I am for ever blowing bubbles

The S&P 500, led by the Nasdaq, had a poor day, adding to the ongoing debate about whether tech stocks are in a bubble. Fears that AI may not live up to the hype and that business returns will therefore never justify the investment in advanced chips are also contributing to this concern. Alongside this uncertainty, the infrastructure and energy needed to support AI’s vast processing needs are not available. These fears are not without reason, and to give you a sense of the potential investment, it is projected that $3 trillion will be invested in AI  technology over the next three years alone. The probability is that the best of expectations for returns is unlikely to be met. On the other hand, it must also be remembered that the investment in AI is not for the next year or two, but for the next 10, 20, and 30 years. The likes of Mike Burry, of The Big Short fame, one feels, are betting on a short-term price correction, rather than another 2000-style tech meltdown or a repeat of the 2007 financial crisis.

One difference between now and the Great Financial Crisis or the 2000 tech bubble burst is that in both periods, many people were forced to sell; they had no choice. Asset values were falling, loan-to-values were narrowing, and margin calls were being made. Investment rather than speculation was rife. The question now is whether there is a similar level of speculation in AI that would prompt a broader sell-off in the event of a correction; at present, it does not seem to be the case. One also has to remember that markets also don’t tend to crash, much like the analogy of kettles boiling when people are watching for it.

Assuming his timing is correct, the issue, as I see it, is where the sellers will come from to help Mr Burry close out. Those who have invested in AI, one gets the feeling, are probably more than happy to endure some short-term volatility, as they believe in the long-term gains. That should suggest any shakeout could be quick.

The Bank of England left rates unchanged as expected, the vote was 5 to 4 in favour of no change, which I believe lays the ground for a cut in December. To remind you of the vote at the last meeting, it was 9-2 in favour of no change. Two-year gilt yields, the most sensitive to changes in interest rate sentiment, have been decreasing over the past few weeks, and fell again today post the vote, now trading at 3.75%. This suggests that the market is now pricing in a 25-basis-point cut, but a lot hinges on the 26th and what Ms Reeves has in store for us.