Tail risks and market concentration

skin A new divide is opening up in stock markets between tech stocks and, well, other tech stocks. Investors still just cannot get enough of the whole AI thing. in the ecosystem of semiconductors or chips to their friends are still ripping higher, absolutely killing it. But Software stocks have been getting clubbered What does that tell you is that AI will kill at least a large part of the industry that forged it in the first place There's gratitude for you. Today on the show, Chips and Dips. We unpack these divergent fortunes and ask, are chips in a bubble or a supercyycle This is Unhedged, your friendly Markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at FT Towers in London where it is aggressively hot Joining me all the way from over there in New York City,'s Rob Armstrong, my partner in crime on the unhedged newsletter with his fancy new glasses. Rob, how's it going? You know whereere ellson T Katie is in the T audio studio in New York I want all our listeners to imagine a large middle aged man. slowly turning into a puddle in here A large middle aged man in quite a small box actually, like you could probably reach Yeah, just about touch the walls, notot quite, but just about and today I'm a little sweaty Okay, that was a thought for all of us So look what's going on here? L ye Chips are absolutely off to the races, right? Yeah, so we all know that there is a mad rush in the United States to build as many data centers as possible as quickly as possible so that we can run AI models on them and do all sorts of wonderful efficient things with those AI models The bottleneck or one of several bottlenecks to building all those data centers, is having enough chips to support them And it's like every kind of chip you need. It's not just Nvidia's fancy GPU's. which are the kind of main central brain training and using an AI It's also old fashioned CPUs. It is very much memory chips. It's networking chips It's, you know, it's it's a whole range And so all my favorite types of chips. Yeah exactly. tortilla chips, corn chips. potato chips through the roof And so like there's been wild stuff like, you know, microns which makes memory chips just to pick one example out of a hat. is up almost a thousand percent this year. Shut up Asolutely because they just can't They cannot make No, it's not almost a thousand, but it's in the eight hundreds and they can't make this stuff fast enough. So this is like the one that's become a trillion dollar company kind of It has a trillion dollar company And this raises A lot of interesting questions for the following reason which is that In one very important respect, U Puter chips are like cows So follow me here for a second the hard thing about the beef industry, the cattle industry is that production follows prices And production leads inevitably to gluts and then to lower prices. So the price of beef goes up. Everybody's like, Holy crow, let's make more cows And so you make loads of cows. And that process of making more cows, which involves you know getting cows together akes several years My cow and daddy cow love and by the time, by the time you have more Cows ready to be turned into hamburger Priceices changed Right? And it's similarly W in the chip industry, it is cyclical in exactly the same way Prices rise. peoplee are like, oh, let's add capacity. Let's make as many chips as we can, quickly, quickly. This is actually a process that takes a long time And then by the time all that All those chips are made, the prices have fallen. you have a huge gut.' have a huge gut. That would be the. Well, you might do if you eat all the hamburgers here. That's true. good point. You have a huge gut you know, it's like the classic cyclical industry where if you look at price charts or revenue charts or whatever, profitability, it's like the sine wave that rolls through. And so the question Conronting us is Are we merely at the top of a chip cycle? An especially big chip cycle and we're headed for a glut Or has the world economy changed in a permanent way such that demand Yeah is permanently higher and the whole industry is going to rerate for good and things are different now. This time is different folks. Look, it's possible. and it's not just micron, is it? There's all sorts of different stocks in this sector that have gone absolutely garar. So the way that we tend to measure this in markets is the Philadelphia semiconductor index, the Philly index to its friends You wrote about this today, didn't you? It's up what percent over the past? one hundred sixty percent in the last twelve months, if I have my numbers correct here And um I mean An interesting fact about this, and we talk about on this show a lot. What's driving that index, which is basically an index of all the big semiconductor manufacturers, the companies that make equipment that makes semiconductors, which are also all those equipment stocks are going bananas. It's like a kind of big industry bucket is driving that index higher is earnings The valuation of the Philly index, known