The co-author of a scenario analysis report on the impact of AI, Alap Shah, publicly commented on Tuesday following a global market sell-off triggered by the report over the weekend. He admitted the market reaction was far stronger than anticipated and called for governments to tax AI to address potential large-scale unemployment.
The Chief Investment Officer of Lotus Technology Management warned in an interview that AI advancements could lead to a 5% reduction in white-collar jobs within the next 18 months, with the US facing the most significant impact without policy intervention. He anticipates service-intensive industries like insurance and banking are at higher risk.
Shah suggested governments should consider taxing the incremental or windfall profits generated by AI to offset the effects of labor displacement and protect consumer demand. He argued that replacing white-collar workers creates a negative feedback loop: companies cut jobs to boost profit margins, reinvest the savings into AI, which in turn drives further job cuts.
As previously noted, the report, which hypothesizes a scenario for 2028, depicts a world where rapid advances in machine intelligence boost productivity but render much human labor obsolete, leading to unemployment, a collapse in consumer spending, and a decline in major stock indices like the S&P 500. Shah admitted, "I expected a modest reaction—but it was clearly beyond our expectations." He stated that given AI-related trading has been ongoing for about three and a half years with a mostly upward trend, leaving few incremental buyers, the reaction was somewhat understandable.
The market reaction was significantly more pronounced than foreseen. The report, published by Citrini Research on social media, combined with market warnings from Nassim Taleb and a statement from AI startup Anthropic, triggered a massive sell-off. IBM's stock plunged 13% in a single day, its largest drop in 25 years. DoorDash, American Express, KKR, and Blackstone all fell more than 6%. A related software ETF dropped 4.8%, bringing its total decline from its peak last September to approximately 35%.
Shah expressed surprise at the market's intensity. "I anticipated a modest reaction, but it was absolutely larger than we expected," he said on Tuesday.
He analyzed that, considering the levels the US market had reached, the reaction wasn't entirely unexpected. "The AI trade has been going on for three and a half years, basically a straight line up. Everyone is long and fully invested now; there aren't many incremental buyers left."
The report set its hypothetical scenario in 2028. Shah explained this timeframe is distant enough to foster discussions on preventative measures but close enough to serve as a serious warning. Recent market volatility has intensified, with tech stocks falling over recent weeks due to fears AI could disrupt business models. The Citrini report further deepened concerns about widespread disruption and job losses.
White-collar employment is at the epicenter of the storm. Shah pointed out that the US hasn't genuinely created any white-collar jobs in the past three years. "A significant number of positions will be replaced by AI, specifically AI agents. These tools have only truly become operational in the past few months."
He believes information workers and their hiring are in the eye of the storm, with employment in information-related jobs down nearly 8% from their 2023 peak. In the report's scenario, a severe economic contraction would lead to 15% of white-collar workers losing their jobs within 18 months with no other employment opportunities.
Shah warned that without policy responses, this group would be forced into blue-collar and gig economies, significantly depressing average wage levels in those markets. Over the next five years, US white-collar employment will be a key metric for measuring AI's impact, with effects likely appearing fastest in the US due to its more dynamic labor market. "It's much easier to fire employees in the US than in the rest of the world," he added.
Shah called for government action to counter AI-driven labor displacement. He stated that taxing the incremental or windfall profits from AI should be considered to protect consumer demand.
"If we allow AI to replace these jobs without appropriately taxing it, we hit the core of the consumer economy. That's the real risk propagation scenario," Shah emphasized. He stressed, "We released this report to the market not just because individual stock risks are important, but more crucially, if jobs disappear faster than expected and there's no plan to address it, the overall economy and the consumer economy are at risk."
Based on the report's discussions, the negative feedback loop from white-collar labor displacement would weaken demand in industries built on intermediary services, such as finance, insurance, and software. Consumer platforms reliant on discretionary spending, including delivery services like DoorDash and Uber Eats, are seen as the most vulnerable areas.
Industry differentiation is becoming increasingly apparent. Shah noted that the benefits of AI are no longer widespread but are becoming dispersed, with the market gradually discerning which sectors will be winners and which will face pressure. "The software industry is the prime example. The market has been selling software stocks for almost a year due to AI threats, and this trend has clearly accelerated in recent weeks."
He said intermediary industries also face tangible risks. Under the potential scenario described in the Citrini report, AI agents could disrupt the payments industry by eliminating transaction fees charged by processors like Mastercard and Visa to save users money.
Regarding investment strategy, Shah revealed, "We typically short companies we believe will be disrupted by AI. On the other hand, we hold significant semiconductor stocks, which we believe will benefit." He expects further near-term market volatility, including for software companies, as traders assess AI's long-term impact. "We are entering a period of high market volatility," he said.
Citrini Research was founded by James van Geelen. The report explicitly states that its content is "a scenario analysis, not a forecast," with the sole purpose of simulating a relatively underexplored possibility. Shah is the CEO of AI company Littlebird and a managing partner at Lotus Technology Management. He previously co-founded the meal delivery service Thistle and served as CEO and Chairman of the financial data platform Sentieo, which was later acquired by AlphaSense.
Comments