For those of you who would prefer to listen:
AI has dominated the landscape in these 2020’s. The transformational technology is clearly the next big thing and has been deemed the driver of productivity and growth in the 21st century. The Stock Market has been driven to all-time highs on the back of AI. Earnings growth has exploded. America’s Economy has kept a steady growth rate in large part due to the AI revolution, while other nations’ economies stay sluggish. AI is everywhere. At first, it was met with fascination and excitement. That eventually transitioned a bit towards caution and skepticism. This week, it quickly turned towards panic and fear. Seeing headlines that there’s a 10% probability that AI will destroy humanity by the end of the decade will do that.
I’m no expert on the subject. But I do follow closely enough to stay informed with an eye towards the Market and economic impacts. It’s such a complicated situation with super smart people on both sides of the argument.
What’s clear is Artificial Intelligence is growing at an exponential rate. The amount of money spent is staggering. Roughly $800 Billion is being invested by a handful of U.S. companies this year, which is expected to clear $1 Trillion next year with no signs of slowing through the end of the decade. It was less than $200 Billion in 2023.
There is a relentless race to win and control the Global Tech Stack. The implications are so significant economically, politically, militarily and socially. Advanced semiconductor demand to build out data centers and computing power is 13 to 1 compared to current supply. They can’t make the chips fast enough.
AI is labeled the most innovative, consequential technological advancement in human history. If it’s going to make all our lives better, how is there a meaningfully non-zero risk that it is going to destroy humanity? What should we believe? Who’s in charge? These are serious questions which require serious answers. Of course I don’t have the answers, but I’ve spent some time studying the situation in order to understand it better.
Let’s start with this: I heard someone describe AI today like the 3-year-old Superman who is just realizing his powers but has no idea what he’s capable of. That’s good and bad. There’s so much that AI can be used for the good, like medical research and diagnosis. But there are clearly some devastating possibilities which require proper oversight and control. Fortunately, Baby Superman was raised by a loving and responsible couple with values who adopted him. It could have been a whole lot different had he been raised by Lex Luthor.
A case can definitely be made that this week’s alarm bell was an opportunity to throw sand in the gears of the Silicon Valley leaders who are competing against each other ahead of their IPOs. That’s Anthropic and OpenAI. It also comes ahead of the midterm elections, as the advancement of Artificial Intelligence has become a lightning rod issue for politics and the American people. Data center build backlash has spiked. AI lost a lot of fans fast. The Stock Market reflects some of it, as the AI trade peaked in June and has seen substantial corrective price action beneath the surface.
Nvidia CEO Jensen Huang, often referred to as the Godfather of AI, did his best to cool the angst saying we’re not going to die by AI by the end of the decade. So that’s nice to hear. Of course that’s what you’d expect him to say. But he also emphasized the need to keep pushing forward in order for the United States to maintain the lead as the alternative would be devastating. The Nvidia CEO was active in his messaging, springing from the Salesforce summit in San Francisco with a spot on the All-in podcast which he took a seemingly spontaneous phone call live on stage with the President, to the Scottish Highlands to meet with the King of England to discuss the innovation’s implications. It doesn’t seem like Jensen Huang sleeps.
King Charles had a message for the AI leaders. And it was a good one. “Those in our world who value our humanity and its vital moral component are anxiously seeking your reassurance that we will not lose control of our destiny.” There’s more to it. The King’s message also reflects growing concern in Europe and others around the globe that this life-changing technology is largely being driven by the United States and China. The AI race is basically 2 competing forces seeking dominance while the rest of the world watches with angst.
President Trump was quick to say the negative rhetoric was an overreaction. His focus is clear: he wants full speed ahead so America wins the AI race. Elon Musk weighed in too. He agreed there is reason to be concerned. In fact, Musk has been sounding the horn on safety and the dangers of AI going rogue for years. He is calling for competing labs to test each other’s models before releasing them to the public. He compared the current process in place to grading your own homework. I’m not sure how that would work, though. Wouldn’t it violate intellectual property? It seems that’s like bringing your opponents into your locker room during halftime or forcing Coke and the Colonel to hand over their secret recipes. But something needs to happen.
