The Business and Finance headlines in The Wall Street Journal were peppered with bad news for investors the past week including:
Small-Cap Stocks Hit Hard Amid Surge In Bond Yields
Scrapped IPO Points To Limits Of AI Frenzy
Markets Hit By Tech Selloff
The top story informed us:
"As bond yields march higher, small companies are taking the brunt of the damage. The Russell 2000 Index which tracks shares of smaller companies, fell for a fifth straight week, its longest weekly losing streak since May, 2022. The index was down by 0.9% this week and 5,7% during a five week span. Investors are worried that surging Treasury yields will hit small companies where it hurts."
The news from the middle story wasn't much better:
"The AI boom has sent global stock markets soaring this year, with the S&P 500 and Nasdaq both hitting records earlier this month. However, investor enthusiasm for AI's ability to deliver productivity gains has run up against challenges such as the popularity of cheaper AI systems made in China, safety fears after some agents went rogue and a growing backlash to data center construction across the U.S. and elsewhere."
Then there is the parlous information in the last WSJ piece:
"The swoon in stocks the past week highlighted the close linkages between the economy, markets and a relatively small group of technology highfliers. We know there are about 45 S&P 500 companies deemed as having material exposure to artificial intelligence. Together, those companies have made up about 39% if the PHLX semiconductor index's 14.1% return through Oct. 11 according to S&P Dow Jones indices."
These results have Ben Inker, co-head of asset allocation at Boston based money manager GMO, worried. By analogy he points to previous manias which didn't end well such as the railroad boom, and the dot.com boom and bust. According to Inker, AI is no different from those frenzies. In his quote in the same WSJ article:
"If AI spending does not continue to grow, that gets tough for aggregate demand."
Recall, Aggregate demand (AD) is the total spending on final goods and services in an economy at a given overall price level and over a specific time period. It can be simplified to a basic formula:
AD = C + I + G + (X - M)
Where:
- C
(Consumption): Spending by households on goods and services
(e.g., food, rent, healthcare).
- I
(Investment): Business spending on capital goods (e.g.,
machinery, factories, technology upgrades).
- G
(Government Spending): Purchases of goods and services by
local, state, or national governments (e.g., roads, schools).
- X -
M (Net Exports): Total exports (X) minus total imports (M)
Aggregate demand not continuing to grow then, means decreases in all of the above elements, and likely C and I taking the biggest hits. The graphs of performance of shares over the last week may be a harbinger of what is headed our way. As the article further notes:
"Warning signs started to flash in the trading of bonds tied to data center companies this week, many of which fell sharply. The losses started with the riskiest and most indebted companies, like Coreweave (a cloud computing company). But by Friday were showing up in data center bonds with investment-grade ratings.
The fears this week trickled through far reaching corners of the market. Riskier and more heavily indebted companies like the cloud computing upstart Coreweave took the brunt of the blow - shares falling 12% on Friday and 25% for the week. But the selloff swept through the tech sector, hitting everyone from giant hyperscalers Amazon.com and Alphabet, to high flying chip tocks (like Micron)."
So it appears the writing truly is on the wall for a bubble bursting as Bob Inker has indicated. Certainly, if bond yields continue their upward turn and AI company indebtedness increases more than receipts for products - it will be a highly negative omen.
See also:
Brane Space: A.I.-Bubble Angst Spills Into Bond Market - What It Means
And:
A Brief History Of Bear Markets For (Primarily) Younger Investors
And:
A Sobering Comment From Andrew Ross Sorkin On 60 Minutes: "A Crash Is Coming": What's Behind It?
And:
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