AIOU: what if the AI boom busts?

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The Economist. Hello and welcome to the Intelligence from the Economist. I'm your host, Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world. Deep within a gold mine on a northern Japanese island, historical tensions are being inflamed. Japan would like the mine's traditional methods listed by UNESCO. South Korea would like the contributions of its wartime slave labor acknowledged. And there's a weird thing going on in America that mixes marketing pouches of nicotine and the political right. One brand called Zinn seems to be cleaning house, in part because it's got some serious zinfluencers doing their advertising for them. But first, We spend a lot of time on this show talking about artificial intelligence. And we're not alone.

Artificial intelligence is reshaping American life.

And that includes changing the investment landscape.

Private equity and venture capital firms are investing in the growing megatrend of artificial intelligence. Nvidia has become the world's most valuable company. The chip maker's share price climbed to an all time high.

Thing is, the world is in the grip of an AI boom. Companies across all industries, including us here at the Economist, are trying to figure out how to put the tech to use. That means investors and tech companies are just piling money into AI, the sheer scale of that investment and uncertainty over if and when it'll all pay off is giving some shareholders the jitters.

In the past few months, the big tech firms, so that's the likes of Alphabet, Amazon, Meta, and Microsoft, have said they will invest ever more money in huge AI data centers.

Guy Scriven is a global business writer at the Economist.

The amount of this spending is truly phenomenal. Some estimates think that total corporate spend on AI infrastructure over the next four years will total about $1.4 trillion. And this is on things like AI data centers, servers, specialist chips, and the power you need to keep all that stuff going. This has created a fast growing supply chain which is in some ways at risk of overextending itself, particularly at a time where more are wondering about an AI bubble bursting.

Okay, so let's dig into this a little bit, starting from supply chain. What do you mean by that?

I think of it as all the companies that provide the bits of hardware that make AI work. There are probably two really big categories or buckets here. One is the chip makers. So that's companies like Nvidia, AMD, and Intel. And then there's a whole kind of category of other companies that make things that basically help the chips work. So networking companies, companies that manufacture servers, companies that build data centers, companies that lease the land for data centers to be built on. So there's a huge array of companies in this supply chain. We looked at a sample of about 60 of these companies to try to get a sense of how they're performing, and they seem to be performing essentially quite well. So since the start of 2023, their average share price has roughly doubled, which compares to about a 40% rise in the S&P 500, which is an index of big American firms. Part of the reason that their share prices have shot up so dramatically is that over that same time period, these companies expected sales have also risen. So lots of people in the financial services industry are very excited about these types of companies.

So without thinking too hard about the burst of any bubble that might be inflating at the moment, that does mean boom time for all these companies.

Yeah, that's right. At the moment, the biggest gainers, or the clearest ones are chip makers. Nvidia, for instance, in June briefly became the world's biggest company by market value, which gives you a kind of indication of how excited investors are about that prospect. But there are lots of other parts of the supply chain that seem to be doing very well. Dell and hpe, which are two companies that make servers, have said that their AI server businesses are going Incredibly smoothly and growing very quickly. You have lots of other kind of companies in this mix as well. So there are companies like Arista, which is a company that makes networking equipment, companies that provide other bits of data center hardware like cooling and switches as well, and the entirety of the supply chain. You can see that a lot of the companies are experiencing a really sharp uptick in demand.

But rather ominously, you mentioned the potential popping of the AI bubble. I mean, what are the risks here?

Yet? There are plenty of risks. The most immediate one is the heavy reliance of the industry on Nvidia. About a year ago, Nvidia announced that it would go from releasing a new high performance chip every two years to every year. And what that meant was that the entirety of the chip supply chain had to suddenly ramp up their production as well to meet the pace of Nvidia. And I think that gives you a sense of just how dominant this company is for this entire supply chain. And what that means in terms of being a risk is that if you are a smaller supplier in Nvidia's shadow, a lot of your sales start to depend on keeping the world's biggest chip maker happy. One of the other big risks is power. An AI server takes up something like 10 times the amount of power that a conventional server does. And one of the risks with that is that there essentially won't be enough power generated to keep up with the demand from these AI data centers. And so if that comes to pass, which I mean, some analysts think that that could happen in the next few years, then you could get to a situation where the AI supply chain has to slow down its growth because there just isn't enough power to keep up with the equipment they're producing.

