For now, the whole world is all-in. Non-US money has funnelled into dollar-denominated assets at an extraordinary pace over the past decade, and increasingly, it is not even hedged for currency risk. In other words, the AI boom has almost by accident become a major prop not just for the US stock market but for the dollar too.
POOR READ ON HOW AI WILL PAN OUT
Without question, US corporate earnings, not only in tech but especially in tech, justify the excitement. If anything, US stocks are pretty cheap right now – stock prices have not kept pace with spectacularly rapid earnings growth, seemingly held down in part by rising bond yields.
But we still, collectively, have a very poor read on how AI will pan out. To some extent, everyone is guessing here, but private equity firm Bain said in a recent report that annual spending on AI infrastructure could reach US$1.5 trillion by 2031. Extraordinary stuff. Even more extraordinary, though, it added that “sustaining this level of investment would require an AI market approaching $6tn annually”. Really? An industry worth one-and-a-half times the UK’s entire annual economic output every year? This is struggling to pass the smell test.
Policymakers seem uncertain what they are dealing with here too. US Federal Reserve chair Kevin Warsh has been of the view that the productivity stemming from the use of AI will, fairly quickly, pull down inflation. But others at the central bank, recently including Mary Daly and Lisa Cook, are veering towards an opposing view, that the build-out poses an upward risk to inflation in the months ahead.
So we’re left with a strikingly two-speed US stock market beloved of pretty much every investor on the planet, dominated by an AI build-out that is, in practical terms, nearly impossible to hedge or avoid. We don’t really understand the long-term economic implications, but the underlying commercial assumptions seem rather heroic.
And we’ve all, deliberately or otherwise, hitched our fortunes to the idea that it will work out just fine. We’d better be right.