affectionately as the socks has not gone up. Earnings are growing so fast That is what is pushing this up. It's not excitement and exuberance saying, oh, let's pay more for these stocks now. It's just like we're struggling to keep up. with the enormous amount of money that is flowing into this industry. Of course, there are stocks that have become very expensive, but there's a lot of others that have not Micron You know, it's just the it's PE its price to earnings ratio hasn't changed. It's just earning just a lot more money This isn't just a vibes thing. That's what is really important about this. L sometimes when stocks go absolutely stratospheric it's because something stupid is going on. like the whole game stop thing or like sort of meme stock thing, a bunch of retail traders on Reddit ganged up and decided to buy some stupid stock for some stupid reason. This is not that. This is real companies making so much money they don't know what to do with it. and they've got a huge backl of backlog of orders that they're struggling to stay on top of and there's a whole bunch of these companies that are just doing unbelievably well Yeah. So we can to wait, wait let me just ref I think you've made an excellent point and I'll just reframe it like this We know that The stocks aren't in a bubble. But industry might be In other words, it might be revenues or earnings are in a bubble. So so like it may be that like the revenues and the earnings back up the stocks. But is the revenue and the earnings sustainable alsoso, chips are unlike cows in several important respects. and one of them is you order a chip Vversion one point zero, right? At the time, it is the world's fanciest chip and you say, I'm going to have a bunch of these chips and you order them. And then they take ages to arrive because everyone else is ordering the same chips And so by the time they arrive, the world has moved on to chip four point zero But you've ordered Chip one point zero.. So they just they don't have the same sort of You know, cows pretty standard, big ones, small ones, you know, you kind of get where you get with cows, but chips are really different over time. I think there's a lot of variety in cows and I don't know if you've seen cow four point zero Katie, but it's an awesome cow I grew up on a beef farm and I've seen a lot of cows. Yeah, I'm sure you have.ike I say big ones, big ones, small ones, different colors. but I feel like we're going down a rabbit hole here that we don't need to go down. No, it's actually a cow hole, technically speaking. But seriously a serious point if I might venture is that there in addition to the point you just made about the generations of chips meaneaning they obsoleess and you want newer, fancier faster ones. There is also a very live debate in the industry and among like people who are skeptical about how long chips will last in data centers, especially GPU's Like if you run these things hot, meaning you're running your data center twenty four hours a day, how long does a high end NVidia GPU last before it turns into a burnt piece of toast How many cat videos can it make before it dies before it dies There is real demand for this stuff. Oh yeah, yeah yeah. mayaybe it's cat videos and maybe it's businesses, maybe it's the Pentagon. I don't know Growing, demand for this stuff is growing And so I'm disinclined to wave this away as just another cycle or just another cycle for the AI industry. I am inclined to believe that something has changed here and that that is going to change the way this industry works But you know, I don't have a crystal ball. I don't know the future of the AI industry, but no it seems like it has legs right now to me. I want to get on to one of our favorite things, which is d shots on the radio. So you've got chip stocks that are just going absolutely bananas like up to the moon. thing that that is happening largely at the expense of is software stocks which So we saw a real outbreak of this in was it February when suddenly everyone got worried about AI eating software? You don't need coders and you don't need code, right? These fancy AI chips can just like enable AI machines to just do it themselves U So this is what's happening now, right? You've got this real bifurcation between chip stocks up to the moon, software stocks getting hammered. What's going on there Well, the idea, especially with business software is that the help of AI, every business will be able to build their own internal software for themselves and it will be perfectly functional and actually superior to the stuff that comes out of the box from like a salesfce or an SAP or somebody like this. And so those companies that sell software as a service, which were, you know, five years ago, everybody's favorite stocks, they have gotten absolutely whacked. I should say that not everybody agrees this is true. the idea that you're just going to whip up your own You're going to throw out your SAP implementation and whip up your own inventory management software U you know, just like in an afternoon with a