You mean in the most AI optimistic case, where growth in AI interest in AI fervor about AI continues at on current pace?

Yes, exactly. Power becomes a problem if demand keeps growing in the way that it looks like it has done in the past year, and that lots of the more bullish observers think it will in the future. But that of course, is not a certainty. And you are increasingly hearing sceptical comments from people in the tech industry and in other industries as well. So in June, both Goldman Sachs, which is a big bank, and Sequoia, which is a very big venture capital firm, put out pieces of research which basically called into question the payoff from the current iteration of generative AI models. And by extension, those pieces of research are also questioning the kind of wisdom of big tech spending. Like it is building all these AI data centers. And so there is the kind of possibility that the returns from the current AI models don't really materialise and that the big tech firms stop spending. And that again, leaves all these suppliers in the AI supply chain pretty exposed.

Because at the end of the day, as hard to grapple with as all of these ideas about AI are, ultimately it's more computer kit.

Right?

It's real stuff in the world that people are buying or they're not.

Yeah, that's right. It comes down to Economics 101 in a sense. Right. This is a question of supply and demand. So if there isn't enough demand for all these kind of AI tools like ChatGPT, if demand does start to drop off in that way, all the decisions to build out new factories and add new production lines, which have been taken by these companies in the last 18 months are going to look really rather suspect. And investors who have really thrown their weight behind this AI supply chain may start to also be more sceptical of that too.

So what you're describing there, that if is a really big if, a like trillion dollar if. But you've also already used the word bubble, which kind of comes with its own expectations there. Do you feel that we're in one?

I think it's very hard to say definitively whether or not we're in one. What you can say, I think, is that if you look at history and the progression of almost any successful technology, humanity hasn't really built any really big technologies without expectations getting beyond reality and some form of bubble being created. So I think at some point we will likely have an AI bubble. Lots of people thought we were there last year, but the bull market continued to run. I think it probably is reasonably likely at some point you get a kind of deflation or correction in all these AI stocks. The question is really what happens after that? Does the AI build out continue, or do we move on to whatever the next big technology is?

Guy, thanks very much for your time. Thank you. Let me draw your attention to a rare look inside one of the groups that has stoked America's political divisions and looks ready to do so again. Lots has been written about the proud boys, the unabashed far right provocateurs who were at America's Capitol on January 6th. But on the latest episode of the Weekend Intelligence, my colleague Rebecca Jackson speaks to five of them, including the founder and the current leader. It isn't easy listening, but it is an instructive look into how things might go under a second Trump presidency. Scroll back in the feed just a little bit and have a listen.

Recently I visited Sado island, which is in the north of Japan, and I went to a town called Aikawa.

Moeka Iida writes about Japan for the Economist.

It's a very small town and it was very quiet, not many tourists. But the mood on the island was unusually festive. On July 27, I attended an event where they live streamed a conference by UNESCO which was gathering in Delhi. At the meeting, the UNESCO decided to register a gold mine in the town as a World Heritage Site. At the streaming event, hundreds of participants applauded and cheered as they witnessed that moment. The festivity continued into the evening. Residents gathered and they danced to folk songs at a traditional summer festival which celebrates the town's mining culture.

So why was that such a big deal for this town?

