Stock options: how to hedge an AI bubble

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The economist.

1:32

Hello and welcome to the Intelligence from the Economist. I'm your host, Rosie Bloor. Every weekday we provide a fresh perspective on the events shaping your world. Turkey has been ruled by one man since 2003. He's become increasingly autocratic and also increasingly old. Now minds are turning to who might eventually succeed him. And a French emigre from Nazi Europe, Georges Bouchard, turned his childhood love of reading into a career as a literary agent. He discovered Samuel Beckett, Elie Wiesel and many more. Our senior culture writer remembers his life. First up though, Alphabet, Amazon, Meta and Microsoft plan to spend a combined total of $660 billion on AI over the next year. Those massive sums signal the enormous hopes being pinned on the technology. Yet they also make people nervous because that's a lot of cash to put in before those firms are getting very much out. Making some fear that the price of stocks in the companies going big on artificial intelligence could actually be artificially high.

1:40

In recent weeks, we've seen big companies announce that they're going to spend absolutely jaw dropping amounts of money investing in AI.

3:13

Josh Roberts is our capital markets correspondent.

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Whereas previously investors were cheering those announcements. Actually, lately we've seen the stock market wobble in response. It seems like they're getting a bit worried about whether they're going to get returns on all of this money that companies are spending on this new technology.

3:25

So what exactly is it that's making the stock markets jittery.

3:43

Well, it's not just that investors are worried about the amounts that companies are spending, although those amounts are vast. It's kind of this feeling that we've been here before. So there are lots of times throughout history where you've had a new technology emerge and it looks like it's going to transform the world. So take railways or canals or electricity or the Internet. And in all of those cases, the new technology actually did transform the world. But in the early stages when it was just coming out, investors got overexcited. They ended up bidding up companies share prices out of all proportion with their underlying profits. And they also ended up picking the wrong firms, not buying the companies that would actually benefit from this. Then, even when the new technology was really successful, a lot of investors lost an enormous amount of money. And there's this worry that something similar is happening again, that AI might be this transformative technology. But share prices have been bid up out of all proportion with underlying profits.

3:47

So we're at a very nervous moment. What is it then that investors can do to avoid getting stuck?

4:46

This is something of a puzzle because you might think the obvious answer is, okay, shares are too pricey, so I'm going to sell my shares. Professional investors often don't have that as an option. For example, if I manage a stock fund and I tell clients, invest in my fund and I'm going to invest in stocks, I can't just suddenly sell them and sit on a pile of cash. I might actually not be allowed to, even if I am my client' ring me up and say, what are you doing? This isn't what I'm paying you for. Even for individual investors who can make the decision to sell their stocks, it's not necessarily a good idea. So take a previous boom, the dot com boom, which ended in a crash. There were lots of wobbles on the way up. And at each wobble, nervous investors might have decided to sell their stocks. But actually, over the course of that boom, share prices rose by a factor of 12. So you would have really regretted selling your stocks on the way up. And in fact, even after share prices plunged at the bottom of the crash, investors who had just held on through the ups and the downs would still have made money. Those who had sold out early wouldn't. So selling your stocks isn't necessarily the right thing to do, even if you think share prices are too expensive and you're worried about a crash.

4:53

So if selling up doesn't make sense, then what else can investors do well.

6:02

The classic way to hedge stock market risk is with bonds. Buy some bonds alongside your stocks. And the reason for this is that bond prices historically have 10 to go up when stocks have gone down, so they've cushioned losses. Now again, looking back at that previous boom, the.com 1 investors who had hedged their stock market risk with bonds did very well throughout that period because actually bond prices went up as stock prices went up, although not as much. And then when stock prices fell, bond prices rose. So they didn't hurt your profits too much on the way up, but they did compensate your losses on the way down. The trouble today is that we've seen this old relationship break down a bit recently. For example, when stock price prices crashed in 2022, bond prices crashed along with them. And what was behind that was the worries were about inflation and inflation can hurt the prices of both of these things. So if we got a similar crash today and lots of investors are quite worried that inflation might cause a crash today, then bonds might not be as effective at protecting people's portfolios as they were in the past.

