On Tuesday, Italy became the first country to formally throw a hissy fit over OpenAI’s ChatGPT. The Italian government data protection wing known as Garante blamed “a data breach at OpenAI which allowed users to view the titles of conversations other users were having with the chatbot,” according to CNBC.

There “appears to be no legal basis underpinning the massive collection and processing of personal data in order to ‘train’ the algorithms on which the platform relies,” Garante’s public statement read. “Garante also flagged worries over a lack of age restrictions on ChatGPT, and how the chatbot can serve factually incorrect information in its responses.”

OpenAI, which is Microsoft’s leading horse in the artificial intelligence race, faces a fine of nearly $22 million – 4% of its global annual revenue –- if they don’t come up with remedies to the situation in the next 20 days.

The OpenAI stock— which is quite literally a penny stock— rallied nearly 15% in trading yesterday, only to give all back today. Another AI stock C3.ai was whacked for 38% over the past two days by short sellers. It too caught some hullabaloo.

This morning, when I asked ChatGPT “why are AI stocks volatile”, she sent me back the following response in less than a second:

AI stocks can be volatile for a number of reasons, including:

High growth expectations: AI is a rapidly evolving industry with a lot of potential for growth, which can lead to high expectations from investors. When companies fail to meet these expectations, it can result in a sharp drop in their stock prices.

Limited adoption: Despite the potential of AI, its adoption is still limited in many industries. Companies that are heavily invested in AI may see fluctuations in their stock prices based on how quickly AI is being adopted in their industry.

Competition: The AI industry is becoming increasingly competitive, with new startups emerging all the time. Companies that were once seen as leaders in the industry can quickly lose ground to newer, more innovative startups, leading to volatility in their stock prices.

“Overall,” ChatGPT concludes, “AI stocks are volatile because the industry is still in its early stages, with a lot of potential for growth but also many uncertainties and risks. Investors need to be aware of these risks and invest accordingly.”

The irony of asking her about the speculative nature of her own stock price is not lost on us. Nor is the timing. We’ve been wondering how, amidst all the angst on college campuses and SAT testing sites, how AI bots are going to change our own business.

We’re thinking it’ll make searching data on the internet for any number of subjects way more efficient. Like Wikipedia was for the Internet.

For example, we’re updating our book Financial Reckoning Day to bring it current from the Tech Wreck, through the Panic of ‘08, through the pandemic and our own current banking crisis.

When we asked ChatGPT “what is the impact of economic bubbles on the stock market, she vomited this passage before my very eyes:

Economic bubbles can have a significant impact on the stock market. A bubble occurs when the price of a particular asset, such as stocks or real estate, rises to unsustainable levels due to speculation and excessive optimism. When the bubble bursts, prices plummet, and investors can suffer significant losses.

Well, she’s not wrong.

Maybe a bit less snarky than I would have been. But let’s compare to a few Mark Faber quotes we used in 2002 while analyzing historic bubbles in the context of notorious “.com” stocks. Faber:

The Mississippi Scheme and the South Sea Bubble are historically relevant because they contains all the major features of subsequent manias: shady characters, corruption, fraud, dubious practices, the creation of money and the extension of risky loans in order to keep the speculative orgy going, the catalyst, which leads to the initial collapse—usually the revelation of some fraud, the inability of a large speculator to come up with the money to meet a margin call, the revelation that insiders had cashed out, or some adverse economic or political news—and then panic during which greed and euphoria are replaced by fear and the speculators’ desire to get out at any price.

A few pages later, Faber explains:

The bubble model always involves a “displacement,” which leads to extraordinary profit opportunities, overtrading, over-borrowings, speculative excesses, swindles and catchpenny schemes, followed by a crisis during which fraud on a massive scale comes to light, then by the closing act during which the outraged public calls for the culprits to be taken to account.

“Investors never squawk when their assets are rising in price,” we quote ourselves from the book, “so the money and credit inflation is allowed to continue—and is even encouraged—until it finally reaches such grotesque levels that the smart money cannot help but notice, and begins looking for a way out.”

Likewise, a major boom is almost always accompanied by some technological or business excitement. In the 1920s, people believed that new machines, radios, and appliances were the source of the apparent boom. In the 1980s, people believed in the quality of Japanese management and Japan’s whole enterprise system.

Despite— and maybe even “in spite” of— the Italian government’s ruling, you can expect AI to have a whopping impact on the economy and stock market, as well.

Concomitant with the “extraordinary profit opportunities, overtrading, over-borrowings, speculative excesses, swindles and catchpenny schemes, followed by a crisis during which fraud on a massive scale” Faber refers to above.

Didn’t we just see a similar event just last December when the crypto exchange FTX went bust amid massive allegations of fraud and theft?

Follow your own bliss.

Addison Wiggin
The Wiggin Sessions

P.S. Yesterday we mentioned Hyman Minsky’s analysis of credit busts. Minsky also showed booms and busts actually play an important economic role — they focus resources on an up-and-coming sector and speed its development.

Investors are not crazy to put money into a boom at the beginning; they are crazy to do so at the end, when prices have become absurd. Just sayin’… AI is here to stay. We just have to keep our wits about us as it prints its way into all of our lives. We promise we’ll always tell you when we’ve used it in our Daily Missives!