Citrini Research’s viral piece, AI and the economy, 90s Nostalgia | Diet TBPN

0:00John Coogan:Massive sell-off in the markets thanks to a friend of the show, Satrini. Lots of crazy reaction. Really broke through with something that, you know, is framed as sort of, you know, fan fiction, low probability. It's always interesting when someone posts something and they're like, I think there's a 10 % chance that this happens, so it's worth talking about. And I'm like, what's the 90 % scenario? No one's getting any clicks for the 90 % scenario. And it gets completely ripped out. It's not that exciting. Yeah, and throwing out something like, oh yeah, like 10 % chance that this crazy thing happens.

0:28John Coogan:People don't react to it. like it's a 10 % scenario or whatever percentage you put on it. 20 % chance, 30 % PD. They only take away from what you said.

0:37Jordi Hays:It's over.

0:37John Coogan:Like as soon as you say something crazy happens, with no matter how low the percentage is, like that's what you're going to be known for forever. So be careful out there with those predictions. But okay.

0:48Jordi Hays:So Sunday, yesterday, doing family stuff, don't really have a bunch of time to like sit down and read something. And the entire day I'm just seeing people quoting it, being like, this is the best essay that I have ever read. So many people that I think are generally pretty smart. And then by the time I actually, after the kid's bedtime last night, by the time I actually sat down and started reading it, almost every paragraph I was experiencing some element of Gelman's amnesia, where you have three sentences that are maybe somewhat coherent and then a statement that feels so wrong.

1:24John Coogan:Sure, sure, sure.

1:25Jordi Hays:Specifically, I think a lot of people obviously called out the... The DoorDash thing. The DoorDash comment, which there's so many businesses that you could have chosen in DoorDash's place, but it didn't matter.

1:35John Coogan:My experience with it was you had mentioned to me that like, oh, it's the current thing. And I was pretty offline. And then by the time I actually started refreshing the timeline, I was like, oh, I'm like clearly like stuck on some search feature because I'm only seeing Citrine posts and like posts reacting to it and reacting to the reaction. and it had done a full news cycle, both a backlash and then a backlash to the backlash and Tay Kim's getting in there fighting and people are posting rebuttals and someone posted a fully AI generated, just like turn it up another notch version, which is hilarious.

2:11John Coogan:So we can maybe go through some of the reactions. I mean, the futures were red last night. The market is down broad.

2:17Jordi Hays:Yeah, and it's interesting. A lot of people were saying, guys, there's no way that futures are red just because of this Citrini essay

2:23John Coogan:that is obviously science fiction. Yeah.

2:27Jordi Hays:And then it turns out Bloomberg this morning came out and actually stated that it's the Citrini sell-off.

2:35John Coogan:Yeah, yeah. But I mean, there were also the tariff things. The tariff news was sort of digested on Friday, Saturday. So there was totally, like, that could be possible. There's a lot of other stuff going on. The quote from the terminal, software payment stocks slide after Citrini post on AI risk. DoorDash and American Express led declines in software and payment stocks on Monday. And we were debating like, you know, PayPal had gotten beat up and there was a question about like, what is the strategy going forward? PayPal has always been an interesting situation because like, absolutely goaded founding team, but they're all disinterested in jumping back in and turning it around.

3:14John Coogan:It does seem like there's some value there. There's some stickiness and it'll be interesting to see, does it go private? Does the new management come in? I mean, they already have some new management, so I'm not exactly sure where it goes, but it feels like the payment rail thing will be sticky for a while. Young Macro had a take, quote tweeting Satrini, good and interesting piece, but a necessary caveat is that it's essentially a hypothetical conditioned on severe institutional failure rather than some sort of macro inevitability. As the piece itself notes, one of its two failure modes, liquidity stress and capital impairment includes a liquidity component that the Fed can address quickly with liquidity facilities and asset purchases, repo lines, quantitative easing, as seen in recent episodes of banking stress.

4:02John Coogan:Losses from impaired assets won't disappear, but can in principle be moved where the broadest shoulders are. It's an odd situation because you're seeing all of this capital evaporate from the public tech markets, but the labs aren't public yet. So they can't fully absorb it like they sort of can, but it's much more opaque. And it's not like most the average investor can't just read this piece and be like, Okay, I believe it. I am worried about software stocks. So I'm going to rotate into a basket of anthropic open AI and SpaceX. They don't have that option yet. They might by the end of the year.

4:36Jordi Hays:You can buy Nvidia, you can buy Google. There's plenty of ways.

4:40John Coogan:Yeah, totally. Plenty in this hypothetical economy, much more than before, he says. There will be plenty of broad shoulders. Couldn't they just tax Anthropic into paying all your pensions in this hypothetical scenario? This would be done through regulatory or fiscal mechanism. The second failure mode, an aggregate demand shortfall for massive unemployment, can be addressed through fiscal policy, transfers, wage subsidies, etc. The piece argues that this may be constrained by falling tax revenues, but in a deflationary, low-inflation environment, the Treasury can run large deficits, and the Fed can buy as much of that debt as it needs to leaving aside that we'd expect the tax structure to change.