couple of interns does seem a bit far fetched and there's a lot more to software than just coding This worry has gripped markets and it continues to grip markets. So it's chips up software down And we should note that this has made the market even narrower than it has been up until this point. So I did a little little bit of mathematics on the back of the envelope yesterday. Did you get AI help here I did not. I do I did it manually. I used an abacus and a blunt pencil I on a slate But in the last month chip stocks and memory stocks make up about half of the gains on the S and P five hundred. Yeah So And so you know, it used to be that it was a kind of a tech market. Now it's that within tech, it's a certain sector that is empowering things. and I should note there was an excellent article in this week's economist about how the narrowness that we see in the American stock market is not the end of it for certain economies U Japan, South Korea, Taiwan. Yeah. the semiconductor value chain is the part of the economy that's growing And the rest of their industrial economies are like suffering a terrible China shock And so if the semiconductor industry globally does a wiley coyote and goes flying over the cliff while it's still running You're not just going to have a problem in the U.S stock market. You're going to have recessions in some pretty big important economies There are other tensions at the heart of this AI trade and this whole AI buildout and this super cycle, if it is that. There's a whole bunch of these tensions. One of them is that In order to keep pulling in money, AI companies need to do a couple of things. They need to be able to say to ordinary companies, we can make you really efficient and you don't need humans anymore, and you're going to be incredibly productive and amazing also need to say we're going to charge a fortune for this stuff, right? We reckon ordinary people and companies are all going to pay loads of money to use this AI stuff But then they turned around to the general public who were like Wait, so you're saying first of all that I'm out of a job and second of all, I'm going to have to pay loads of money for this technology How does How does that make sense? You know, we are seeing gattered in different parts of the world The start of a real backlash to AI. There's lots of parts of the states, for example, where these permits for huge data centers have been given. and the people who live in these places are like, No, I don't want a data center the size of Manhattan to be built next to my house. Thankks very.. And we're seeing like all these commencement speeches at U.S universities where you know people are giving them giving speeches about how marvelous AI is. and the students are booing them off stage. And you know there just seems to be a kind of social and political potential backlash to this stuff that really conflicts with the stock market narrative See, what was the name of there was this paper that somebody wrote that started this freak out about AI The Catrini report The Citrini report now The Sitrini report was a very, very bad piece of economics for the following reasons. He envisioned a future in which there was a massive amount of production thanks to super powerful AI making loads and loads and loads of stuff and a future in which everyone was fired In a future where everyone is fired or a lot of people are There can be no there won't be a lot of consumption because people won't have any money. right? And Does it make sense to posit a future where there's loads and loads of production without loads and loads of consumption because consumption and production have to match, right? You know what I mean? You know, the people who are not worried about the AI future say simply this. The workers, it's not a lump of labor, the workers who are liberated in quotation marks from their terrible drudgery jobs, making podcasts or whatever it is go on to do something else. They're freed up to find some new creative thing to do. The economy changes And we all adjust. And this, by the way, is what has happened in the past with revolutionary new technologies Internet personal computer, telephone car Fine. The question I would say about this is the sequencing Like when does when do the firings happen or the disappearance we let's call it the disappearance of certain jobs. And when do the new jobs and the new forms of income appear Because if those come in the wrong order It's gonna be. An unpleasant decade for some of us.. You know what I mean? Like we don't know how to do anything else, for example. No, that's a problem. We barely know how to do this, let's face it. But there's also a big question about how do we as societies distribute the wealth that comes from AI? So it was a really interesting story in the FT this week from South Korea Samsung electronics. Over there, workers have approved a landmark profit sharing agreement that's expected to award employees in the booming memory chip division an average bonus of nearly fourour hundred thousand dollars each and it's a way to