Winners & losers of AI slowdown

00:00:00: AI leaders calls to slow frontier model development triggered a sharp rotation across technology, punishing chip makers while lifting big technology and software stocks yesterday.

00:00:12: And well the implications go well beyond markets.

00:00:14: obviously slower AI development could mean weaker investments and weaker economic growth at time when energy shocks inflation geopolitical tensions and rising borrowing costs are already biting.

00:00:28: So welcome to Swisscoats.

00:00:30: daily market talk is Tuesday, the fifteenth of September.

00:00:34: I'm Ipeko Skardishkeya.

00:00:36: today we will discuss good bad and ugly related to latest AI news.

00:00:42: but before you do as always please keep in mind that opinions are my own.

00:00:54: So

00:00:57: the week started with a positive pressure on energy prices.

00:01:00: The US ten-year yield surpassing five percent psychological mark and very, very uncomfortable questions regarding AI.

00:01:08: And this time it was not about circular deals but financing capabilities of these startups.

00:01:13: Investors greed, earnings impact on different sectors and businesses The parabolic rise that we saw in some stock prices PE ratios.

00:01:22: It was about the existential question of whether AI developments should happen at this current speed.

00:01:29: For investors of AI enablers, faster progress can be monetized and better for their investment returns right?

00:01:36: So the news were not necessarily brilliant for everybody!

00:01:40: AI companies like OpenAI and Anthropi received a lot but a lot funding from investors But also from companies around the world.

00:01:49: In return they made Huge.

00:01:52: They made very big commitments to Lee's data centers, which then make commitment to build these data centers by chips energy and other raw materials from providers in some of the AI enablers than invested back in AI model providers themselves looking at you and video and likes so that this wordly financing issues would not prevent them growing, growing faster and from needing more compute capacity.

00:02:20: More chips, more energy and more raw materials lost.

00:02:24: it appears at risk that AI poses to humanity seems to be worrying AI leaders more than how fast they could turn their investments into revenue.

00:02:32: And no matter the ethics behind that thinking That's a big problem for Some investors, not for the others but for some investors yes.

00:02:40: So the market reaction was a swift sell-off in AI winners and yesterday's trading session.

00:02:45: Philadelphia's SMI Conductor Index tanked nearly six percent in just one session while those who were sitting on other side of table did quite well actually because likes of Google and Meta rallied all the news as it slowed down in frontier model developments.

00:03:02: where then justify slower K-PAK spending.

00:03:06: As a thing that investors would love to hear now, that most free cash flow is gone!

00:03:11: And slower pace of travel will also give these companies time to monetize what they have already.

00:03:17: Then there are the software stocks.

00:03:19: These companies couldn't be happier.

00:03:21: on shares expanded technology, Software Sector ETF jumped five percent yesterday for the most obvious reasons.

00:03:28: Whether this is just a blip or will develop into a brother market theme, it's to be seen, cost slightly down at the time I'm talking here but SoftBank has already rebounded nearly eight percent!

00:03:40: Zooming out on a macroeconomic level, AI adoption won't necessarily decelerate with slower progress of frontier models.

00:03:52: Existing AI capabilities have been enough across global economies.

00:03:58: And this AI adoption will continue as companies and economy seek help from technology to increase productivity, decrease

00:04:07: costs.".

00:04:09: China seems to agree with the idea that ARs should be taken seriously although we all know that China would better keep its own speed of development complicated geopolitical context.

00:04:24: And I like what Wall Street Journal wrote about Demeter, they said China also thinks AI could kill us but first it wants to match the US.

00:04:33: Now whether its good or bad news is to be seen The Bad News really however Is that slower model developments will undoubtedly slow AI investment and It'll slow the AI investments at a time where Western world needs AI led growth.

00:04:48: To keep their heads above water adds to trade tensions, wars disrupt the trade rose spiking energy prices and rising inflationary pressures everywhere across the western world.

00:05:00: And the rising borrowing costs as a result of it could only be neutralized by something very powerful like AI.

00:05:08: So if the ai dream slows down It will provide negative backdrop for cyclical sectors particularly industrial and consumer discretionary.

