It’s hard to keep up with developments today:
- Two major wars are underway in Europe and the Arabian Gulf
- The IEA warns they have already created “the largest energy supply disruption in history“
- And now, it seems financial markets are waking up to the major risks created by the AI bubble
As the Bloomberg chart shows, the momentum behind the recent ‘Magnificent 7’ rally has matched the earlier ‘FANGS’ rally:
“Since the Global Financial Crisis, there have been two long momentum waves. The first, from 2017 to the pandemic, centered on the “FAANGs” (Facebook, Amazon, Apple, Netflix and Google), companies who dominated their corners of the internet and had become licenses to print money.
“After Covid, the 2022 launch of ChatGPT set off the Magnificent Seven hyperscalers — Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla… Broadcom and Oracle are sometimes added. The new story is that AI will conquer the world, and established tech giants can use their scale to dominate it.”
But today, investors are starting to worry about the $2.6tn of spending now being committed for AI rollout – in the belief that:
“A few great companies with bottomless pockets would spend whatever it took to dominate the thrilling new technology”.
MARKETS GO UP VIA THE STAIRS AND DOWN BY THE ELEVATOR
The Korean stock market has been flying this year due to investor excitement over the AI memory chip boom, as the Wall Street Journal chart shows.
But then some investors got cold feet. Essentially the market was betting on 2 companies – SK Hynix and Samsung Electronics.
As always, the rally took time to develop – essentially ‘going up by the stairs’. But then it came ‘crashing down via the elevator’:
- Many people had borrowed heavily to trade on “margin”
- And then the market turned. As Reuters reports, Goldman Sachs estimated:
- “Around one in 30 adults in the country, or 3.4% of the adult population, have received margin calls”.
Of course, the market rebounded on Friday. But the damage had been done.
Goldman estimated 320k-360k accounts were liquidated in the crash. And those investors won’t be coming back in a hurry.
MIDEAST OIL EXPORTS FAIL TO RECOVER
At the same time, oil exports are continuing to reduce as the Reuters chart shows for the Middle East:
“Combined exports from the Gulf and Saudi Arabia’s west coast slipped this week to around 6.2mbd. That’s less than half the wartime peak of 13.4mbd hit in late June and far below the more than 20mbd that typically left the region before the conflict.”
The reason is that another “pause” in the Gulf War between the USA/Israel and Iran has come and gone.
But this time, Iran’s new attack prompted the most extraordinary comment from President Trump, live on Fox News:
“We’re going to beat the f*cking sh*t out of them”.
Swearing, as our parents taught us, betrays weakness rather than strength. Clearly the White House is worried.
25% OF THE WORLD’S OIL SUPPLIES ARE NOW AT RISK
It is easy to understand their worries. The chart from the Wall Street Journal highlights the energy market issue:
“The closing of the chokepoints at Hormuz, Bab al-Mandeb and the Black Sea collectively imperils roughly a quarter of the world’s oil supply”.
Plus China has banned fuel exports to preserve supplies for its domestic market.
The White House worries are based on the fact that the mid-term elections are now less than 100 days away:
- Normally the governing party would expect to lose seats
- Today’s rising energy prices, plus AI-related stock market volatility, might well increase the losses
The next few weeks may therefore see political worries start to increase, alongside energy and financial market concerns.