So for nearly three decades, local residents and politicians on Sado island have been calling for this gold mine to be recognized as a World Heritage Site. This town has an aging and shrinking population like the rest of Japan, but they hope that tourists and even residents might come back to the island and. But this registration has faced a lot of challenges. So the topic became a diplomatic issue between Japan and South Korea. And these two countries have long been in disputes about history telling. During the Second World War, under Japan's colonial rule, at least 1,500 Koreans were forced to work at mines in Sado. But the Japanese government denies that history. Their explanation is that these Korean workers were there willingly and that they received payment. This is very similar to the way the Japanese government downplays other wartime atrocities. And in 2022, the Japanese government made its first submission to UNESCO. But the application was unsuccessful. It was rejected. But this time, the Japanese government managed to negotiate with and strike a deal with the South Korean government. And the South Korean government reversed its opposition to Saro's inscription.

So quite apart from the diplomacy though, why would a gold mine be a UNESCO World Heritage Site in the first place?

So officials argue that the uniqueness of the mine lies in the endogenous or unique mining techniques that developed on the island. And I went inside the mine myself. I was guided by a local activist called Kosugi Kunio. It was almost like walking through a little dungeon or a cave. It was dark and very cold inside. And there was some water dripping from the ceiling as well. And as I walked through the mine, there were some displays on the walls explaining the history of the mine and also the techniques that were used to extract resources there. And there were also these mannequin, like very Realistic robots representing Edo period workers dressed in clothing like kimonos. And you can see them crawling through these tiny little caves and digging with chisels. But some historians and activists are very skeptical of this approach, which focuses on the so called traditional mining techniques.

Which is to say it overlooked the participation of Korean workers back then. Is that the idea?

Yes, exactly. I spoke to some historians and they emphasized how the mines on Sado played a big role in building Japan's empire in the modern period. So the 20th century, the gold extracted at these mines were exchanged to acquire weapons, and it helped Japan's victory in the Russo Japanese War as well. And there was also a chart at one of the mines museums showing the amount of gold and resources that were extracted from this mine and that peaked in the 1940s, which is during the Second World War. But there is very limited mention of that colonial history or the wartime history. And this is something Kosugi Kunio said. He feels as if the government officials and the company running the museum had omitted that modern period or the last 100 years, because it raises tricky questions about Japan's involvement in the war and Korea and its colonization of Koreans. This omission of history is exactly what made the South Koreans uncomfortable. I mentioned I saw the UNESCO meeting on July 27, but it was very choreographed, as if everybody knew what's already going to be said. And there was a speech by the South Korean delegation that comprehensively addressed the whole history of the Saddle island gold mines and sincerely remembers all the workers, especially those from the Korean peninsula. The spokesperson said the South Korean side has decided to approve the inscription because Japan decided to accept their request to tell both the bright and dark side of the mine's history.

So what's your view here on how much this is a sign of improving relations of the history being more completely told between these two countries.

So on a surface level, it looks like an improvement. But if you take a closer look at the case, there is a catch. So after the meeting, Japan immediately set up an exhibition in Sado to showcase the conditions of Korean workers at the time. But the language they used was quite telling. So they said the Korean workers faced hardships at the mine, but they shied away from using the word forced labor. And I'm borrowing the words of one of my sources, but anybody going down a mine has hardships. The point is that these Koreans were there against their will, but there was no acknowledgment of that. And for people following this issue closely, it was almost like deja vu. So South Korea and Japan actually went through a very similar process back in 2015 when Japan's so called Meiji industrial sites were recognized as a world heritage. Back then, South Korea also approved on the condition that Japan would tell the full history. But again, Japan set up a very disingenuous exhibition. And following Sado's inscription, there was a lot of backlash from opposition parties and activists and news media in South Korea. So despite the fanfare on Sado, Japan and South Korea's rifts over wartime memory are far from resolved.

Thanks very much for your time. Moeka.

Thanks so much for having me.

But I really enjoyed nicotine so much. It just added a lot to my life. And then I also dipped. I love dipping, but at a certain point. You've probably heard of Tucker Carlson, former Fox News host. But what about Tucker Carlson?

Max Norman is a culture correspondent for the Economist.

They have a lot of intriguing flavors, I would say, but I stuck with Spearmint and it's been a massive life enhancer. I'd really recommend it to you. Mr. Carlson has earned the moniker for his enthusiasm for the tobacco free nicotine product Zyn. That's Z Y N. Thanks in part to Mr. Carlson, Zinn has become a symbol for a new boyish blend of conservative masculinity.

