Katie Martin (2:40)

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 spirit 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.

Robert Armstrong (3:11)

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 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.

Katie Martin (3:53)

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 like 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.

Robert Armstrong (4:13)

Yeah, it was, it was correct.

Katie Martin (4:14)

Can't remember exactly when it was, but. 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?

Robert Armstrong (4:29)

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 9 or something like that.

Katie Martin (4:46)

Yeah, yeah.

Robert Armstrong (4:47)

Looking back on the recession and market Crisis created by AI starting in 2027 already, I'm out.

Katie Martin (5:00)

This sounds rubbish. Why did they.

Robert Armstrong (5:03)

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. 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 goes on and on like this and 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 banks and asset managers were selling off merrily once again, apparently because of this piece of speculative fiction, which is quite

Katie Martin (6:36)

striking, extremely weird, and I don't mean to throw any shade at Citrini researchers 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.

Robert Armstrong (6:56)

Yes, the market, as I put it in the newsletter yester 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, and I agree with you, that is the most important thing about this blog post is not the content of the blog post, but, but the fact that the markets responded the way they did and what that says about market mood.

Katie Martin (7:32)

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. And you know, you guys can Handle it. But like the S and P is like last time, I looked a tiny bit negative on the year so far. Yes, the world is is fine.

Robert Armstrong (8:18)

And the stocks in the S and 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 and 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 sub employment and there is a massive demand shock, it will not be confined to tech stocks, right? Anybody who sells anything is going to be caught up in a kind of deflationary wave. 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, Cintrini 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. 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 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.

Katie Martin (10:45)

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 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, 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 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.

Robert Armstrong (11:57)

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?

Katie Martin (12:35)

Yeah.

Robert Armstrong (12:35)

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. 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.

Katie Martin (13:11)

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.

Robert Armstrong (13:23)

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.

Katie Martin (13:44)

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?

Robert Armstrong (14:36)

I mean, is there a world in

Katie Martin (14:38)

which you get a sort of human centipede kind of phenomenon where these things start feeding off each other?

Robert Armstrong (14:45)

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.

Katie Martin (15:24)

We should get him back on soon.

Robert Armstrong (15:25)

Yeah, we should. 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, 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.

Katie Martin (16:07)

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 going to take a pause. So I don't know.

Robert Armstrong (17:06)

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

Katie Martin (17:19)

Well, your ceaseless optimism about the States similarly never ceases to amaze me. Readers, tell us who's right and who's wrong.

Robert Armstrong (17:27)

Listeners. They're listeners, Katie. Keep up with the technology.

Katie Martin (17:32)

Listeners, tell us who's right or who's wrong. Drop us an email unhedged.com. we're going to be back in just one second with long shorts. 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?

Robert Armstrong (17:55)

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.

Katie Martin (18:15)

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 10 pieces down to nine pieces. Yes, we notice and yes, it pisses us off.

Robert Armstrong (18:38)

But I notice you're not saying the brand. Do you want to just say emails?

Katie Martin (18:43)

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 gun 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 Bryant Urstadt. Our Executive Director 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 Clarke, 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 unhedgedoffer I'm Katie Martin. Thanks for listening.

Robert Armstrong (19:42)

Sam.