6:08

And what about an even older haven, gold?

7:09

Yeah, well it's done very well recently and as you say, this is a time honoured hedge against chaos. What makes people worried about gold just now is, is counterintuitively just how well it's been doing recently. It's gone on a roaring bull run over the past year. At the start of this year, traders talk about prices going parabolic, just shooting up and seeming to go towards the moon. What can happen after that though is very large swings in prices. And we actually saw that a few weeks ago. The gold price dropped by about 9% in a single day and then swung wildly afterwards. When you see an asset that is supposed to be a hedge behaving like that, you might feel a little less confident that it's actually going to be a hedge. If it can swing wildly, is it really a safe haven and are there.

7:12

Any other alternatives then?

7:55

Counterintuitively, perhaps the best way to hedge stock market risk is with other stocks. So I looked at a study that analysts at Goldman Sachs did recently on hedges that would have performed particularly well during the dot com bubble. And intriguingly, they found that some of the best ones were select baskets of stocks. So for example, stocks that pay very high reliable dividends, so they offer you a reliable income. They did well on the way up and the way down during the dot com crash. Stocks with low volatility, this is kind of dependable old companies, it might feel a little unsatisfying to say the best way to hedge your stock market risk is with other stocks. But when you look at the alternatives and how these have performed in the past, it might be the best that investors can do.

7:57

So it does sound like there's no way to bubble proof your strategy.

8:41

Maybe no way to completely bubble proof it. But there is a boring answer here, which is that the one safest investment strategy is buy and hold. For the long term. Investors that rode out the dot com bubble on the way up and on the way down and then held on for the following years, they still ended up doing very well. The very worst thing you can do is sell your stocks during the depths of a crash when you actually lose your money. The best advice anyone can give is invest slowly, steadily throughout your career while you're saving and just hold on through the ups and downs.

8:45

Josh, thank you very much.

9:17

Thanks for having me.

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The average age of world leaders has been rising. Unsurprisingly, that trend is driven by autocracies. But even if you're desperate to hang on to power, biology will ultimately defeat you. Everyone has to think about succession eventually.

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Turkey's president, Recep Tayyip Erdogan, has no intention of leaving office anytime soon.

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Piotr Zelewski is our Turkey correspondent.

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He has ruled Turkey since 2003, first as prime Minister and then as president. But that has not prevented some people in his camp from jockeying for position in case Erdogan decides to name a successor or cannot run in the coming elections.

11:11

So I thought he was in for the long haul. Why are people talking about his successor now if he's got no no intention of stepping down?

11:29

Tayyip Erdogan has dismantled most checks on his power, but he has to contend with two things. One is elections, and the other is term limits. Technically, he cannot run again after his current term expires, that is 2028. But he wants to remain in power, and many of the people around him, including his coalition partner, are desperate for him to do so.

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Now.

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There are two ways he could have a shot at another term and at least five more years in power constitutional changes or an early election. As long as that election is called by Parliament, a new constitution or constitutional changes are less likely. Erdogan would need the backing of at least 400 out of 600 members of parliament to push a new constitution without a referendum, and he does not have the numbers now. He could get 360 votes to put new constitution to a referendum, but he risks losing such a referendum. The far more likely outcome is that Erdogan will ask Parliament to call a snap election, presumably in late 2027.

12:02

So what happens if he doesn't stand?

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Erdogan's health is something of a state secret in Turkey, but at 71 years old, he has visibly lost a step. And so if he doesn't stand in the next elections, he is expected to anoint a successor to run his justice and Development Party and run on his party's ticket. Now the party itself has become something of a rubber stamp body and will probably have little to say on the subject. Publicly, justice and Development leaders refuse to entertain a future without Erdogan at the helm. But behind closed doors, a struggle is taking shape. A struggle for Erdoan's ear and for his favor and for a pole position in a future race to succeed him.

