We know that we should be focusing on the future, but we are often fixated on the present.
Earnings for the next quarter, or whether Fed will increase rates next week are given more importance than they should. It’s partly because it’s more convenient to think about the future in terms of years, rather than weeks.
This short-termism is what causes the volatility of the market. Each minor change, such as in inflation expectations, is extrapolated beyond what can be seen.
Short-term changes in outlook can be of great importance for a perpetual asset such as a share with no redemption date or an long-dated bond that will mature years or decades from now.
Rarely, though, will something come along that has a real impact on the long-term prospects.
Everyone is in agreement that the new “something” will change the world beyond recognition. Canals, trains, radio, space travel and the internet all seemed to be transformative.
AI is the newest in this revolutionary line of technologies. The emergence of generative artificial intelligence can be both exciting and frightening.
The International Monetary Fund’s second-ranked economist, Gita Gupnath, stated this week that breakthroughs in AI – especially large-language models such as ChatGPT – have the potential not only to increase productivity and economic growth, but to disrupt the labour market, and possibly fuel mass unemployment.
Gopinath used the example of the automation of the car production line to demonstrate the dangers that lie ahead. He also made the mistaken assumption that the workers who were laid off due to this technological shift would find new opportunities quickly in other sectors.
It is more interesting to look at what happened in the past, when these same factories were full of workers and they themselves became the future. They replaced within a few years an entire horse-based economy.
In 1908, there were 120,000 horse in New York and 8,6 million horses in the US. It’s hard to underestimate how much the economy of America was dependent on horses.
Farmers prospered in this country by producing hay for the millions of horses, with one horse per five people.
The city came to a grinding halt when equine influenza spread across the US north east. Streetcars stopped running, shops ran low on supplies, and construction workers had to put down their tools.
In a single generation, everything had changed. In 1890, there were almost 14,000 American companies that made carriages pulled by horses. In 1920, there were only 90.
In 1903, when Henry Ford produced his first automobile in America, only 11,000 cars were sold.
Sales had reached 3.6 millions ten years after his first assembly-line reduced the time to manufacture a car to less than three hours. Ten years later, the production rate had risen to 20 million cars per year.
The change from horse to automobile was a transformational one. In the 40 years since 1910, the auto industry is estimated to have created nearly 7 million jobs. This represents 11pc in 1950.
The real impact of the economic downturn was not predictable.
Consider all the hay. In the 1920s, the rapid decline in animal feed demand led to a depression in agriculture. This had a major impact on the US economy in the Great Depression.
In other countries, automobiles were instrumental in the creation of new industries. Mid-1920s, three-quarters of cars were purchased on installment credit. Consumer finance was fueled by cars, and vice versa.
Goldman Sachs predicts that AI automation will disrupt 300 million jobs over the next decade and increase global economic output by 7pc. It is easy to understand why investors are both excited and afraid about AI’s potential to reshape global economies.
Why they should be looking for winners and losers. The search for AI-based beneficiaries has fueled the 27pc rise in the tech-heavy Nasdaq year-to date. Individual investors, like they did 25 years ago during the early days dot-com boom, are now chasing higher the market.
FOMO is back!
Nvidia, a maker of AI chips, has seen its shares rise 164pc in the first half 2023. The company’s stock is now valued at 200 times expected earnings. This is four times the valuation multiple that was under 50 only six months ago.
Investors were pulling their money out of equity funds three months ago as a growing banking crisis and higher interest rates increased the appeal of money-market funds.
Those risk-free, but pedestrian returns seem dull today. You are correct if you feel we’ve been here before.
It is worth remembering what happened in the past if we are at the beginning of a new TMT bubble. The mania was widespread.
Many businesses that were not very exciting added “.com” at the end of their name to get a new rating. Investors found new and inventive ways to convince themselves that profits were not important.
The newbies were too late to the game when they couldn’t stand watching their friends and relatives make life-changing sums of money, while they watched.
There is a big difference between an industry that changes the world, and one that transforms the fortunes investors. It may not have been the advent of the automobile and the demise of the horse-drawn industry that preceded it.
It could be due to the rapid growth of the airline industry.
It really transformed our lives, but as Warren Buffett likes to point out, investors have probably lost money since the Wright Brothers took flight at Kitty Hawk.
AI will likely change the world. Investors are still unsure if they will gain from AI.