Here’s perhaps the biggest problem: There is no single global authority or dedicated agency that regulates Artificial Intelligence. AI is governed by what’s basically a patchwork of Federal agencies, state legislation, various standard-setting organizations, and some international frameworks. So, the natural question: Who’s in charge of AI? Who’s the Boss? The short answer, it appears, there really isn’t one.
The U.S. Federal Government enforces AI rules using existing agencies applying established statutes to new software. That includes the Federal Trade Commission, the Department of Justice, and the Securities and Exchange Commission. Washington has been fairly loose on regulating AI. Over 400 AI bills have been introduced. None of them have passed. Lawmakers remain strictly divided. On one side is a push for safety, discrimination, and deepfake protections. The other side fears that overly onerous regulations will stunt American innovation and cede the lead to China. It’s an understandable debate, but there needs to be solutions. There needs to be compromise. But we all know, compromise is a 4-letter word in Washington.
Individual states like California, Texas and New York have also passed laws to fill in the Federal gaps. Of course, Silicon Valley is ground zero for AI. California Governor Gavin Newsom issued an executive order this week to strengthen the state’s safety and security laws around AI. It requires third-party oversight in conjunction with independent audits. The order includes a possible kill-switch, which would require companies to create an emergency shutdown mechanism for frontier models. Newsom’s order calls on a group of experts to meet and create a guide for the state to strengthen its AI safety and security laws. They were given 2 months.
Self-regulation needs to be part of the solution too. It’s bad business to launch faulty and dangerous products. That’s pretty basic stuff. So, companies need to provide the necessary oversight. But companies can’t decide what’s acceptable and responsible alone. We can’t forget that there are bad actors out there. That’s where independent authorities are required. And it has to be an informed and knowledgeable body that isn’t on a payroll that conflicts interests. Ethics are necessary everywhere.
The United States already has plenty of rules and regulations. Many of them can immediately be applied to AI. For sure, not all. But innovation is moving at the speed of light. Knowledge isn’t. The government, in partnership with Corporate America, needs to get in front of it and enforce the law and create new laws if deemed necessary.
Also of importance: Regulation doesn’t directly mean restriction. The Financial Services industry is a good example. As Registered Investment Advisors (RIAs), we are held to the highest standard in the industry. As fiduciaries, we are obligated to act in our clients’ best interest at all times. Registration requires a license and that license requires strict ethics courses on top of the necessary industry knowledge. There is no such certification for AI. It seems like that would be a good start.
Congress continues to fail to meet the moment. The lack of leadership and backbone enables risky behavior. Congress has been asleep at the wheel on America’s reckless spending and its mountain of debt, now to the tune of $40 Trillion. Both parties are to blame. So, we cannot expect this branch of government, which seemingly lacks any understanding of technological advancement, to establish rules and assert its leadership on AI. Case in point: in the wake of the alarming rhetoric this week, Congress decided to leave early for a midterm recess. It’s no wonder the approval rating wallows in the single digits.
But there’s also this: The fact that people are talking about the dangers is important. Seemingly nobody was focused on the power of the internet and social media to influence if not lead people, young and old, into bad behavior. And unfortunately, the results reflect it. Now our society is paying the price and institutions are trying to play catch-up.
Our nation does have precedents for responsible approach to monumental matters. There was a nuclear race led by the Manhattan Project during World War II. There was a space race during the Cold War. It was deemed imperative to win the race while being firmly mindful of the risks and responsibility of the outcomes. Private enterprise partnered with the Government in those pursuits. The point is, there needs to be balanced debate on AI with real expertise who represent the best interest of the American people, its Economy, and, of course, our national security.
