China’s AI Keeps Gaining Ground
I was terrified that the AI bubble would collapse while I was on vacation and then I would have nothing to do this week. For better or worse, it’s still there, and the AI stocks I’ve been tracking are worth $2.2 trillion more than they were two weeks ago.
Here are this week’s numbers:
I will mention one highlight (or lowlight) of my vacation. We were traveling through Eastern Oregon, Utah, and Idaho, all areas hard hit by the wildfires. The air in many of these places was truly awful. I have been fortunate in being relatively healthy and have no real breathing problems. But there were places where I was coughing regularly due to the amount of soot in the air. I can’t imagine what it must be like for a kid with asthma. If I were a parent living in these places, I would be really angry at the global warmers.
Anyhow, here’s a quick look at some of the topics that caught my eye.
+++
Alibaba’s new top model, Qwen 3.8 Max, was released last week. It ranks fourth in overall performance, ahead of OpenAI’s top ranked model. However, more striking than the performance is the price gap. The OpenAI model costs 250 percent as much for input tokens and 500 percent as much for output tokens. OpenAI is asking customers to pay much more to get less.
Lower costs are leading more users, both internationally and in the United States, to switch to Chinese AI. According to OpenRouter data, the use of Chinese AI far exceeds the use of US AI. The crypto company Coinbase recently switched to Chinese AI. The differences in cost are so large that it swamps any home country bias for many companies in the United States. At the moment, it looks like if there is some great AI bonanza to be had, it will be in China.
Productivity Is Lagging
The Bureau of Labor Statistics released data on productivity growth for the second quarter. It was just 1.4 percent. That is the third consecutive quarter of weak growth. Remember, if the AI boom is going to pay off, we should see a massive surge in productivity growth in the range of 4-5 percent. We’re going the wrong way right now.
I have to throw in the usual caveats: productivity growth data are erratic and subject to large revisions. But the data we are seeing does not support the boom story. In fact, the next revision will likely be downward. We will get preliminary benchmark revisions to employment data this month, which will likely show slightly more rapid job growth. More rapid job growth means more rapid hours growth, and therefore slower productivity growth. Although these revisions won’t be incorporated into the productivity data until the final revisions are released next February.
The one sector where there could be a plausible story of AI killing jobs is insurance. Employment has dropped by 81K (2.7 percent) over the last year. That sort of decline might be what we should expect in the sectors where AI is having a major impact.
The AI Escape Stories
There were several accounts of training models escaping the sandboxes in which they are being trained and penetrating other companies’ computer systems. Sebastian Mallaby has a good summary in his Substack. It doesn’t seem like major harm was done, but we can’t know for sure everyone was being truthful. Obviously, OpenAI and Anthropic aren’t anxious to publicize harm caused by their AI, and the victims don’t particularly want to advertise their vulnerability.
In any case, it’s a safe bet that this will not be the last “escape,” and odds are that future ones will do serious damage. Maybe they can put in enough safeguards to ensure that this is not the case, but I don’t know if that would be the surest bet.
Talk of the AI Bubble Is Everywhere
It now seems as though everyone recognizes the AI bubble. Just last week, Oracle’s Larry Ellison was the coverboy of New York Times Magazine as the likely number one victim of the bubble’s collapse. Marketplace radio was talking about what happens when the bubble pops. Business Insider told us that famous Big Shorter Michael Burris is betting on the collapse of some AI darlings. And we were told that Broadcom will somehow survive the crash.
It is great to see more discussion of the bubble so that it becomes common wisdom. The question is when it will start to affect stock investment in a big way. The problem here is that the “who could have known?” defense creates a huge asymmetry for fund managers.
If they pull their money out of AI-related stocks and they continue to rise, they will be called on the carpet for failing to match the performance of other managers. But if the AI stocks crash, and bring down the rest of the market, they will all say, “who could have known?” and be given a pass. No one will be fired and few will probably even miss a promotion.
This is a massive problem in how our financial system is structured. We have people getting high six and even seven figure salaries who are completely unaccountable for their performance. It’s not nice to fire people, but if a person lost a pension fund hundreds of millions (or even billions) of dollars because they made the same stupid mistake as everyone else, they really need to be shown the door.
If all the fund managers are doing is following everyone else, we can pay a high school kid the minimum wage to do that. Better yet, we can have an AI program do the job. If someone is getting paid big bucks, then they need to be thinking for themselves, and when their strategy produces bad results, they should face serious career consequences. Many of the rest of us will face serious consequences for their mistake in allowing the bubble to grow so large.
This first appeared on Dean Baker’s “AI Bubble Monitor” blog.
No comments:
Post a Comment