Disappointing total factor productivity growth reminds Albert Edwards of how Asian contagion started

Global strategist Albert Edwards finds a parallel between the mid 1990s and the present day AI boom

Three decades after predicting the Asian crisis of 1997, one strategist pinpoints similarities between the financial contagion that spread across Asian economies then and the current AI investment boom that he thinks is a bubble.

That strategist is Albert Edwards, who self-identifies as an "uber bear" as a London-based analyst at Societe Generale, and the prompt for drawing the comparison was a research note published by Torsten Slok, chief economist at Apollo Global Management, who pointed out disappointing readings from an economic indicator known as total factor productivity growth. This measures how much output the economy produces from a given quantity of labor and capital.

Slok explains the measure as "what remains of growth after accounting for more hours worked and more machines installed. When firms produce more without adding inputs, TFP rises, making it the best available proxy for technological progress."

Slok's conclusion after scrutinizing the data is that while the AI boom is visible in investment data and equity valuations, it's not yet visible in productivity statistics, meaning "the productivity payoff from AI remains a forecast, rather than an observation."

No AI productivity boost in the data yet

This thesis triggers Edwards' recollection of the chief cause of his bearish call on Asia back in the mid 1990s when he came across an article by Nobel Prize-winning economist Paul Krugman, which highlighted poor TFP growth as undermining the widely accepted bullish narrative.

This, and a range of other publications hailing Asia's economic "miracle" led Edwards to conclude "too many people believed the beguiling narrative" and as a consequence, "lent these economies cheap, abundant capital which was misallocated." Edwards reckons the so-called Asian contagion was "entirely predictable" as was the dot-com bubble of the late 90s in the U.S. He is therefore skeptical of the consensus that claims the current AI boom is not a bubble.

Edwards acknowledges that perhaps it's simply too early for the benefits of AI to be showing up in TFP data but still, he does cite another economist Rob Parenteau on the trends. Formerly of Allianz, Parenteau has demonstrated that net business investment is "moving sideways" even as gross investment is rising briskly.

US business investment (nominal, as % of GDP, before and after depreciation)

Edwards argues that if U.S. business investment is only growing sharply in nominal, not real, terms, his skepticism about AI is well-justified.

The State Street Technology Sector SPDR ETF XLK has surged 40% this year, with semiconductor stocks SOXX in particular nearly doubling in value.

-Jules Rimmer