Stock markets have been looking decidedly choppy of late with price volatility increasing from day to day, especially where artificial intelligence-related stocks, and technology stocks in general, are concerned.
There have been similar episodes in the past so why should we think this one is any different?
One reason is that tech entrepreneurs are rushing to raise huge amounts of new capital while they perceive the going to still be relatively good. Another is the growing realisation that the AI stock market boom is running on empty and that it is being financed largely on credit.
The latest manifestation of this rush to “monetise” AI mania is the fact that OpenAI, the creator of ChatGPT, has reportedly filed confidentially to go public in a blockbuster listing that is likely to value the firm at more than US$1 trillion as it races rival Anthropic to Wall Street.
Social media giant Meta, meanwhile, is considering raising megabucks in a stock offering to fund owner Mark Zuckerberg’s vast ambitions in AI following the launch of Google’s parent Alphabet’s record $85 billion share deal.
Overshadowing even these giant deals is Elon Musk’s SpaceX’s pitch to achieve a $1.78 trillion market valuation in its initial public offering.
Voice of reason
Mohamed El-Erian, former chief executive officer and president of bond giant Pimco is one of the relatively few people to have diagnosed market madness in aspects of the AI mania.
“Markets are flying high because a broad-based willingness to keep spending has been matched by an ability to keep doing so. But as more economic participants exhaust their means and rely on debt, a painful moment of truth will arrive,” he wrote in a comment published by Project Syndicate.
By the start of June, as El-Erian noted, the S&P 500 stock index had recorded nine consecutive weeks of gains. He also pointed out that major indices across the US and Asia have not just shrugged off the ongoing geopolitical turmoil, they have climbed to one new record after another.
He suggested that this remarkable decoupling reflects a singular, powerful narrative that is more than compensating for the strengthening headwinds facing the global economy: the promise of AI.
“The market is understandably enthralled by visions of a looming productivity miracle, betting that the efficiencies and growth unlocked by AI will be sufficient to outpace the gathering forces of stagflation, debt, deficits, and economic inequality.”
But he added that “it is essential to supplement the AI-driven narrative with a simple yet essential reminder: the willingness to spend and the ability to spend are two different things. This critical distinction applies universally across households, corporations, governments, and investors”.
“So far, all key actors’ remarkably resilient willingness to spend has been matched by a sufficient, though increasingly engineered, ability to do so. But this willingness has not been funded just by current income or organic cash flow. It has also been facilitated by a massive drawdown of buffers — financial, strategic, and psychological — and an accelerating reliance on leverage (debt).”
