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- [00:00]
Katie Martin
At PGM, our global perspective today unlocks investment opportunities tomorrow. Our 1400 investment professionals provide global expertise and local insights to help you navigate the complexities of a changing world. We offer a diverse range of active strategies across public and private markets to help you identify opportunities and achieve your long term goals. Pjum our investments shape tomorrow today. Pushkin. Here's a company we haven't chatted about here for a little while. Nvidia. It's a chip maker. It's basically the artificial intelligence trade. And it's now worth, wait for it, a little over $4 trillion. That's trillium with a T, folks. And for reference, the entire FTSE 100 index in the UK is under $3 trillion. What the hell? So it looks like the whole AI hoopla is alive and well in financial markets, that's for sure. So why is it that whenever I see something that's AI generated, it's rubbish? Today on the show we're asking, is it, is this a lot of money riding on a wing and a prayer, or is this technology the real deal? 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 and I'm joined by one of the youngsters on the Unhedged newsletter who makes Rob look clever, Aidan Reiter.
- [01:42]
Aidan Reiter
Hello.
- [01:43]
Katie Martin
Now, Aidan, one of the challenges with toy talking about AI is that like lots of normal people don't really know what it is and we don't really understand how the technology works or what it's going to do. So a very confusing thing for us to be talking about today. But we're gonna try.
- [02:00]
Aidan Reiter
Yeah, we're just gonna not know, but we'll keep on going.
- [02:02]
Katie Martin
You've gotta love that. This is the On Hedge podcast way. So let's start with a little bit more on Nvidia. I mean like two years ago it was worth a measly $1 trillion. Who cares about that? But it's just like, so, like, it's just unholy how massive this thing is. Now the shares are up about 40% since early May. Like why has, why has it just rocketed like this lately?
- [02:33]
Aidan Reiter
I mean, it's interesting that it's rocketed like this, given that just what, six months ago we weren't sure it had any future. After Deepsea came out and proved that you can make these complicated AI models with the lower grade chips. So not the chips that Nvidia says will build the future, its stock plunged. I think 17% in a day, or, you know, at least very in the teens. And then of course, within two days it was back up because it was.
- [02:56]
Katie Martin
Very clear this is when China came out with its own version. Effectively.
- [03:00]
Aidan Reiter
A Chinese company, Deepseek, created a model using lower grade chips. So the chips that are not the fancy dude ads that Nvidia has hawked, saying this is the future of AI and they did it for, you know, relatively cheap. There's a lot of debate on whether or not the numbers they gave are actually accurate. But the point is that a lot of people doubted whether or not you really needed such advanced chips in order to make complicated models that do the work that AI is supposed to do. But, you know, the market has clearly forgotten that because despite that concern, all the big tech companies that are buying Nvidia's chips and plowing them into data centers have continued to do so and have done so at a very rapid rate.
- [03:40]
Katie Martin
I think there's also a sense that back in January, AI stocks were so richly valued, they were so expensive, they'd had such a great run that it only took a little bit of bad ish news in the form of a new Chinese competitor that the shares took a really big hit. And then of course, a little bit later on, we had the big shakeout in US markets that came from Trump's massive Liberation Day tariffs. And so everything was just terrible for a little while in AI and in big tech for a few weeks there. So, you know, again, it's just sprung back incredibly quickly. And, you know, this is about numbers from Nvidia, right? This isn't just kind of, oh, you know, trust us, we're massive and important. The earnings back it up.
- [04:27]
Aidan Reiter
Yeah, I mean, the earnings are incredible. They've successfully sold a lot of chips to these data centers because people really believe that AI is the future. These, the companies that have benefited so much from the quote, unquote hype continue to hype up the product. And at the same time, as you were saying before, the market is continuing to buy it and, you know, continue to ride the momentum. But people are jittery, they're expensive stocks. I mean, their PE ratios are very, very high.
