(MENAFN- Asia Times)
America has financed a current account deficit that bloated to US$1.2 trillion in 2024 by selling tech Stocks to foreigners. Tech stocks, meanwhile, are trading at valuations not seen since 2000, when the nasdaq Composite began a descent that wiped out 75% of its market capitalization by 2002.
Could a tech crash turn into a funding crisis for the United States if expectations sour on the revenue prospects of artificial intelligence? The January 27 crash in AI-related stocks in response to cheaper and better Chinese competition raises troubling questions. These questions have the undivided attention of every equity investor in the world.
Graphic: Asia TimesForeigners stopped buying US debt of all kinds – Treasury, mortgage, and corporate – after the post-Covid inflation of 2021 and the Federal Reserve's consequent rise in interest rates. That denoted the end of a 40-year bull market in US bonds. From a 1981 peak of 15%, the US 30-year bond yield fell in a nearly straight line to an August 2020 low of just 1.41%.
The inflationary surge of 2021-2022 put an end to this bull run. In March 2022, moreover, the US and its allies seized half of Russia's $600 billion in foreign exchange reserves, prompting other central banks to shift away from US Treasury securities to gold and other assets.
But the world's appetite for American tech stocks has been bottomless for the past ten years, whetted during the past year by the advent of Large Language Models (LLMs). Are elevated valuations for AI-related stocks justified? That depends on two factors: Which sectors are likely to generate revenues from AI and how fast they will generate them.
China's DeepSeek R1 model appears to have achieved a breakthrough in model efficiency: novel architecture and related optimizations reduce the required computation by one or two orders of magnitude.
DeepSeek, moreover, offers its model at a small fraction of the cost that its US competitors now charge. That isn't necessarily bad for the US tech industry as a whole. If China has a better technology, US companies can adopt it rapidly, and lower costs for AI modeling will benefit the users of AI models.
There are seven major categories of AI applications in which the US and China compete. China is ahead in most of them and its AI prowess is likely to increase its lead. They are
Manufacturing: China has poured enormous resources into factory automation. One gauge is the number of factories outfitted with dedicated 5G networks, which support AI applications. China claims 10,000 such installations, while the US has only a few dozen, concentrated in the auto industry. The advantage is strongly in China's favor, and advances in AI are likely to enhance it. But US manufacturing has had small impact on equity valuations.
Internet of Things: China is ahead in automating transportation and warehousing, with fully robotic warehouses now in operation.
Robotics: China installs more industrial robots each year than the rest of the world combined and is now a major producer of industrial robots.
China is the leader in the so-called low altitude economy, cited by government planners for the first time in a December 2024 working paper . Drone taxis, drone deliveries and other applications are now a $100 billion business in China and are expected to double by 2026.
Autonomous vehicles: We'll call this a toss-up between the US and China, although China already has autonomous taxi services operating on a small scale.
Large Language Models: again, a toss-up. The gains to be harvested by LLMs include the Philippines' $40 billion a year call center business, in which human operators can be replaced by AI systems to a considerable extent. But the possibilities for LLM applications are so varied and extensive that predictions are guesswork at this stage.
Biotech: The US has a distinct advantage with a strong pharmaceutical development infrastructure. China has a lead in medical data, but America's complex of large pharmaceutical companies, startups and venture capitalists give it an edge.
The big question mark over LLM monetization is timing. The payoff could be big but will probably take longer than expected to materialize.
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