So what is Zinn and why is Tucker Carlson acting as a kind of human billboard for it?

Zyn is a small white pouch about the size of the pad of your finger that you place between your lip and your gum and it delivers a jolt of nicotine. It's a tobacco free product owned by a subsidiary of the smoking giant Philip Morris International. The product has gone absolutely viral online thanks to self proclaimed Zinfluencers, which the company fervently denies hiring. But you can't deny that they're getting a lot of really great free publicity. In fact, there's so much activity online, this corner of the Internet has been dug the Zinternet. These characters speak in this lattice lingo. They're obsessed with punning. They talk about popping or throwing a Zimbabwe or a lip pillow.

So in terms of the form factor here, what you're describing sounds a lot like what I know as a variant of snuff of dip.

Yeah, so there's chewing tobacco which you'd place in your mouth actual shreds of tobacco leaf. And then there's a sort of refinement of that called the snus. Very popular in Scandinavian countries, which is tobacco leaf inside a little tea bag. You can think of Zyn and related Products of which there are several other brands, as the kind of pure, clean isolation of just the nicotine, it doesn't make you spit, it's incredibly subtle and it comes in fancy flavors. In the us, things like spearmint coffee, even cinnamon. But yeah, this is an evolution. The latest and greatest version of the.

Snus, which was a product class that I thought was kind of on the out. Right. I thought all the innovation, all the hope was being pinned on things like vaping.

Vaping definitely still huge and much bigger than the use of pouches. But pouch growth has exploded. It's still on a small base. So in the U.S. just about 0.4% of Americans regularly use these pouches. But between 2019 and 2022, sales increased sixfold. This product as it's gone popular, Philip Morris International has toute that success as a step forward towards the smoke free future, which of course means their own survival, continued survival as a company.

But just to be clear here, is there anything of a health claim attached to this? Is the suggestion that this is better for you than the actual tobacco versions of the same product, in turn better for you than than smoking?

The claim here, which is broadly true, is that this is healthier than smoking. So if you're switching from smoking to pouches, that's a positive step. That's a net positive in terms of public health. The problem is that there's been relatively little research done so far about whether these pouches can actually be used as a cessation device. And they're not being marketed, I should say they're not being marketed as a smoking cessation device. They're being marketed as an alternative because it's tobacco free, there's no smoke involved, they're certainly safer than cigarettes. But the concern among the public health experts I spoke to is that this product might get young people addicted to nicotine, which prepares them for a more intense nicotine addiction later on in life. And naturally, because this is the US the public health conversation has become polarized. In January, Senator Chuck Schumer had a press conference.

So today I'm delivering a warning to parents because these nicotine pouches seem to.

Lock their sights on young kids, teenagers.

And even lower, and then use the social media to hook them.

And he waded in, I think, into a zone of the culture wars that he didn't entirely understand.

Well, I'm not sure I entirely understand here. What are the battle lines with this one?

As soon as he held that press conference, Marjorie Taylor Greene, the right wing congresswoman from Georgia, called for a zinsurrection, and there was just a whole lot of hullabaloo. People on the right saw this as yet another instance of the nanny state getting involved in. Literally, you know, what people are putting in their mouths. What's really interesting about their complaint here is they say the left promotes marijuana. They're into legalizing drugs. They like marijuana because it makes you passive, because it makes you relaxed and you don't ask questions, whereas nicotine focuses you. It makes you dangerous, it gives you energy and drive. And they say the left doesn't like that.

Have you tried one of these things? What are they like?

Yes, I did my research. I popped a Zimbabwe. For me, the experience was focus. I definitely will keep my distance, though, because I could see how easily I could go back and seek that experience again. So I've had it within.

Max, thanks very much for your time.

Thank you.

That's all for this episode of the Intelligence. We'll see you back here tomorrow.