Monday's market sentiment felt somewhat peculiar, reminiscent of a prelude to a dystopian sci-fi film: fears that artificial intelligence (AI) might consume the economy. However, there is truly nothing new under the sun; similar anxieties emerged during the 18th and 19th centuries. Back then, textile mills replaced artisans (the "software engineers" of 250 years ago), triggering significant social upheaval. While we are not at that stage yet, and contemplating such scenarios is indeed meaningful, this is unlikely to be the baseline forecast or even a high-probability event. Although the theory of AI disruption makes for an interesting (even entertaining) topic, more immediate dangers may be lurking elsewhere.

The report that unsettled Wall Street on Monday seemed to suggest the economy faces an unprecedented threat from AI, which could harm employment and subsequently weaken consumer spending power. It is unclear if the invention of the wheel put sedan-chair carriers out of work, but such disruptions certainly occurred during the Industrial Revolution. Indeed, the term "Luddite" originates from a series of early-19th-century riots in England, where protesters decried how textile mills displaced skilled workers and drove down wages. Decades later, the "Swing riots" erupted in opposition to similar developments in agriculture.

Overall, this period coincided with the rise of the British Empire, although the exploitation of colonial wealth also contributed significantly to the nation's prosperity. The disruptive impact of AI is not something society is powerless against. Fiscal policy could play a role, for instance, by eliminating tax subsidies for AI investments or even turning them into tax penalties. One co-author of the AI crisis report did propose such measures, though the realism of this outcome remains debatable. Given that current political rivals struggle to agree on even the most basic facts, expecting a swift governmental response to AI-induced social turmoil appears overly optimistic.

In any case, the potential for AI to disrupt labor markets is no secret. In fact, high levels of capital expenditure have had this effect for decades. Longtime readers of this column may recall a study from several months ago, which found that productivity gains from substantial non-residential investment often manifest as weak employment growth rather than enhanced economic output. High expenditure also frequently fails to deliver returns on profit.

This does not yet constitute a revolution, at least not for now. A common rebuttal to this point is that "you can't see the road ahead by looking in the rearview mirror, and this time is truly different." Honestly, what makes this time feel genuinely distinct is that the "victims" are those in business suits or business casual attire, rather than in overalls. Some commentary suggests there is an "AI risk premium" in the bond market, artificially suppressing yields. Frankly, this is not evident. In fact, the 10-year yield is almost exactly where my model predicts it should be.

Admittedly, the model incorporates expectations for interest rate cuts over the coming quarters, which could arguably reflect deflationary effects from AI. Then again, given Trump's obsession with ultra-low rates and his history with Powell, one might reasonably assume he would appoint a dovish chair regardless of the backdrop. Interestingly, while market focus has largely centered on AI's disruptive impact on sectors like software, the worst-performing industry this year has been finance.

It is still early, and much can change. However, it is noteworthy that the years when financial stocks ranked at the bottom of the returns leaderboard were 1990, 2007, 2008, and 2011. Those are not years one wishes to repeat, and turmoil in the credit markets is growing louder. Meanwhile, the S&P BDC Index is currently at its lowest level since November 2020.

Typically, one would say that a significant risk premium is embedded there. Yet, the problem with the financial industry is that price movements themselves can become "news," which is not necessarily the case for other sectors. Trust is a key component of the financial business model; if that is lost, the consequences can be fatal. Like AI science fiction, this may currently represent a risk rather than the base scenario. But from a broader perspective, spreads offer little cushion compared to historical levels. Even if doomsday scenarios about AI are exciting to ponder, it is best not to overlook what is happening in the private credit market.