- [04:51]
Katie Martin
That's the price earnings ratios, which is how much investors are prepared to pay for future earnings that they think the company is going to make. But let me tell you someone who is convinced that Nvidia is the real deal, and that's its chief executive, Jensen Wa. Now, I can't remember if I've mentioned this on the show before, but like at a certain point last year, I was on a panel session with a couple of people from the Irish tech scene and they were saying, we remember when Jensen Wang was just like some guy who would turn up to the same tech conferences that we did. And he was such a nerd and so unimportant that he didn't even get invited to the best parties. And now, you know, they're doing panel sessions with me in a pub in Ireland and Jensen Wang is running a company that's worth four, four trillion dollars. And just recently Wang has been going around Washington D.C. talking to Trump and also going around Beijing, and he's been talking about how AI is fundamental, like electricity.
- [05:52]
Aidan Reiter
I mean. Yes, but he's not the only one to think that AI is going to be transformative. I mean, there's evidence to suggest it already is. You know, we've had a long history of automation and new technologies in the world that have changed how we work, what we do, how we interact with one another. AI seems poised to be the next one. I mean, if you think about what mechanization and automation did for workers in the 19th century and 20th century, that completely changed how people were employed, what jobs were there in the economy, how people made money, and you know, there was definitely displacements, but by and large it helped make the world a more rich and prosperous place. Sam Altman at OpenAI says, we're about to enter into the greatest period of human history, everybody's gonna be more prosperous, etc. And that's because what it's best poised to do is to replace knowledge jobs and knowledge work. Now some people argue that will be displacement, some people argue that will be enhancement and we just don't know. It's also probably going to affect physical tasks and physical jobs like warehouse jobs, truck driving and other driving jobs. I mean, the impacts will not just be on the knowledge economy.
- [06:57]
Katie Martin
There's a lot we don't know, isn't there? And I think we should just sort of set to one side the argument that you hear some kind of excitable tech bros making, which is AI is poised to become effectively sentient and it will take over the world and destroy all humans. I'm willing to set that to one side as a tail risk. So you know, whether, whether you love this technology or hate it, it is the dominant force in the US stock market at the moment, which means it's the dominant force in, in global stock markets at the moment. Like you, you can't ignore this stuff no matter how hard you try So a little note that caught my eye recently came from Torsten Slok, who's the chief economist at Apollo, the private equity group. And he was talking about how the AI bubble of today is greater than the IT bubble of the 1990s. And what I found interesting there was just this casual, like dropping in of the B word, like, this is a bubble. It's like, oh, oh, okay. I guess that's one way to think about it. And there is a kind of long running argument about this. But what we're certainly seeing is that big sort of AI adjacent stocks are getting all sorts of expensive now. And they're more expensive than kind of shiny it like tech stocks were at the back end of the 90s and that all ended badly. So what's your sense of how people are trading this or how they should be trading it?
- [08:19]
Aidan Reiter
Yeah, well, I'll say first of all, I mean, I don't think the risks of an AI bubble are as big as, you know, the Internet.com bubble of the 2000s for the most part. A lot of these, like little companies that just attach AI to a very mundane product are VC backed. And in private markets, it's not going to result in a big stock market crash. Also, I mean, yes, there's a huge, huge hype around the seven big tech companies that make AI, but those are companies that have other revenues and other things they do. So, you know, right. There is a floor which is good. But in terms of the whole market, I mean, if you look at Nvidia's expensiveness, right, its price to earnings, what investors will pay versus what actually earns in money, that started ticking up, you know, sometime in mid to late 2023, around the same time you saw the same expensiveness show up in the rest of the S&P 500. So stocks got expensive right next to Nvidia. And you know, that could just be like a dragging effect, but it also could just be, and this is, sorry, stocks excluding Nvidia and the other, quote, unquote, magnificent seven tech stocks. So the rest of the S&P 500 got expensive. And some people will call that the AI halo. And if you really believe that AI will pan out, there's reason to believe that those companies will benefit too. The point is you can actually have some cost cutting across all these companies. So you're saving on their bottom lines. You think that they'll still have the same amount of revenue but with fewer people. So that inherently just makes them more expensive and, you know, increases their future earnings.
