Every silver lining has a cloud, if you’ll pardon the pun. And so the unexpected Democrat “blue tsunami” that swept the US midterms has apparently exacerbated the big tech sell-off that has been quietly rumbling for some time, albeit until now not attracting many headlines outside the financial pages.
Trillions of dollars have been wiped off the stock value of major tech firms overnight in the US, Europe and Asia amid concerns of a slowdown in AI development.
There are fears that a Democrat-controlled Congress and newly installed blue governors in states such as Texas will pass laws, impose regulations and generally stymie the previously uninhibited growth in returns from already bloated AI investment.
If lawmakers won’t let the likes of OpenAI, X and Anthropic regulate themselves, and if state legislators won’t permit data centres to be built where residents don’t want them, then the industry will grow more slowly and generate lower profits. Therefore there’s less point in putting investors’ cash into them.
Hence what is now a general “correction” – a broad loss of about 10 per cent of value – rather than a crash. There’s still enough faith in the future of AI for it to attract investors who don’t want to be left with outdated portfolios – a useful “Fomo” effect. But there is also sufficient nerves, ignorance and lack of transparency around these new tech giants, AI itself, chipmakers and hardware firms, that valuations and share prices will be volatile.
We’ve seen such gyrations before, notably in the internet dot-com boom and crash around 2000, but also in previous over-excited booms such as railway mania of the 19th century. The good news is that although some investors are ruined, such over-exuberance leaves behind a socially useful legacy and some sound companies. This time, the scale of the money involved is unprecedented, so, as with the mooted flotation of Anthropic, a scaling back from $2 trillion to $1.5 trillion has an oversized impact. The same goes for ChatGPT, which has reduced a routine round of private fundraising from $30bn to $20bn. Another factor is the way highly leveraged hedge funds have piled in, drawing on private equity – and have all been placing their bets in the same direction.
They’ve also been running into trouble. There is also a significant Chinese sector, which, ironically, has many more publicly quoted AI companies than the US, based on an open access model. In New York, the only real examples are Alphabet, which owns Google and much else, plus Elon Musk’s SpaceX. Some disappointing numbers from Google the other day triggered a substantial fall in the share price, an early harbinger of the current turmoil. In any case, the average punter can get immediate exposure to the AI boom much more easily in China, which has its downsides when things get rocky. Out in Hong Kong, the Hang Seng Tech index, comprising 30 major technology companies, is down 30 per cent year to date.
Boom and bust then, which is normal for capitalism. But central banks and governments, at least in most of the West, will now find it extremely difficult to insulate their wider economies from a crash. This is something that Andrew Bailey, governor of the Bank of England, has been warning about, rightly, for some time. The problem now is that the levels of public debt and interest rates make it harder for the authorities to intervene to prevent a sectoral collapse from transmuting into a global recession. We were able to launch a massive international rescue campaign when the banks failed during the global financial crisis in 2008 and after.
The crash of 1987 was swiftly ameliorated by the Fed – the “Greenspan Put”, which has reassured market players in succeeding decades. Much the same goes for the aftershocks in the eurozone crises around 2011, bailed out by German public money, and we even managed to stop Covid from turning into a Great Recession by mortgaging our economies, borrowing a year’s worth of GDP. This time around, because we have less room for manoeuvre, it’s harder to see how the wider world economy can be cushioned from a tech sell-off that could easily turn into a panic, wiping billions off the value of people’s pensions, among other terrible consequences, as Donald Trump has rather gleefully pointed out. China and America won’t cooperate for geopolitical reasons, and Europe is irrelevant. So we find ourselves in the strange position that AI will ruin us before it makes us all rich, and we mere humans can’t understand why.
