A trillion dollars leaves the artificial-intelligence giants, a doomed burger chain levitates on a Reddit chant, and the market quietly remembers the difference between mass and helium.
The headlines called it a crash. It was not a crash, quite, and the difference is the most useful thing that happened all week. A crash is when everything falls together, when the lifeboats sink alongside the liner and the only number on every screen is red. That is not what last week looked like. The giants fell hard, the very biggest fell hardest, and yet the Dow Jones closed the week slightly higher, mid-sized companies edged up, and small companies rose more than three per cent. The fear gauge, the VIX, which leaps towards forty when investors are truly frightened, drifted down to eighteen and a half, which is roughly where it sits on a quiet Tuesday. Something fell out of the sky last week, but it was not the sky.
What fell was the top. Over a handful of sessions more than 1.3 trillion dollars of value left the semiconductor complex alone. Micron dropped thirteen per cent in a single day, having very nearly tripled earlier in the year. In Asia the damage was sharper still: South Korea’s market fell ten per cent and tripped its circuit breaker, the automatic pause that stops trading when an index falls too far too fast. The Nasdaq, home to the technology megacaps, shed more than four per cent on the week and is now well below the peak it set on the second of June. The S&P 500, dragged by the same handful of enormous names, fell about two per cent. And underneath them, almost unnoticed, the smaller and duller companies that make up the rest of the economy were quietly green.
Gravity, applied with discrimination
Regular readers will know the conceit this column keeps returning to. On the force that “Planet Finance,” the work of gravity is cash. Earnings pull a price down towards something solid; the discount rate sets the strength of the field. When money is cheap and the field is weak, valuations float free of the things that are supposed to justify them, and the lightest, most speculative objects float furthest. For two years the artificial-intelligence giants have been the lightest objects of all, lifted less by what they earn today than by a story about what they will earn in a decade. The further a thing has floated from its earnings, the more room it has to fall when the field switches back on.
And the field is switching back on, for the reason I described a fortnight ago. The Federal Reserve, under Kevin Warsh has stopped promising cheaper money and started, very quietly, to price the opposite. Last week two of the largest banks on Wall Street, Bank of America and Deutsche Bank, moved their forecasts to three rate rises before the year is out, in September, October and December. That is the end of the easy-money story on which the giants were floating. So gravity returned, but it did not return indiscriminately. It reached up and pulled down precisely the objects that had drifted furthest, and left alone the ones that had never left the ground. This was not the sky falling. It was the market remembering the difference between mass and helium.
What actually pricked it, in plain words
The official language for last week is rotation, a healthy consolidation, a broadening of the market. That is the soothing register this column distrusts on principle, so let me name the actual causes, which are less dignified. The first was a chip company declining to flatter everyone. Broadcom, earlier in the month, reported enormous growth and then refused to raise its forecast for the year, and in a market priced for miracles a refusal to promise more is treated as a confession. The second was a hiring number that was too good, the sort of strong labour market that makes a rate cut impossible and a rate rise thinkable. Strength, in a market built on the expectation of cheap money, reads as a threat.
The third cause is the one this column flagged when it first described Planet Finance. SpaceX came to market a few weeks ago in the largest flotation in recorded history, raising some eighty-five billion dollars, and last week it returned to ask for roughly twenty billion more in bonds. A single company is now hoovering tens of billions of dollars of investable cash out of the room to feed its ambitions, and money spent buying the new rocket is money sold from something else. Its own shares briefly fell below their debut price amid a sell-off that erased six hundred billion dollars across the sector before recovering. The largest object ever launched turns out to have a wake, and last week the rest of the market was rocked by it.
The fourth cause is almost a parable. Alphabet, the parent of Google, lost some 270 billion dollars of market value in a matter of days, and the proximate trigger was that two of its researchers changed employers. A Nobel laureate left for one artificial-intelligence rival and the co-lead of its flagship model left for another. Pause on that. A company can shed a quarter of a trillion dollars, more than the entire worth of most listed firms on earth, because two people walked out of a building. That is what it means for a valuation to rest on a story rather than on a machine that prints cash. Stories have legs, and last week two of them used those legs to walk across the road.
Meanwhile, at the other end of the casino
Now for the part that ought to make a serious person laugh and then worry. In the same week that a trillion dollars of the most sophisticated assets on the planet evaporated on fears about the future of machine intelligence, one of the best-performing shares in America was a struggling hamburger chain. Wendy’s, whose stock had fallen about a quarter and which speculators had sold short to the tune of nearly thirty-two per cent of its available shares, announced a new finance chief, attracted a swarm of small traders from an internet forum chanting that they needed to save Wendy’s, and jumped as much as twenty-two per cent in a morning. Not because anyone had sold more hamburgers. Because the shares were heavily shorted, the crowd noticed, and a crowd that notices a crowded short can squeeze it.
Hold the two pictures side by side, because together they describe the whole strange planet. At the top of the market, machines dump the largest companies in history on the syntax of a central bank statement. At the bottom, a crowd levitates a failing burger chain on a meme. The mechanisms look opposite and are in fact identical: in neither case is the price being set by the cash the business produces. One end sells the giant because a story wobbled; the other buys the minnow because a chatroom found a target. Earnings, the thing that is supposed to anchor a share to reality, is a bystander at both ends. The only honest question to ask of the Wendy’s rally is the one the original report asked: how long before the company, handed a soaring share price it did nothing to earn, quietly sells stock into the crowd and uses its own believers as a piggy bank. It would not be the first.
The tell is what did not happen
The most revealing number of the week is the one that stayed calm. In a genuine crisis the fear gauge spikes, credit markets seize, and everything correlated to everything else falls at once. None of that happened. The VIX barely moved, small companies rose, the Dow gained, and government bonds did not signal panic, with the ten-year yield sitting around 4.4 per cent and the thirty-year near 4.9. This is the signature of a sorting, not a seizure. The market did not lose its nerve. It changed its mind about one category of asset, the most expensive and most narrated category, and left the rest broadly alone. That is healthier than a crash, and it is also more honest, because it means the selling was aimed rather than blind.
What to watch, and how
The dangerous conclusion to draw is the comforting one, that because last week was not a crash the worst is behind us. The more sober reading is that gravity has so far reached only the most obvious offenders, the names that had floated furthest, and that if the Federal Reserve delivers even half the rises the banks now expect, the same force keeps working its way down the ladder towards the merely expensive. Watch whether the rotation into smaller companies is conviction or simply money with nowhere better to hide. Watch whether the artificial-intelligence complex steadies or whether 1.3 trillion dollars was a deposit rather than the bill. And watch Wendy’s, not because a hamburger chain matters, but because the appetite for turning a beaten-down share into a lottery ticket tells you how much loose, restless money is still searching the bottom of the market for a thrill.
Both casinos are still open. The algorithms are still making the law at the top, and the crowd is still writing its own at the bottom, and between the two of them sit the cash flows, patiently keeping score, ignored by almost everyone until the week they are not. Last week they finally got a hearing at the very top of the market, and a trillion dollars listened. Whether they ever get one at the bottom, where a failing burger chain trades like a winning ticket, is the question that will define the rest of this strange year.
Eric Lefebvre
See also: The Week the Oracle Fell Silent
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