5:16John Coogan:The political process is unlikely to be as meaningful as a bottleneck as the piece claims as the hypothetical fiscal hawks pointing to unsustainable deficits would not have much of a point given the economy in this hypothetical will have much higher potential output. The first principles intuition obviously tells you something is awry when we're told that people will want at least as many real things as before and the economy will have the means to produce more real things than before, but the people won't be getting the amount of real things that they want or need. This is because that typically requires major policy slash institutional frictions or delay in translating capacity into purchasing power.

5:57John Coogan:If you suddenly have two loaves of bread in your house instead of one in your house and you weren't starving with one, you probably shouldn't starve when there's two, but if by some hypothetical through the complexity of the novel two bread loaf production process you suddenly get tangled and can no longer access the cupboard then it's quite possible you will you will starve i thought that was a good take it is interesting how this moved the markets way more than ai 2027 like it's sort of the same piece and it has a lot of the same sort of extrapolations based on AI progress, a lot of same -

6:34Jordi Hays:But like AI 2027, probably like the market reaction was like, invest more in the labs at the time because it was kind of aimed for more of a West Coast audience in general.

6:45John Coogan:Yeah.

6:46Jordi Hays:I just mean, if you had taken AI 2027

6:49John Coogan:and you had just asked, like, I own this basket of public company stocks, what should I be doing? And AI 2027 is your backbone. you would probably sell a lot like you're selling right now. Like the AI 2027, situational awareness, PDFs, like those are the Leopold Aschenbrenner philosophy that is now being reflected in the market. But, you know, he didn't go long any of these stocks. Anyway, sorry, really quickly.

7:16Jordi Hays:I wonder how much that is just because of like who is actually writing it. Like the AI 2027 people are like, you know, very San Francisco coded, like vaguely EA, maybe say PS people, where this is like, okay, they're like a financial research firm.

7:29John Coogan:And it's written with a financial audience in mind, and it speaks in that language. So it's been somewhat translated. Interesting that it took almost a year for it to be translated in this way.

7:41Jordi Hays:I did think it'd be helpful to kind of provide a summary of the essay. I think the original essay, it feels like they use quite a lot of AI to write it. I'm going to use AI to summarize it for you. There we go. So anyway, so this scenario, you should have got to this at the beginning. But by late 2025, agentic AI tools become vastly better at coding and complex tasks. Obviously, that was historical. Firms found they could use AI to replicate work normally done by humans, radically cutting labor costs. Productivity looks great on paper. GDP and productivity metrics soared because AI output counted in the official numbers.

8:15Jordi Hays:But most of that value didn't translate into real consumer spending. So, like, businesses are spending money, but they're spending it on data centers. And that is not as opposed to labor, where if you give somebody money, they'll buy a house, they'll do home improvement, they'll buy cars, they'll put their kids in school. Consumption. Consumption, right? So they're calling this ghost GDP, economic output, that doesn't actually circulate in the real economy. And then they identify an emerging negative feedback loop, which is companies lay off white-collar workers and reinvest savings into more AI.

8:46Jordi Hays:Displaced workers have less spending power. Consumer demand weakens, especially for discretionary goods. companies facing weaker demand invested even more in AI to maintain margins. And this creates a negative feedback loop with no natural break. The next step is market and credit stress. So they talk about private credit having lent to a bunch of these different SaaS companies that are now being threatened, defaults climbing as this sort of like perceived recurring revenue ends up not being fully recurring. There's a whole segment talking about how like a lot of value capture in the world is actually just humans like not wanting to deal with frictions it's like not switching uh car insurance because even though you know you're paying more than you should it's just kind of a hassle uh but if you could have an ai agent go and do that uh then then maybe you do that more often and that that pulls out um some potential earnings from the system uh the other thing they talk about is like all these different tech hubs and how many like prime mortgages there are that might not be so prime if there's a layoff and somebody ends up having to switch, you know, switch career paths or something like that.

9:55Jordi Hays:So generally talking about unemployment surging, consumer spending collapsing, severe drawdown in the stock market, and then even our sort of normal economic indicators hiding this sort of overall weakness. Anyways, takeaway, AI being great and powerful may not equal all the markets ripping, but

10:16John Coogan:Well, two different things. Market ripping, GDP growth, and median income. Yes. They're three wildly different things. You can see asset prices rise massively based on future promise of GDP growth. If it's guaranteed that GDP growth is going to happen 10 years from now, the market will price that in today. And then if all of that GDP growth goes to one person, you're not going to see median incomes rise. You're not going to see broad prosperity in America.

