Hello there,
How are we feeling about AI right now? Wall Street can’t seem to make up its mind. Nvidia underwhelmed investors despite a blockbuster quarter and a bullish sales forecast. Its chips are powering the AI revolution but shareholders are clearly worried about the durability of the boom and they want some cash back.
While fretting about the AI economy overheating, investors are also worried that it will tear through the consumer economy, ripping up jobs and business models. But they can see the benefit of partnerships between companies and AI labs.
It’s understandable that investor sentiment is so skittish right now. A ton of money has been bet on the AI economy and the endgame is uncertain. Without hard data to show how the technology is impacting jobs, productivity and the wider economy, investors are left latching on to viral scare stories and their gut.
Fed policymakers are also wading into the AI debate. Federal Reserve Governor Michael Barr doesn’t see the AI boom as a reason for lowering policy rates even with a potential boost to productivity. Fed Vice Chair Philip Jefferson has also flagged how faster productivity gains may, at least temporarily, lead to an increase in the so-called neutral rate – a guidepost for monetary policy.
Kevin Warsh, Trump’s pick to take over as Fed chair when Jerome Powell’s term ends in May, has argued that AI could trigger a productivity boom that would allow for lower interest rates because it could mean economic growth without a boost to inflation.
But in the short run, investment in AI could be inflationary – if the demand for the energy and components of this boom outstrip supply. The warning signs are already there. The demand for memory chips to run AI chatbots is getting worse, and Nvidia warned this week that it will affect its gaming business. A respondent in the Dallas Fed’s Texas Services Sector Outlook released on Tuesday said the components faced “pandemic-like supply constraints.”
The situation is a boon for memory chipmakers and their share prices. South Korea’s equity benchmark index is up over 40% this year after rising more than 75% in 2025 powered by Samsung Electronics, the world’s top memory chipmaker, and rival SK Hynix.
A shortage of memory chips could inflate the prices of a whole range of products from smartphones and laptops to cars and data centers. So too could shortages of two niche rare earths used in chips, defense and aerospace. The shortages of yttrium and scandium, produced almost entirely in China, underscore the West’s vulnerabilities. While Beijing has allowed many rare earth exports to resume since it imposed restrictions in April, shipments of these materials still rarely make it to the U.S. despite the October detente with Washington.
China’s chokehold on many strategic minerals was one of the reasons why the U.S. and Europe were so keen to “de-risk” from Beijing. Now that policy mantra is being applied to DC. The never-ending tariff psychodrama and President Donald Trump’s designs on Greenland triggered a change of tack earlier this year among the so-called “Middle Powers”. Canadian Prime Minister Mark Carney used a speech at Davos to sketch out the shift and it’s the topic of this week’s Reuters Econ World podcast. Listen here.
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