Is AI a market crashing bubble?

My wife received a book on Christmas morning ahead of a big day of festivities with our family. It was over 500 pages thick, and its title wasn’t bound to stimulate positivity! That title was: 1929: THE INSIDE STORY OF THE GREATEST CRASH IN HISTORY!

Author Andrew Ross Sorkin also wrote Too Big To Fail that captured the drama behind the GFC and what was done to avoid a 1930s-style Great Depression.

Sorkin is also co-host on CNBC’s Squawk Box, a New York Times writer and co-creator of the TV show Billions.

He’s an impressive guy!

History will record that Maureen couldn’t put this heavy book down as she learnt about the big business stars of the Roaring 20s in the US and how they contributed to the biggest crash and worst economic depression of all time.

Her excitement was such that I indirectly read the book as she read aloud countless exposes for my benefit about some of the astounding practices that sowed the seeds of the market crash on 29 October 1929.

These intermittent readings were a bonding experience of a money kind, which of course was something I could relate to!

The book is timely as Artificial Intelligence has become the potential problem that could trigger a market crash as the US stock market has surged on the huge investment and speculation around what AI will deliver in terms of productivity and profits. Ultimately, if AI is the magic pudding that Wall Street sees it as, then a market crash could be averted or at least delayed.

And as a financial advisor and market commentator whose job is to be a market messenger, the question around the promise of AI is critically important for a number of reasons.

First, I want to keep delivering good returns for my clients’ portfolios. Second, I don’t want to go too defensive too early and perhaps miss out on another good year for market returns. Third, I want to be relatively cashed up when the AI is found to be a bubble, and it bursts.

However, be clear on this: I don’t know if AI is a bubble. While I can’t rule it out, I’m not going to be a doubter just because I can’t be confident about its potential. What I’m seeing is some of the smartest people on the planet throwing billions, no trillions, of dollars at what AI is bound to do. So, this is a work in progress, where reporting seasons will be important for telling us about how this new technology is delivering.

Overnight, one of the titans of tech and AI i.e., Taiwan Semiconductor announced another record quarter result and informed the market it would pump up spending on AI-related capital outlays by as much as US$56 billion! As CNBC reporters put it: “Signalling confidence in the artificial intelligence buildout from the world’s largest contract chipmaker.”

This reaction to CNBC from Kim Forrest, investment chief at Bokeh Capital Partners sums up the current feeling about AI: “Taiwan Semi’s results today, and more importantly, their capex spending plans, point to reassuring investors that the AI trade is not necessarily a bubble at this point. “They’re going to spend money, lots of money, to build out capacity.”

Provided over the next month or so with reporting season in the US, we see other big AI players being consistent with their messaging on AI and related spending, then bubble fears will dissipate. Clearly, if the opposite happens, then a market slide would be inevitable.

Are we talking a crash?

Not sure on that one. While the GFC brought a 50% crash in stocks, behind that was a problem with an investment product called collateral debt obligations (CDOs) that the debt ratings agencies inaccurately assessed. Shock revelations lead to big crashes and investors rushing for the exits at the same time.

The AI boom and the levels of debt that governments, businesses and individuals hold could sow the seeds for a big market slump in the future. However, I do think governments and central banks are miles better at managing the economic fallouts of market madness. However, that doesn’t mean that bankruptcies, job losses and people losing their homes won’t happen some time down the track.

Adding more drama to my job is the US President who right now has problems with Iran, Russia, China, Venezuela, US banks credit card interest rates, Israel, Palestine and let’s not forget Greenland and his central bank boss, Jerome Powell!

On whether a market crash would KO us into a Great Depression, the AFR carries a story today on the AI bubble and an expected market fallout by John Plender of The Financial Times.

While I reckon his story was stimulated by Sorkin’s 1929 book, this is what he concluded on whether an AI bubble bursting would lead to a Great Depression: “So yes, there could be a 1929-style crash. But once again, as after the dotcom burst and the 2007-09 financial crisis, the central bankers will be putting a safety net under markets. And the US will continue to act as the ever constant borrower of first and last resort in the global economy. So, this rerun of the Roaring Twenties will not be followed by a Great Depression.”

I agree. While I’m betting 2026 will be OK for stock players, in 2027 there could be good reason to go very defensive to protect the good profits we have pocketed over the past three to four years. Remember, while the average US bull market lasts 4.3 years, the longest was 12 years. And in recent times they’ve lasted longer than in the past.

How old is the current bull market? I started on 12 October 2022 so it’s only three and a bit year’s old. That was a revelation that hosed down my financial fears.

That said, when I get scared about an AI bubble or a Trump curve ball, you’ll be the first to know. And after reading Sorkin’s book, I bet my wife will be looking for parallels between then and now! I did hear her put in a request for Pulitzer Prize-winning author Liaquat Ahamed’s Lords of Finance, so watch this space!