- [09:44]
Katie Martin
Yeah. So I guess the question is, did other stocks rise at the same time as Nvidia really hit the ascendancy purely because they were just sort of carried along for the ride? Or is there a sort of sensible narrative that actually this really is going to transform the bottom line of corporate America writ large, like every single sector. And again, my kind of problem with the the latter argument there is always that my day to day interaction with AI makes me think it's like really rubbish, just like really poor quality. It gives me like terrible search results that I can't get rid of at the top of my Google page. It spits out faulty information, it spits out pictures of people with like six fingers and three legs. And you know, it just makes you think, how is this worth so many trillions of dollars? This just seems silly.
- [10:39]
Aidan Reiter
Well, so it's going to get better, right? That's the common argument you hear from everybody. All technology gets better over time. It's the more mundane number based tasks like financial analysts or you know, just sending basic emails or writing very basic code that it's already shown to be very, very effective. So I have a lot of friends who are coders and they say they use AI every day in their jobs. I have a lot of friends who work in finance who say they use it absolutely every day and it makes their lives easier because it's taking away like some of the very basic numeracy and coding they have to do. So and it's not just going to be those people imagine HR it, other people are replaced by cheaper AI. Right. You don't necessarily need to find the guy in the office who knows how to use your computer. If you can ask the AI how to use the computer better. It's not better. I'm not saying that's a world I want, but it's one you could very easily imagine.
- [11:27]
Katie Martin
Yeah, yeah. I mean one of the things that people often say about the dominance of AI in markets right now is that the eventual winners from AI are not always the companies that kind of originated it or that provide the foundational technology to it. Like, like for example, Nvidia now it could be that 10 years from now it's healthcare companies and it's consumer companies that are really kind of showing the benefits of this. And actually in 10 years time we might have forgotten who Nvidia are. Do you think that's possible?
- [12:06]
Aidan Reiter
I think that's definitely possible. I mean, I'll say first on who benefits as opposed to the big tech companies. We said, you know, there's Cost reduction across the board. There's also the chance for revenue enhancement. So if you have each worker becoming meaningfully or marginally more productive, then you can have higher output. And as long as there's people to buy that output, then you have higher earnings. Right. So it's, you know, the health care companies who can now see more patients or you know, provide more at home care and be able to charge their insurance more efficiently. It could be law firms or consultancies who can now, you know, serve more clients and serve more people much more quickly and efficiently with the same amount of people.
- [12:42]
Katie Martin
Banks, that kind of thing.
- [12:44]
Aidan Reiter
Banks, yeah. So you know, you have revenue enhancement on top of cost reduction. Again, this is assuming a scenario where AI doesn't put everybody out of work and people still have money to spend on things.
- [12:53]
Katie Martin
Yes, that'll be helpful. Yes.
- [12:55]
Aidan Reiter
So you know, so that, that's the AI scenario where it helps everybody else. And in that scenario, yeah, you could have big tech being a winner, especially if they're making the AI models that everybody's using. But you know there's going to be winners and losers among those companies. Some companies will opt for certain models. Some models might prove to be better at certain things than others. Some companies might not actually be able to properly scale and meet the specific and industry specific domain demand in that world. So it could be some of the big tech companies are huge winners. There is also very high odds that they're losers too. Also they're most likely to come under whatever regulation eventually comes out around this, right. About how they make their money, how they sell their models. It's going to be much more burdensome for them to continue to be winners in the future.
- [13:39]
Katie Martin
Now a lot of people who listen to this show are like not, not market specialists and they probably do look at what's happening with us tech stocks that are in this kind of AI universe and the first thing they will be thinking is they will hark back to that kind of dot com boom and bust of like 20 odd years ago. Do you think that is a reasonable concern? I guess I'm asking like, is this a bubble or not?
