The report that rattled Wall Street

0:06Rob Armstrong: Pushkin. 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 going to 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.

0:47Rob Armstrong: 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, Robber Armstrong, off of the Unhedged Newsletter. Rob, are you wearing like seal skin and like...

1:21Katie Martin: It's funny you should mention that. I am just back from harpooning a seal.

1:25Rob Armstrong: Yes, you're wearing it.

1:27Katie Martin: And I'm wearing it as a scarf. It's true.

1:29Rob Armstrong: You lot need to stay warm.

1:31Katie Martin: Yeah.

1:31Rob Armstrong: 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.

1:41Katie Martin: No.

1:42Rob Armstrong: 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 Mr. Martin. And we had many, many surprise birthday drinks. Many drinks.

2:20Katie Martin: 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 physical proximity, a terrible hangover generally results. So it's best we keep our distance. Let's talk about serious things. Enough of your birthday hijinks.

2:40Rob Armstrong: 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.

3:11Katie Martin: Yeah, it did seem like things picked up. I don't want to undersell how weird the previous two weeks have been. There was a 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 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 is a new high or possibly a new low, depending on your perspective on the whole situation.

3:53Rob Armstrong: 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 that loads of companies have tried out AI. Almost all of them think that it's useless. And so this was, you know, cast a bit of a chill through AI stocks. I'm going to say last summer. Big tech stocks.

4:13Katie Martin: Yeah, it was. It was correct.

4:14Rob Armstrong: Can't remember exactly when it was. 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? What's this?

4:28Katie Martin: 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, 2028 or nine or something like that. Looking back on the recession and market crisis created by AI starting in 2027.

4:58Rob Armstrong: Already I'm out. This sounds rubbish.

5:02Katie Martin: 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 Citrini sermon, if you will. This is looking back from 2029 or something. The owners of Compute saw their wealth explode as labor costs vanish.

5:54Katie Martin: 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 the real economy. It goes on and on like this and it's all very scary. And the market really responded. Everybody, all the finance nerds on Twitter, all they were doing yesterday was arguing about this post. And meanwhile, tech stocks and things like banks and asset managers were selling off merrily once again, apparently because of this piece of speculative fiction, which is quite striking.

6:37Rob Armstrong: Extremely weird. And I don't mean to throw any shade at Citrini Research. Never come across them before. But it's not like this was a big report from like Goldman Sachs or like BlackRock or, you know, 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.

6:56Katie Martin: Yes, the market, as I put it in the newsletter yesterday, 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, you know, in these sensitive sectors. And 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 mood.

7:32Rob Armstrong: 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 U.S. 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 is 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.

8:10Rob Armstrong: 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. Yes. The world is fine.

8:18Katie Martin: And the stocks in the S &P, just to push your point a little further, the stocks in the S &P that are not in tech 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, 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 Satrini, they make the point that if AI causes mass unemployment or sub-employment and there is a massive demand shock, it will not be confined to tech stocks. Right. Everybody who sells anything is going to be caught up in a kind of deflationary wave.

9:14Katie Martin: and the question, and this is one of those debates that makes me wish I had actually bothered to get a formal education in macroeconomics, which 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 the economy, that that is impossible, right? In other words, the economic logic here might not stand up. Think of it this way.

10:01Katie Martin: 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 got to be buying. Of course, there's also a question here about distribution. So I just made 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.

10:41Katie Martin: This seems to me to be one of the possibilities.

10:44Rob Armstrong: One thing that's interesting to me here is 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 is going to end in tears, and AI is basically crap. Now the debate has flipped in the completely other direction, but it's 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 dynamic. And I agree, unless robots gain 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.

11:23Rob Armstrong: 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 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 shiny tech things that have worked so brilliantly for so long. So maybe this is a healthy correction.

11:57Katie Martin: 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 kind of multiple personality problem. We've all seen recently what the technology can do. In other words, to a degree, the technology is 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 videos. Right? Yeah. So it's kind of happening. You know, we can debate the degree to which it's happening, but there is an anchor in reality.

12:42Katie Martin: 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, are these really quite old, established, large software and related company franchises? I don't dismiss the possibility that those businesses might be under pressure.

13:11Rob Armstrong: Well, on that point, one of the companies that really like puked earlier this week was IBM, whose stock lost double digits yesterday, right? Like I think it was 13 % at the worst point.

13:23Katie Martin: I'll just interject that that's only partly Satrini. 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's a bit of a mixed story.

13:44Rob Armstrong: 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 around 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 is just sort of lit a little fire under the idea that, huh, is there something rotten going on in private credit?

14:28Rob Armstrong: 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. Yeah. I mean, there is a world in which, you know, you get a sort of human centipede kind of phenomenon where these things start feeding off each other.

14:44Katie Martin: 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.

15:43Katie Martin: 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.

16:07Rob Armstrong: 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. And might there be a moment where this all comes together?

16:39Rob Armstrong: 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 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 going to take a pause. So I don't know.

17:06Katie Martin: Katie, your ability to turn any intellectual theme into an attack on the United States never ceases to amaze. So I congratulate you.

17:18Rob Armstrong: 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.

17:29Katie Martin: Keep up with the technology.

17:31Rob Armstrong: Listeners, tell us who's right or who's wrong. drop us an email unhedged at ft.com we're going to be back in just one second with long short

17:47Rob Armstrong: 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

17:58Katie Martin: 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.

18:15Rob Armstrong: Just too much of it. I am short shrinkflation. So I just want to let my the company who's chewing gum I buy I have noticed that your little packets have gone from 10 pieces down to 9 pieces. Yes, we notice. And yes, it pisses us off. But I notice you're not saying the brand.

18:40Katie Martin: Do you want to just say a word that rhymes with it? I don't want to get mean emails.

18:43Rob Armstrong: 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 gum companies on my behalf. 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 Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forehead. 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.

19:29Rob Armstrong: Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.