The next piece of the economy that I really don’t agree with is the recent AI hype of the last 4 years or so. Because of bad Fed policy, where they didn’t grasp the concept that printing more money would devalue the dollar (inflation) they were very far behind the curve in raising rates and thus ended up having to raise them quickly, and to a point higher than they otherwise would have, keeping them high for much longer than they should have. Because of the delay in rates’ effect on the economy (and the Fed’s super slow reaction to anything) that should have caused the economy to choke in a major way. And I think it would have, if ChatGPT 4.0 hadn’t come along in the spring of 2023.
ChatGPT showcased how far AI had come, it was a nice step and really jolted people into thinking it could replace jobs and make companies much more efficient and productive. That seemed to make everyone involved in the stock market think that every company, especially the tech ones, should be worth much, much more, and that any company involved with AI in any way should be trading at a ridiculous multiple, basically instantly.
My first issue with this line of reasoning is that AI has been around for a long time – it didn’t just appear out of nowhere in the spring of 2023. Garry Kasparov was playing chess against computers 3 decades ago and Ken Jennings played Jeopardy! against a computer 15 years ago. We’ve had AI replace operators and customer service people at all kinds of companies (and notoriously not doing a great job) for years.
I’m not saying AI won’t be a great improvement on our lives over time; I’m saying it’s been evolving for a long time and didn’t just come out of nowhere and therefore there’s no need to assign ridiculous valuations to the involved companies.
My second issue is that I don’t believe this will help companies as much or in the way that people seem to be pricing into the stock market that it will. And I think the internet revolution in the 90s is a really good analogy for this.
It’s important to think about what really happened when the internet was developing, specifically for the companies that existed back then. It seems like a great way for those companies to have reached their customers more easily – for advertising, online shopping, etc. And to a degree that has played out over the past 25 years or so… for those companies that survived. However, the reality is that not evolving killed many companies (think Circuit City, Radio Shack, Borders, Sears and many other department stores, and so on). A company from back then HAD to create some kind of online presence – NOT to become MORE profitable, but just to survive. Hundreds of internet-related companies were born, most didn’t survive (think Pets.com as the great example of the top). And the pick-and-shovel companies like Cisco, Intel, etc., made some money, but could only grow to a certain size and were eventually right-sized after the crazy speculation period was over.
Of course, some companies were born that couldn’t exist without the internet (eBay, Facebook, Google, Amazon) and they’ve grown to be huge. But for every one of those there are countless one-time competitors that didn’t make it. I remember uBid and other auction sites; everyone around my age remembers Myspace and maybe even Friendster; there were countless search engines at one point (I used Yahoo, AltaVista, Lycos), and there were even companies doing what Amazon does today – you could order a variety of things and have them delivered to your door within a couple of hours.
I see this going one of two ways from here: Either these companies spending tons of money to build out an AI presence realize they can’t make all that money back, and stop spending, or they spend the money once to have that presence and can’t continue to spend at the same rate going forward. Either one results in the high multiples assigned to the pick-and-shovels companies collapsing. I just can’t imagine AI causing that much extra money (the amount that all of these companies’ market caps have inflated) to flow into the economy. Just like the internet more changed HOW we spend money, than HOW MUCH we spend.
Which brings up another thing seeming to happen among these companies: the circular flow of capital. Company A buys something from Company B which buys something from Company C and C buys from A. This obviously causes the problem of an appearance of lots of money changing hands, when it’s really just a net wash.
AI has already had a big impact on our lives, and that will no doubt continue. The question, which I think the stock market is greatly overestimating, is how much money will that ultimately generate. Again, think internet – are you spending more money now than you would have before the internet, or are you just spending it in a different way?
-DD