The messaging about the risks and the benefits about AI from Silicon Valley has been beyond poor. They seemed to let their stock prices do the talking. Making money can mask underlying problems. The Treasury Secretary had it right: The players are doing a terrible job of explaining what’s happening and how it’s going to benefit the people. At first people were worried that AI was going to take their jobs. Now they’re worried it’s going to take their life. Silicon Valley has got to get in front of this. Washington has to get in front of this.
There’s an important meeting next week. President Xi is coming to Washington to meet with President Trump. The timing is big, considering all of the issues at hand. Unfortunately, expectations are low. Our sources see very little common ground between the two. Congress just passed the Lindsey Graham Sanctioning Russia and Iran Act. But China keeps buying Iranian and Russian crude.
China is showing no signs of slowing down nor concerns about AI’s threat to humanity. The Asian Superpower is focused on winning the AI race and dominating the 21st century, this Digital Age. Importantly the U.S. still has a sizable lead. It is responsible for roughly 70% of global compute. But the race is tight enough that both sides think they can win.
China labeled the calls for AI slowdown self-serving fear-mongering from Silicon Valley. Beijing accused them of trying to further hurt Chinese competition. Chinese AI companies already face US blocks on the chips needed to train and operate frontier models. According to our sources, Beijing knows it is lagging the US in innovation and sees AI as a once-in-a-lifetime chance to reshape the tech balance in its favor.
China does have fears about the future of AI. In fact, its biggest concern is believed to be its own government’s legitimacy. The advancement of Artificial Intelligence could threaten the communist party’s tight gripped rule over its system and people. Beijing is really worried about AI opening up their walls and letting in spies from adversaries. The threats are existential for many entities.
Back to the Market:
The Fed raised interest rates for the first time since 2023. The Bond Market had been pricing it in all along. The 10-Year Treasury yield hit 5% for the first time in 3 years. It’s at the highest levels since 2007.
The Market is pricing in a 90% probability of another one before year-end.
The 5% mark on the 10-Year has been a cooling agent. It doesn’t necessarily kill capital dependency. But it definitely stresses it. Companies that need to finance their operations have struggled. That’s Utilities and Industrial companies. That’s developers and builders. That’s so many small businesses. They’re the ones most exposed to these rising costs. It’s reflected in the Stock Market.
What’s more, the Yield Curve is flattening. The spread between 2s and 10s is now just 28 basis points (0.28%). It’s been cut in half in under a month. It runs the risk of inverting again. As a reminder, every recession has come after the yield curve inverts. However, every yield curve inversion has not led to a recession. That was the case from 2022 to 2024. It made for a bumpy go for investors, but there was no recession.
Tech has been trading heavily all Summer. The Tech-heavy NAS has not made a new high since early June. The AI-trade has felt the weight of the pushback on angst well before this week. This week was a Triple Witch. That occurs when all 4 sets of options expire simultaneously. An estimated $7 Trillion rolled off the books. It was the second-largest options expiration day in history. Triple Witching day always creates additional volatility. Mega Cap Tech caught a bid while more cyclical stocks fell.
No matter how much we try, we can’t escape AI. The excitement and fear is everywhere. Estimating exponential growth is no easy task. Human beings have proven their limitations on it time and again. When electricity was first rolled out, people were afraid that turning on the lights might start a fire. It was unthinkable back then the way we live today. So of course, it’s unthinkable for most to envision what life will be like with AI in the 2030’s and beyond. Will we still have jobs? Will the quality of life be better than ever? Nobody knows. A big part of the problem: People don’t know who to trust.
Strong leadership and doing the right thing doesn’t require an “S” on your chest and a red cape. It’s the collaboration of smart thinkers with good hearts and a sense of moral responsibility which provides the best solutions. The best leaders have a servant’s heart and a warrior mindset. It’s a powerful combo. It’s a magnetic trait. We could use that with AI right about now.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