00:05:16: So that's from a macroeconomic perspective.

00:05:18: If you look at the picture, from a central banker perspective, how slow economic growth should have cooling effect on inflation and hands-on monetary policy outlook?

00:05:27: But today demand let pull back in inflation would perhaps be insufficient unfortunately to reverse broader inflationary pressures that are stemming from external energy supply shock rather than from excess demand.

00:05:42: And AI productivity gains are supposed to be disinflationary.

00:05:45: That's a view that Kevin Walsh has been defending.

00:05:48: I still think they will be disinflationary, whatever happens in the pace of development.

00:06:05: know what it will be really.

00:06:07: Yes, activity on Fed funds futures assesses a great chance more than ninety percent for the twenty-five basis point hike this week.

00:06:15: but that's what investors are positioned for!

00:06:17: It is not what the Fed said it would do because Fed under the new chair Kevin Walsh just stopped guiding the markets toward a policy decision.

00:06:28: forward guidance from the Federal Reserve and left investors guessing about what the Fed's next move will be.

00:06:34: As such, these implied probabilities that we are looking at from activity on Fed funds futures now reflects.

00:06:40: What would investors do?

00:06:42: What would you do?

00:06:43: how Would YOU react to data and to broader economic and geopolitical factors if you were in Fed officials shoes?

00:06:51: How are you positioned regarding that knowing that You won't be in the room, you won't vote for the right decisions.

00:06:57: Fed officials will and decision could be different than what you expect.

00:07:01: That is a risk to keep in mind at this and next FOMC meetings.

00:07:06: Now I don't think Kevin Warsh is crazy or bold enough against market expectations And we'll get that twenty-five basis going high This Wednesday, because if the Fed maintain its rates unchanged we would see US dollar tank across board and yields spike further on exploding inflation bets.

00:07:25: And no one wants that.

00:07:31: even White House doesn't want it!

00:07:32: So it's better to deliver a twenty-five basis point hike this week AND avoid trouble across bond markets especially and explain to Big Boss that adding a market sell off into the mix today wouldn't be politically or chemically, anything great when energy prices have been this high and bargain costs are biting heart.

00:07:53: And you know what?

00:07:54: According to a recent Bloomberg survey, the Federal Reserve rate heights are not even the biggest worries for bond investors!

00:08:01: Only seven percent of respondents said that higher federated expectations were the bigger threat to treasuries over the next six months.

00:08:09: The biggest threats they said is accelerating inflation!

00:08:13: Forty per cent of the respondents say that followed by rising term premium due fiscal concerns with thirty eight percent people concerned about And some sixteen percent also pointed at the massive amounts of hyperscale debt issuance that comes to compete with government bonds.

00:08:30: Yes, we are clearly heading toward a point where Google's debt looks less risky than US governments and it is not just my gut feeling!

00:08:38: In fact, Alphabet & U.S.

00:08:39: Government now carry the same AA plus rating as S&P.

00:08:44: Modi still raised Uncle Sam one notch higher but higher.

00:08:49: So we are getting remarkably close to a world where lending to Google and lending today, US governments sit in almost the same credit.

00:08:57: they bet it.

00:08:58: obviously google cannot print money.

00:09:00: u.s government can but if they print too much money then the U.S dollar And the us treasures will be worthless.

00:09:07: so what do you buy?

00:09:08: In this environment or probably less of what depends on cheap money an aggressive growth assumptions what generates cash today.

00:09:16: And as context, energy and mining companies remain interesting in a world of expensive commodities and persistent inflation then broadly companies with strong balance sheets companies with low leverage and companies with solid free cash flow should be better positioned to weather high end borrowing costs in the coming months and years... ...and if the AI story becomes less about building the next gigantic model exists while the next opportunity may increasingly lie with users of AI rather than its builders.

00:09:51: And in this context... Big technology could come back to the frame if K-Pak slow and rising revenues help these companies rebuild their cash reserves.

00:10:00: So this is all for today, I'm Ipek Oskar Deshkaya And thank you for joining me!

00:10:04: Thank you for your beautiful and supportive comments.

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