12:49

So who might succeed him?

13:33

Four people are set to be in contention. The list occasionally changes, but these four include Erdoan's son in law, a former interior minister, the current foreign minister and his youngest son, Bilal Erdogan. In a survey in December, about a third of Turks said they would like to see Foreign Minister Hakan Fidon in the role of justice and Development Party leader and Erdogan's success successor Bilal Erdogan came in at third place with just over 14%. Lidan, the foreign minister, has by far the best CV of the bunch. He has headed Turkey's intelligence agency for a decade. Before that, he was head of the country's development agency, and he has spent the last two years as Turkey's top diplomat. But Bilal, the sun has become increasingly visible both in media and in party politics. And there is speculation that he in fact is being groomed as Erdogan's prospective successor.

13:36

So what do we know about Bilal beyond him being the president's son?

14:41

He doesn't hold any public office, but he does have a spot on the board of a number of pro government foundations. And he has been edging into the political limelight. He has made appearances at rallies for Palestine. He has been seen alongside his father at meetings with foreign dignitaries and foreign leaders. So all that has fueled speculation that he is being groomed to become Erdoan's successor. I spoke to some analysts who have held focus groups with justice and Development Party voters, and the early verdict is that those voters oppose the idea of government as family business and a family or dynastic succession. The paradox in Turkey is that Erdogan is an autocrat, but he does enjoy genuine support among among the party base. And he does enjoy democratic legitimacy, having won every election he has contested. And Bilal does not have that. He does not have democratic legitimacy. And Erdogan supporters see that.

14:45

So what might we see from Bilal if he is going to try and be anointed as successor?

15:52

Bilal already enjoys significant support in parts of the justice and Development Party. I'm talking about not the base, but politicians and members of parliament. I think the most telling evidence of Bilal being groomed to succeed Erdogan, if not ahead of the next elections, then down the line, would be being appointed at head of justice and Development. And that would place him in pole position in Erdogan succession sweepstakes.

15:58

So what are the odds then of an imminent succession?

16:30

I think there's a clear understanding in Turkey and inside the justice and Development Party that the party itself may have trouble surviving a leadership change. Already it's clear that Erdogan himself, Erdogan senior, may struggle to win another election. High interest rates, new taxes and spending cuts have eroded his popularity over the past couple of years. Inflation is down, but at over 30% remains unacceptably high for most Turks. And Erdogan trails his main opponents in the polls. It's worth recalling that one of those opponents, Ekrem Imamolu, the mayor of Istanbul, has been in prison since March 2025 on trumped up charges. And so while Erdogan Sr. Is hardly assured of victory in the coming elections, any successor would face even steeper odds, especially a successor whose last name is also Erdogan. And that's why the president and the people around him are so desperate for him to run Once again. Turkey's democracy is in very bad shape, but an Erdogan dynasty is from assured Petro.

16:34

Thank you very much indeed.

17:43

Thank you.

17:45

After the war, Georges Borchardt and his oldest sister tried to reclaim their family's apartment in the Trocadero section of Paris. After all, they'd never sold it. They had simply fled.

18:02

John Fasman is our senior culture correspondent. This week he's standing in for our obituaries editor.

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The boyfriend of his sister's friend warned them ahead of the Velodrome d'ver roundup, during which French police arrested 13,000 men, women and children for the crime of being Jewish. Most of them would end up being sent to Auschwitz. Heeding the warning, 14 year old Georges, along with his mother and two older sisters, hid briefly in Paris before making their way south. They went to Nice. After the French militia arrested his mother, he feared they would be next, so they fled again. His sisters to a remote hilltop village, and George to Aix en Provence, where he attended lyce. Unofficially and using a pseudonymous. When they made their way back to Paris, they found the apartment empty. George's stamp collection was gone, as were his beloved books. For Christmas he used to ask his parents either for a new book or to have a favorite one bound. He loved selecting the end papers in leather bindings, loved books not just for their content, but as objets d'.

