The AI bubble just burst. Here’s what it means for NZ – Liam Dann

A crash is less specifically defined. I don’t think we’d call it that ... yet.

A crash involves investor panic and historically looks more like a single-session fall of more than 6%.

Chip maker Nvidia (the world’s most valuable company at various points in the past few years) fell as much as 9%, which probably fits the bill.

Could tech stocks bounce back? Sure.

In fact, I bet we’ll see what share traders poetically call “a dead cat bounce” in the next few days.

They say that because, apparently, even a dead cat bounces if you drop it from enough height – I’m not aware that the science has ever been tested.

More broadly, is AI still on track to massively change the world in the next few years? Of course.

But the prevailing market view that tech stocks are a one-way bet for investors has been obliterated (like that cat).

It has popped in a blue wave of US political regime change that will bring greater regulation and oversight of AI companies and the building of data centres that power them.

For those worried about side effects of unfettered AI expansion – (like mass job destruction or the extinction of humanity) this is probably a good thing.

A pause for breath in the AI arms race will come as a relief.

It might not last long so we should probably make the most of it to reset our expectations for safety and security around the technology.

But this is big existential stuff.

What does it all mean for us in New Zealand?

Well. Good news and bad.

First up, don’t look at your KiwiSaver balance for a while.

Your balance has been artificially (although not particularly intelligently) inflated by this tech bubble for about three years.

As it comes back down to earth, it is important not to panic.

There will inevitably be an impact on consumer confidence.

With house prices in the doldrums, the only thing generating a wealth effect for most New Zealanders has been that steady rise in our KiwiSaver tally.

Compared to house prices, I don’t know how good KiwiSaver is at making us feel wealthy.

Obviously, consumer confidence and the consumption part of the economy have remained weak through the tech boom.

But perhaps we’d have felt even worse without that retirement savings reassurance.

Okay, now the good news.

Wall Street meltdowns typically create a global demand shock. Economic activity slows.

This is bad for global growth but it is also disinflationary.

What’s the biggest issue facing the global economy right now? Inflation.

There’s a reason the Reserve Bank Monetary Policy Committee, at its meeting last week, raised the prospect of having to cut the Official Cash Rate in December.

That raised a few eyebrows. At the press conference last week, Governor Anna Breman wasn’t too keen to give us a headline by pinpointing the risk of global market meltdown.

But I think the risk was implied.

In fact, I’d go as far as to say (with hindsight) they’ve called it exactly right.

Everyone knew the bubble was going to burst.

I’m no investing genius but I’ve been writing and podcasting in gloomy expectation of a sell-off for the last few weeks.

It was always when, not if.

It doesn’t necessarily threaten our fragile economic recovery.

While the local NZX will inevitably be dragged down in the immediate wake of a Wall Street sell-off, we’re not particularly exposed to the tech sector.

Power companies, freight logistics, manufacturing. The companies that dominate the local market might even be seen as safe haven investments.

It’s happened before. The New Zealand market recovered relatively quickly after the Global Financial Crisis (GFC).

In terms of global economic demand, the fact that we mostly sell food is a good thing.

There is a near insatiable global demand for protein right now that is boosting export earnings for the dairy and meat sector.

There’s no obvious reason why that should diminish.

This isn’t a GFC mark two ... probably (touch wood).

There are some concerns in the US about highly leveraged tech companies and interrelated lending.

But they are not yet on the scale of madness that we saw in 2008 when a complex array of financial products caused a domino effect that led to some of the world’s largest banks falling over.

If anything, this tech sell-off may have come just in time.

We may see bond yields and borrowing costs fall back as the equity markets unwind.

A big bellwether of how serious this thing gets from here is the Anthropic IPO.

Anthropic, the company behind Claude, is one of the world’s top three AI companies and it is due to list on the Nasdaq in the next two weeks.

I’ve seen the float – which is seeking to raise about US$100 billion ($178.65b) in capital, for a total valuation of around US$2 trillion – described as a referendum on the tech boom.

It may be that after the events of the past few days, the Anthropic board decides not to put it to the vote and delays the IPO.

Perhaps we’ll see the market stabilise and in coming months tech stocks will resume their rise on a more sensible and measured growth path.

Historically, though, there isn’t much precedent for that kind of orderly market rebalancing.

I do think we should buckle up and brace ourselves for a wild sharemarket ride.

I don’t think we should panic.

We’ll be fine.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.

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