Accurately Predicted the 1997 Asian Financial Crisis! Societe Generale's Legendary "Big Short" Finds Startling Similarities

Nearly 30 years ago, he accurately forecast the 1997 Asian Financial Crisis. Now, this well-known strategist is issuing another warning: the current global artificial intelligence (AI) investment frenzy bears alarming similarities to the market conditions that triggered a chain of financial crises across Asian economies back then. In his view, the current AI boom is very likely a bubble.

This strategist is Albert Edwards, a London-based analyst at Societe Generale. He is known for his extremely bearish market views and even refers to himself as a "super bear."

The catalyst that prompted Edwards to draw parallels between the current AI frenzy and the Asian Financial Crisis was a recent research report by Torsten Slok, Chief Economist at Apollo Global Management.

In his report, Slok pointed out that a key economic indicator called Total Factor Productivity Growth (TFP) has shown disappointing performance.

This metric measures how much output an economy can generate given a certain amount of labor and capital inputs.

Slok explained: "After removing the contributions from increased working hours and growth in machinery and equipment investment, the remaining portion of economic growth is total factor productivity. TFP rises when businesses can increase output without needing additional inputs, making it currently the most reliable proxy for measuring technological progress."

AI Investment is Booming, But Productivity Gains Remain Elusive

After carefully examining the relevant data, Slok reached a noteworthy conclusion:

Despite the AI boom being clearly reflected in corporate investment data and stock valuations, its actual effect on productivity has yet to materialize in the statistics so far.

This means that "the productivity dividend from AI currently remains a prediction rather than a reality confirmed by data."

This perspective reminded Edwards of his experience in the mid-1990s when he was bearish on Asian economies.

At the time, he read an article by Paul Krugman, a Nobel laureate in economics. Krugman noted that Asian economies had weak total factor productivity growth, which contrasted sharply with the prevailing market narrative of rapid Asian economic growth.

This discovery became an important basis for Edwards' pessimistic forecast back then.

Meanwhile, the market was flooded with research reports and publications praising the Asian economic "miracle."

Edwards realized that the market had fallen into dangerous collective optimism.

He noted: "Too many people believed this enticing story."

As a result, investors and financial institutions poured cheap and abundant capital into these economies, and these funds ultimately ended up being misallocated.

In Edwards' view, the financial crisis that subsequently swept across Asia and its spillover effects were "entirely foreseeable."

Similarly, the formation and burst of the U.S. internet bubble in the late 1990s was, in his view, also not unpredictable.

For this reason, Edwards has remained skeptical of the mainstream view that "the AI boom is not a bubble."

Another Warning Sign: Corporate Investment Appears Strong, But Actual Growth May Be Limited

Of course, Edwards acknowledges that it may still be too early, and the economic benefits from AI may not yet be fully reflected in total factor productivity data.

However, he further cited research by another economist, Rob Parenteau, to support his skepticism.

Parenteau, formerly of Allianz, pointed out that while U.S. corporate total investment is growing rapidly, corporate net investment has basically remained flat.

This discrepancy is noteworthy.

Total investment reflects a company's overall spending on equipment, buildings, and other capital assets, while net investment represents total investment minus depreciation of existing capital.

In other words, companies appear to be investing more and more money on the surface, but after deducting the spending needed to maintain and update existing capital, the actual new capital accumulation may not be as strong as imagined.

Chart note: Current economic data has not shown a significant productivity boost from AI. Chart source: Apollo

Edwards believes that if the notable growth in U.S. corporate investment is primarily reflected in nominal amounts rather than actual investment scale, then his skepticism about the AI boom is entirely justified.

This judgment further deepens his concerns about the sustainability of the current AI investment frenzy.

Tech Stocks Surge 40%, Chip Stocks Nearly Double: Is the Market Overly Optimistic?

It is worth noting that while economists are questioning whether AI can truly drive productivity growth, financial markets continue to show enthusiasm for artificial intelligence.

The State Street Technology Sector SPDR ETF (XLK), which tracks the U.S. technology sector, has surged 40% year-to-date.

Meanwhile, the semiconductor sector has performed even more impressively. Chip stocks represented by the semiconductor ETF (SOXX) have posted gains approaching 100% this year, with market value nearly doubling.

The strong performance of technology and semiconductor stocks highlights the enormous expectations investors are placing on the AI revolution.

However, Edwards' warning lies precisely in this: when the market forms a highly uniform optimistic expectation around a particular technology or economic growth narrative, capital may pour in massively, and whether these investments can truly translate into productivity gains and economic returns remains to be verified.

From the 1997 Asian Financial Crisis, to the internet bubble of the late 1990s, and to today's AI investment frenzy, Edwards sees a common thread worth vigilance: the market may place excessive faith in an exciting growth story while ignoring the underlying economic data that supports that narrative.

However, whether the current AI investment frenzy will ultimately evolve into a bubble, and the extent of artificial intelligence's long-term impact on productivity, remain uncertain.