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Art.

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At school, he excelled at memorizing and reciting scenes from Racine and Moliere. On his own, he devoured Walter Scott and James Fenimore, Cooper, Proust and Gide. But various people had lived in the apartment and in wartime, unattended objects have a way of wandering off. Paper was scarce, books were valuable, but being in the empty apartment was unpleasant. His sisters wanted to emigrate to America. They had no family left except each other. His parents were German Jews who left Berlin after Hitler came to power, hoping that Paris would be safe, which it was, until it wasn't. Their father, a record company executive, died of cancer shortly before Jews in Paris had to start wearing the yellow star. His mother, like so many others, died in Auschwitz. And so, at 19, without connections and speaking schoolboy English, Georges turned up in New York. He put a pair of employment seeking ads in the New York Times and received one letter for each of them, both from the same person. Marion Saunders ran a literary agency that represented French authors and had recently sold American rights to the Stranger by a then obscure Albert Camus. For $350. She hired him, and he did what countless other ambitious young literati seeking a career in publishing have done filing, bookkeeping and errand running while reading manuscripts and hunting for overlooked gems. In 1953, he thought he found one in a middle aged Irishman who was writing novels and plays in French. Editors didn't share his enthusiasm. Pale imitation of Joyce, they told him, unreadable. But he persisted, and eventually he sold Waiting for Godot, Malloy and malone dies for $1,000 for all three of them. Sixteen years later, Samuel Beckett won the Nobel Prize for Literature. Later that same decade, Georges championed another future Nobel laureate, a Romanian Jewish journalist who had written a memoir of his time in Auschwitz. In his cover letter to publishers, Georges said that he felt more strongly about this book than any other I have ever sent you. Still, 15 of them rejected was too soon. Nobody wanted to hear or talk about the Holocaust. The co founder of one of New York's most illustrious publishing houses told Georges that writer will never find an audience in this country. She was wrong, but it took some time. Georges sold the rights to Elie Wiesel's Knight for $250, conditional on finding a British publisher to share translation costs. Its first print run of just 3,000 copies took three years to sell. By 2018, it was selling that many copies each week. Wiesel won his Nobel for Peace in 1986. In 1967, George and his American wife started their own agency. The work suited him. It required judgment, taste and a degree of arrogance. Just as writers must believe they have something to say that nobody has said before, agents must believe they can recognize this ability better than anyone else. His client list steadily grew. He eschewed smash and grab bestsellers and genre fictions, preferring the sorts of novelists, critics and historians whose books won highbrow prizes. Talking made up a lot of the job, and he was good at it. With his wry humor and the slight French accent he never quite lost. He could negotiate fiercely, though he himself was reserved and polite, and, as one author recalled, he had a formality that was a kind of courtesy and seemed to come from a bygone age. He extended it to everyone on Port CROs, the southern French island where he and his wife had vacationed since the 1950s. He would precede his granddaughters down a favored walking path, brandishing a long stick to clear away the spiderwebs they disliked. Touching. He had enough stories to fill a memoir. But he demurred. He was a reader to the end and preferred helping writers to being one asked what he looked for in a piece of writing, he responded simply, I just want to fall in love with it. You don't know until you've found it, but when you find it, you know.

19:24

John Fasman on Georges Bouchard who has died, age 97. That's all for this episode of the Intelligence. The show's editors are Chris Impey and Jack Gill. Our deputy editor is Sarah Lanyuk and our sound designer is Will Rowe. Our senior producers are Henrietta McFarlane and Alize Jean Baptiste and our senior creative producer is William Warren. Our producers are Anne Hannah and Jonathan Day and our assistant producer is Kunal Patel. We'll all see you back here tomorrow when the new series of Boss Class takes the weekend. Intelligence SL.

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