn’t).
Across the remainder of global markets over the last week, China is top again, up 2.7%, closely followed by the UK (FTSE 100) and India, both up 1.9%. It is interesting to note these persistent increases in China week after week. The most dynamic and profitable stage will be punctuated by growing press coverage – we appear to be some way off that point. This is just as we highlighted with gold in late 2023/early 2024, with the media and many investors only catching on this year, just as the gold price was beginning a multi-month pause. For years we drew investors to exactly the same trend in Japan, all the way from 2009/2010, but most investors and headline writers only caught up with the potential in 2024, just as the Nikkei went into a very volatile tailspin.
The UK and India are very different beasts. Although India had a decent week, year to date it is the worst of the major stock market indices, up just 4.8%, just behind the US Dow Jones. In contrast the UK’s FTSE 100 has enjoyed an excellent year, up by 13%, also somewhat better than the much-vaunted S&P 500, up 8.3%.
Despite gloomy domestic headlines, domestic and global investors have looked through these to the value in the UK. Great news, though the risks in the closely connected US market remain a dark cloud, so be sure to have your stop-losses in place. In contrast, India remains expensive, but after a correction from the September 2024 peak, does now appear to be 3-4 months into a recovery which has further to go.
Out of interest China is way ahead of other global equity markets, 26%. Only the German Dax is close (22%), buoyed by the considerable uplift in defence spending. The FTSE 100 comes third.
Steady as she goes. But please please please have stop-losses in place.