Société Générale's "Big Short" Edwards: TFP Indicator Closely Resembles Eve of Asian Financial Crisis, AI Boom May Be a Bubble

Cailian Press, October 9 (Editor Huang Junzhi) — Disappointing "total factor productivity growth" reminded veteran analyst Albert Edwards of the outbreak of the Asian financial crisis.

Edwards, a London-based analyst at Societe Generale, is known for his extremely pessimistic market views and even calls himself a "super bear." Nearly 30 years ago, he accurately warned of the 1997 Asian financial crisis. Now, he has set his sights on the currently red-hot artificial intelligence (AI) boom.

What led Edwards to this conclusion was a research report published by Apollo chief economist Torsten Slok. Slok pointed out that an economic indicator called total factor productivity growth (TFP) has performed disappointingly. The indicator measures how much output an economy can produce after a given amount of labor and capital input.

"After stripping out the contributions from increased working hours and growth in machinery and equipment input, the remaining portion of economic growth is TFP," Slok explained. "TFP rises when companies can increase output without adding inputs, so it is currently the most reliable proxy for measuring technological progress."

After carefully reviewing the data, Slok concluded that although the AI boom is evident in investment data and stock valuations, it has not yet shown up in productivity statistics, meaning that "the productivity payoff from AI remains a forecast, not an observation."

This result reminded Edwards of the main reason he was bearish on Asia in the mid-1990s, when he happened to read an article by Nobel economics laureate Paul Krugman that highlighted weak total factor productivity growth, in sharp contrast to the then widely believed narrative of rapid Asian economic growth.

On top of that, the market at the time was flooded with a series of research reports and publications praising the Asian economic "miracle." All of this led Edwards to conclude: "Too many people believed this highly seductive story," which resulted in "cheap and abundant funds being supplied to these economies, and those funds were misallocated."

Edwards believes the financial crisis that subsequently swept Asia and its contagion effects were "entirely foreseeable," just like the U.S. internet bubble in the late 1990s. Therefore, he is skeptical of claims that the current AI boom is not a bubble.

However, Edwards also acknowledged that the benefits of AI may not yet have shown up in total factor productivity (TFP) data, and that it is indeed too early to characterize the AI boom as a bubble. But he further cited research by another economist, Rob Parenteau, to support his skepticism.

Parenteau, who once worked at Allianz, recently pointed out that although total U.S. corporate investment is growing rapidly, net corporate investment is basically flat.

Edwards noted that if U.S. business investment has grown substantially only in nominal rather than real terms, then his skepticism about AI is well founded.

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