10:45Jordi Hays:Worth maybe noting like the kind of companies they call out in the piece by name. So poor all these companies. Let's check in with ServiceNow, which is one of the companies that was most heavily down for almost 4.5 % today. So they talk about a bunch of the SaaS tools. They call out Monday.com, Asana, Zapier. Zapier is kind of funny because in some ways like it was just like work automation before work automation was even that cool. MasterCard and Visa, they talk about suffering revenue pressure because an AI agent would just opt for stablecoins, which feels like, again, something that many people on the show have come on and made the case for why agents will leverage stablecoins or prefer stablecoins.

11:30Jordi Hays:Seems like a possibility, but unlikely that that will just, you know, all payment volume will shift over there overnight. Amex they called out specifically because of their consumer base being just generally weakened by labor displacement. And then a bunch of others, travel booking, insurance, real estate, tax, etc. Travel booking I thought was funny because most travel agents don't actually take fees from the consumer. They take fees from the side of the hotel, the airline, whatever.

12:02John Coogan:The thing that just keeps sticking out to me is like, and I was debating with Sagar and Jetty about this as well. like he was telling me like AI is the only thing holding up the economy. I was like, no, AI is actually doing very little for the economy right now. It's doing a lot for the markets. It's doing a lot for the future. But like in terms of the actual economic impact of AI, it's very low. And we just know that because you add up the actual AI revenues from the AI labs. And you're talking about like 30, 40 billion dollars. And okay, maybe there's like a 5x multiple on that. And so you're generating$200 billion of GDP on top of those tokens.

12:43John Coogan:But like, that's just not that much in the grand scheme of the actual America's GDP. And so there's this disconnect between like the market, which is pricing future GDP, future cash flows, future value creation. Then you have what is actually driving GDP today. And then you have like the actual workforce and what Americans do. There's this odd disconnect, and I keep coming back to the Tyler Cowen slow takeoff philosophy. What's actually holding up the American economy? It's like healthcare jobs. And there's a lot of jobs that are, they feel very AI resistant. I don't know, maybe something changes, but it just feels like the number of people that are software developers is less than 1 % of America.

13:24John Coogan:The number of people that work at tech companies broadly is less than 10%. And so even if there's some massive reallocation there. And then you go into like, even in like white collar, if everything shifts, like the rest of the world is hit. And there's just a lot of other dynamics that feel like you can see crazy gyration in the markets and you can see really quick reallocation of 10 % of capital, billions of dollars flowing around. But that doesn't immediately translate to what is happening in the real economy. There's always this disconnect.

13:57Jordi Hays:John Loeber wrote a great piece very quickly after this called Contra Citrini. He says, popular markets commentator Citrini recently published a compelling and popular piece of AI doomer fiction, admittedly with some small probability of occurring, but I'm old enough to have seen many cycles of economic doomsaying. I want to present a critique of Citrini's work and show a much likelier, more positive view of the future. One, never underestimate institutional momentum. In 2007, people thought the U.S. was geopolitically done under peak oil. In 2008, they thought the U.S. dollar was just shy of collapse.

14:31Jordi Hays:In 2014, they thought AMD and NVIDIA were done. Then came ChatGPT, and they thought Google was done. Every time, existing institutions with momentum have proven themselves far more durable than onlookers thought. When worried about institutional turnover and rapid labor displacement, it's very funny that Satrini writes, even places we thought insulated by the value of human relationships proved fragile. Real estate, where buyers had tolerated 5 % to 6 % commissions for decades because of information asymmetry between agent and consumer. People have been calling for the end of the real estate broker for 20 years.

15:03Jordi Hays:You don't need superintelligence for this. All you need is Zillow or Redfin or Opendoor. This example actually shows the very opposite of Citrini's point. We have the type of labor that most people consider obsolete, and yet market inertia and regulatory capture have made the real estate broker far more resilient than anyone would have bet a decade ago. My wife and I bought a house a few months back. the transaction required us to have an agent ostensibly for the above reasons. Our buyer's agent made about$50 ,000 on the deal for about 10 hours of form filling and party coordination that I could have done myself.

15:32Jordi Hays:This market will eventually be efficient and price this labor fairly, but it takes a long time to get there. I know a lot about inertia and change management. I built and sold a company that focused on moving insurance brokerages from service to software, and the main thing I learned is the iron rule of dealing with human reality. Everything is always more complicated and takes much longer than you think it will, even if you already know about the iron rule. That doesn't mean that a meaningful change in the world won't happen, but that the change will be more gradual, giving us the time to respond and adjust.

15:59Jordi Hays:Second point, software has infinite demand for labor. The software sector has been struggling in recent months as investors fear that companies like Monday, Salesforce, Asana can now be easily replicated and that the value of their backend systems is indefensible. Satrini and others talk of AI coding is a spell of the end of jobs at SaaS companies are one, the products become obsolete, zero margin, and two, the jobs themselves disappear. What everyone seems to be missing is this, these products effing S-U-C-K. That's his opinion. My own personal call out here is like, until we see a round of layoffs at a company that is 5 ,000 software engineers at once, it's hard to believe that AI is replacing software engineers versus just making them a lot more productive.