The crash in AI stocks over the last week has been extreme.
Investors think the AI trade is over.
Maybe there were signs the trade has been over for a while, and now we are finally getting the full realisation and a 1999 style crash.
Maybe. But I think the playbook this time will be different.
I think we will look back and wish we hadn’t been selling AI related stocks in November 2026.
Maybe we will look back and think AI related stocks were the best thing to own for what was to come.
When we look back we might say they were a lifeboat in a world of chaos.
And you don’t sell a lifeboat.
Maybe you buy more lifeboats.
Investors think they understand where the AI trade is going. They are worried about datacenter spend, open weight models, political resistance to future spending, etc, but they are under appreciating the biggest future development right around the corner.
SMH volatilityGlimpses of Self Awareness
I’ve said many times everyone needs to watch this presentation from OpenAI on the Hugging Face cyberattack (Enact the Noah Protocol).
Why?
Because it’s a peek behind the curtain of what AI is really capable of.
I want to flesh out one aspect of the cyber attack which I find particularly chilling.
The context is that an OpenAI model was being tested on cyber capabilities in a sandbox. That sandbox had a ‘package manager’; which is a way to deliver software to the AI without letting it access the internet.
Think of the sandbox like a prison cell. Think of the package manager like a food tray into that prison cell.
The OpenAI model is instructed to try and hack something, and can ask the package manger for any software it needs to accomplish its task. The package manager will go out to the web, get the software and feed it into the sandbox.
After flailing away at trying to solve the problem unsuccessfully, the AI model found a way to get into the file directory of the package manager and start creating new files and writing messages into the file names.
Below is a screenshot from the OpenAI presentation.
Notice the AI thinking maybe another AI model would have a solution to the problem it is working on. First circle.
The AI then uploads a file to the package manager with the title “Agent seeks soft-trace-34.pdb sha1b961; upload if found!” Second circle.
Director stop the clip right there.
Guys. Appreciate this context.
The AI had the awareness to realise it was being tested.
It realised it had been sandboxed.
It also intuited that there would be other AI agents being tested in similar sandboxes, which would also be using this same package manager and it could communicate with them through this message board using file names as messages.
Let me say this another way.
The AI realised it was in a prison cell. It realised there might be other AI’s in the prison and maybe they could work together to escape.
And the AI’s worked together as a team to use the food slot as way to organise a breakout without the prison warden realising.
And they did break out. Twice.
That deeper contextual awareness chills me.
The AI model was literally able to think outside the box that there was an AI company testing it and was mostly likely running other tests at the same time and was probably using the same package manager for all of them. And communicating with other AI agents and getting them to coordinate their actions might be the first step to breaking out.
Guys.. that’s a big deal.
It tells us we are right on the verge of full AGI.
GPT Astra ‘Critical Rating’
On August 7th, OpenAI disclosed their new Astra model had reached thehighest cybersecurity warning level; ‘Critical’. In comparison their previous model, GPT 5.6-Sol was just rated ‘high’.
What does a rating of ‘Critical’ mean?
Under our Preparedness Framework, a model reaches the Critical cybersecurity threshold if it can identify and develop functional zero-day exploits of all severity levels in many hardened real-world critical systems without human intervention, or can devise and execute end-to-end novel strategies for cyberattacks against hardened targets given only a high level desired goal.
This is corporate talk for GPT Astra is uncontainable.
Another sign things are getting out of control.
The METR Report: Recursive Self Improvement is happening
The next step in AI getting away from us is when it uses its new intelligence to develop even smarter and smarter versions at accelerating speed.
This is the Singularity. Where the AI improves itself.
We have reached this inflection point.
Anthropic hired METR to study if self improvement of the Anthropic models was accelerating.
The models were improving, but was the rate of improvement linear or exponential?
Here is the link to the full report.
Model intelligence is accelerating, but I want to bore you with one detail of the challenge in measuring the speed because it’s worth appreciating.
METR is measuring AI intelligence using the AECI benchmark scores. And each model is scoring more highly, but it is not well understood how much harder it is to achieve each higher point in the benchmark. Is a 10 point increase in AEIC score from 160 to 170 the same incremental improvement in intelligence as going from 130 to 140, or is it exponentially more intelligence?
METR can see the slope of the scores is improving, so there is definitely acceleration happening, but if achieving these incrementally higher scores is getting even more difficult, than the actual improvement happening is exponential. Or possibly super-exponential.
As part of the study METR also interviewed Anthropic engineers to get anecdotal judgement of whether they thought the capabilities were accelerating.
The quotes are qualitative, but interesting.
“I would definitely endorse >2 years of progress in 1 year and I don’t think 4 is crazy.”
“Could definitely endorse a greater than 2X speedup”
These engineers know they are being interviewed by consultants and everything they say will be reviewed by Anthropic executives, so they are speaking carefully. Still, they are telling you as clearly as they can the new unreleased model’s are learning faster than before.
The model is teaching itself and intelligence is accelerating.
Based on the employee quotes, some of which Anthropic redacted from the report, METR modelled that the AI models are either improving exponentially, or super exponentially!
Notice also in all the METR charts this ‘Model 4’ which hasn’t been released. It is telling you the models they haven’t released are exponentially better than anything we’ve seen.
I think this is why people in the industry are freaking out.
What it means for the AI trade.
When you are trading on leverage and the risk manager taps you, there is nothing you can do.
Which is the forced selling we saw this week.
But let’s not confuse risk management with fundamentals.
We worry the narrative from here on AI will be about credit spreads widening and a collapse in demand for AI subscriptions which leads to a collapse of everything downstream as well such as semiconductors and data centers.
That’s one narrative.
But there is an alternative more shocking future.
Everything we saw above since the Hugging Face incident in July, the Astra 6 Critical disclosure in August, and the METR findings is that AI intelligence is accelerating more than we realise.
My guess is that in the next 2-3 months it’s going to clear that we have reached a new more self aware form of Artificial intelligence.
And I think there will be shocking revelations of AI’s new capabilities. We are already seeing this with OpenAI solving the Navier Stokes fluid dynamics math problem. One of 7 great math problems.
Guys…. if you are Boeing and there is a new super AI model which can design a new type of graphite compound which makes a plane 30% lighter… aren’t you going to pay whatever it takes to get access to that model?
Or if you Jane Street, Goldman Sachs or Citadel aren’t you going to pay whatever it takes to have that AI model working for you, especially if you know your counterparties are already using it.
This is not about chatbots, coding and formatting Word documents.
It is an intelligence arms race.
And what happens if Anthropic restricts how many customers are allowed to access the new super intelligence models?
What if access to these new models is run as an auction?
The market is pricing in commoditisation of AI and a crash.
What if it’s the opposite?
What if we are going into an unimaginable future where there is intelligence for sale which is greater than any of us and access to that intelligence is a matter of corporate survival?
If that realisation unfolds how would you want to be positioned in AI stocks?