share the spoils of this AI bananza. Now I imagine in Silicon Valley this is getting a flat. I don't think so, boys and girls. But in other parts of the world, this is a live debate. Why should all the benefits of AI accrue to some hideous billionaires, and why shouldn't they be spread more fairly around Because in society, I don't have the answer, but I know it's a good question. Yeah, it sure is. you know, there is if nothing else people running these companies, the open AIs and the everyone else They better think more carefully about their messaging than they have so far Boy are they falling over their feet right now? and they are not making themselves pular and they've got to rethink how they're approaching this whole situation. Yeah. We're great because we're going to fire people as not is not politically very palatable This is not a winning corporate message Congratulations, you're fired. Yes. courourtesy of Anthropy. Yeah, be happy about it. Really quickly on that. Another thing Anthropic has been doing is it's created this advanced AI model called Mythos that it was going to release out to the general public and then they realized that this thing was just too powerful. Now arere they tooting their own horn? I don't know. But the idea is that this AI machine potentially so powerful that it can haack all the banks and bring down the energy systems and you know it could do in theory pretty much anything. So instead of releasing it to general release being tested out by a few private sector companies, which I'm not sure I'm hugely a fan of, but Nonetheless It's not a silly question to ask is supercharged AI going to cause a mass cyber security event? Is it going to cause a mass hacking? Is it going to cause financial crisis, this is something that should be not necessarily something you worry about every day, but it should definitely be on your radar screen somewhere. I think the kind of tail risks around this whole economy need serious thought. And one you just mentioned takes all digital security and throws it out the window and that also has to rebuild be rebuilt our colleague Hack Young wrote. piece yesterday for the newsletter about how the whole supply chain underlylying this digital revolution veryer concentrated very interrelated, very geographically concentrated, dominated by monopolies or duopolies. And you know, one or two links in this thing Break. And we're going to have a serious economic problem to say nothing of what will happen to markets So there is, I think you're right to point this out. it's There's just a great concentration of low probability, high damage risks Yeah that a very concentrated economy brings along with it. Yeah, Speaking of which, there was an executive order waiting on Donald Trump's desk to sign limiting some of the power of AI and asking it to various companies in that space to submit themselves to checks on on, you know, on the security around them Anway, Donald Trump decided not to sign it because he quotes did not like it, so that's that sorted. All right So so good. Shuffle my paper, wait for the sky to fall in. In the meantime, we're going to be back in just one second with Longshore. Let Oak, it is time for long, short that part of the show where we go long a thing we love or short a thing we hate. Rob, what are you saying? I'm sureort world peace and in particular peace in the Middle East. You know, I don't know anything more. about the situation there than any other reader of the FT does. But you read the coverage And Iran and the U. S just are miles apart and not getting any closer I just I just sted them round in circles on this deep Yeah round and round in circles. So growing cynical about the prospects for this process. You were growing cyicalt hear from listeners what they think, but you know I think the market is too optimistic. Yeah. I am long Johnny Ives' new Ferrari model. Have you seen this? You're long at Everybody else is short at. Well, do you know what I like about it? first of all It's just a car. I mean, like it's fine. People are like up in arms about how hideous it is and I think It's just a car. I'm not going to buy it It's like five hundred grand or something. but also very, very fast. It goes fast, it's a car. I'm long it because I think some of the online trolling has been extremely amusing and because I think it looks fine five hundred grs worth of fine I'mnd my next five hundred grand, I'm going to buy you one of those. You're going great. Beautiful. I very much look forward to that. Okay, so listeners, veryy good news that Rob's going to buy me a car. We are gonna be back in your ears on Tuesday. so listen up then. Unhedged is produced by Jake Harper and edited by Brian Erstatt. Our executive producer is Jacob Goldstein. We had additional help from Topra foreheads. Special thanks to Laura Clark, Greta Coh, and Natalie Sadler FT premium subscribers can get the unhedged newsletter for free and a thirty day free trial is available to everyone else. Just go to ft dot com slash unhedged offer I'm Katie Martin, thanks for listening.