- [14:05]
Aidan Reiter
I mean it sort of goes back to what I said before. I mean it's not as risky a bubble as in the 90s from what I can tell because not all these AI companies are publicly listed. And also it seems less risky because we've already started to see some real benefits and real impacts on the AI space in the ecosystem. Right. As we talked about, you could have cost reduction, revenue enhancement across a Variety of industries. What does feel more dangerous is how much the market is reliant upon these seven big tech companies that make AI who may not be the winners at the end of the day. I mean, have you heard anybody effectively using Grok, which is, you know, AI offering? No, they're not really part of the big conversation, but there's a lot of money going into them and investing in the theory that Tesla and X and, you know, Elon Musk's various companies will deliver on AI in a way that other companies might not. And that could be a very bad bet, or it could be that OpenAI is a bad bet. You just don't know.
- [14:57]
Katie Martin
I mean, there's a lot of, there's a lot of these companies out there that are making serious money. You know, that this is not entirely kind of a jam tomorrow thing. It's not kind of, you know, buy this stock and just hope, you know, buy it basically as a bet and a gamble and see if it pays off. These are real companies doing, doing real things. I just think some of it is a bit excessive and the, the extent to which it really does drag along the rest of the US stock market is for me, a of vulnerability rather than a point of strength. But I, you know, I don't think this is necessarily going to crash like the, you know, late 90s or early 2000s thing, but I do think it's sensible to just try and stay slightly grounded along the lines of, what is this technology actually doing? Aidan, I don't think we're going to put this debate to bed. We are never going to solve this debate, but so help us, we have tried. Speaking of debates, we're going to be back in just a second with Longshore. Speaking of Alternatives, a podcast from pgim. We take you beyond the headlines, exploring timely insights from the industry experts.
- [16:13]
Aidan Reiter
Our belief in sizing really is the key metric to think about in this business. In long, short equity, and frankly, in any sort of investing, there's really two parts to it. One part is hit rate how many ideas actually work, long or short. But I believe the more important part is the slugging slide. So for every dollar you lose, how many dollars do you make?
- [16:28]
Katie Martin
Tune in to Speaking of Alternatives, a podcast from PGym. Okie dokie. It's time for Long Short, that part of the show where we go long a thing we love or short a thing we hate. I'm in charge, so I'm going to go first. I am long. A comment from Mark Austin, who's a very prominent lawyer in the City of London and very much a kind of City of London big wig. And he was talking about the Mansion House speech from the UK Chancellor yesterday. She gave her big kind of annual speech to the great and the good of the City of London. And some people were hoping that this would result in a massively impactful set of reforms for the city that could really like jazz up the stock exchange or whatnot. And some people were a little bit disappointed by that. But Mark Austin said basically, you may be a little bit disappointed by some elements of this reform agenda, but and I quote, we need to keep on shaking the snow globe. That is my favorite quote.
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Aidan Reiter
It's a good one.
- [17:29]
Katie Martin
So shake your snow globe. Aiden, what is your long or short?
- [17:33]
Aidan Reiter
I'm long stone fruit. Much less stereotypic. It's, it's almost stone fruit season. You know, the cherries are coming out the plums and I'm just enjoying eating some delicious cherries before I go to bed every night. It's been great.
- [17:47]
Katie Martin
Can I just strongly advise you not to overdo it because this can go quite wrong if you eat too much stone fruit in one go. So I don't wish to sound mumsy. I'm just saying please don't over consume stone fruit. You'll regret it. Right, listeners, we're going to be back in your ears next week, so listen up then. Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our Executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of Audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Seidler. FT Premium subscribers can get the Unhedged newsletter for free. A 30 day free trial is available to everyone else. Just go to ft.com unhedgedoffer I'm Katie Martin. Thanks for listening. The FT Weekend Festival returns on September 6th at Kenwood House Gardens in London. Register today for debates, tastings, Q&As and more. Speakers include Stephen Fry, David Bedeel, Nikolai Tangen, Nick Clegg, Tim Harford, and many, many more. Plus your favorite FT writers and editors. Register now and claim 10% off using the code FTPodcasts.