The AI 'Chipwreck'
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What caused the recent 'chipwreck' in the AI trade?
Hello, I'm Alan Collar, editor-at-large of Intelligent Investor and finance presenter, columnist and podcaster for the ABC. And I'm James Thompson, senior Chanticleer columnist at the Australian Financial Review. And we are The Money Cafe. Well, James, it's before eight on... Wednesday morning, and no doubt you've been bashing something out about what happened on Wall Street last night. Tell us what you wrote.
Alan, yes, I've been watching this closely and just filing on it. And I think that the story here is that it's all started with a Korean barbecue. I don't know if you spend a lot of time watching the Korean market, but it had a bad night on… Quite like a Korean barbecue, though. It had a bad day on Tuesday. The market fell 10%. It's called the KOSPI index. And this year, it's been powered by two stocks, basically, SK Hynix and Samsung Electronics, both of which make memory, computer memory, which has become increasingly important in the AI infrastructure build-out. You need lots of memory to help make those data centers. But yesterday we saw – on Monday night we saw a bit of skittishness in tech stocks on Wall Street.
The big move there was SpaceX was down 16%. That carried over into the Korean session on Tuesday where But two things happened. One thing is that SK Hynek said that they will adjust their production. They'll make less of their AI memory chips and more commodity memory chips, they're called. That's the stuff that goes into your laptop and other devices.
Yeah.
And while this was portrayed as a move because the commodity memory profit margins are bigger than the AI profit margins, so SK Hynix is sort of making sure it maximizes profits. That's a bit surprising. Yeah, a little bit. But we have seen in the last little while a bit of a push from around, you know, we've seen laptop memory prices shoot up. I don't know if you've noticed that. It's been a while since I bought a laptop. Yeah, if you went and bought one now, you'd probably end up paying the same, you know, let's say you wanted to spend, I don't know, I'm picking a number here, $1,500 on a new laptop. You'd still be able to find a $1,500 laptop. It would just have less memory and less compute in it than it did a year ago.
because of these soaring memory costs. There's a shortage of memory around the world. So anyway, SK Hynix made this announcement. People read it as, uh-oh, is AI demand shrinking? And that weighed heavily on these stocks. But the other problem in Korea, Alan, is that they've become very enamored with these ETFs that allow you to bet on a single stock using leverage. That's not just in Korea, is it? No, it's not just in Korea. It's in America and Hong Kong. The most popular ones are in Hong Kong, actually. And the most popular of these levered ETFs is the most popular levered ETF in the world allows you to bet on the share price movement, the daily share price movement on SK Hynix. With two times leverage.
So let's say SK Hynix goes up or down 5% in a day, then this ETF goes up or down 10% in a day. And the Asian investors have fallen in love with these things. and are juicing their bets on the AI trade with extra leverage. Now, that's great when the stocks are going up, which they have been, but at moments of doubt, you get these moments of big volatility. And so yesterday we saw the Korean market briefly shut because it hit its – it fell as much as the operators are allowed to – Allow it to fall in any one session. That's the fourth time that's happened in the last year. And we saw SK Hynix and Samsung closed down more than 12%. That rolled over into Wall Street. So the Philadelphia Semiconductor Index, the SOX Index, which has been the hottest trade in the world this year, it was down 8% last night.
NVIDIA was off 4%. A company called Micron Technologies, which is Probably the hottest memory stock in the world other than SK. Sorry, the hottest chip maker in the world was down 13%. So we've seen this real sell-off in chips and chip stocks and memory stocks. It's already got a little name, the chip wreck.
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Chapters
6 chapters
1
What caused the recent 'chipwreck' in the AI trade?
0:12–8:21
2
How is SpaceX's stock performance affecting the market?
8:21–16:48
3
What are the implications of KPMG's whistleblower scandal?
16:48–25:52
4
How do recent changes in capital gains tax affect SMSFs?
25:52–33:48
5
What questions are being raised about housing affordability?
33:48–39:56
6
How is childcare impacting working parents financially?
39:56–48:23