The hope and the hype
Where do I sign up?
Joe Calhoun of Alhambra Investments says something I’ve wanted to say myself but hadn’t found the right words for.
Calhoun has.
Information technology has long promised a productivity miracle, but it’s turned out to eat up almost as much productivity as it adds. Constantly learning and applying new tech takes a lot of time and effort and means you never really have a chance to get good at it. Calhoun says:
“Technology has jumped the shark; today, it often makes life more complicated rather than less. Endless two-factor authentication codes, dynamic pricing, a constant flood of spam and phishing attempts (which have now invaded our calendars), app-only discounts, subscriptions for everything, embedded vehicle tracking, endless customer service bot loops (OMG, how do I get a human on the phone?), QR code menus, self-check-ins, and grocery self-checkouts. Technology has enabled companies to become more efficient but at their customers’ expense.”
To this we could add the endless app updates that don’t really improve anything and the proliferating channels of communications, from mail to telephone to email to voicemail to text messaging, etc. All this is externalizing costs, much as Big Tech seeks to do with its privacy appropriation and energy demands. And it’s going to have to extract a lot more from me and thee to justify its market valuations. It’s growing so big and pervasive it’s as if we’re growing another government.
I could quote much more but you will want to read the article for yourself.
More on the investment angle …
Michael Burry’s bearish view. The market is in ‘denial’ about the end of the AI trade.
I just want out: Billionaire investor Jeffrey Gundlach, who called the housing bust in 2007, says you should have almost nothing in AI stocks
One nit to pick. IBD frames this as a “pessimistic” view. I see it as the opposite. Bubbles are bad for the economy, and the longer they go on the worse. An implosion of the AI bubble, while transiently difficult, would ultimately lead to better living standards than its continuance. There’s only just so much real capital available, and the AI bubble is hoovering it up, leaving housing, transportation, education, medicine, etcetera wanting. Deflation of the bubble would take emotion out of it and lead to a more rational balance of capital priorities.
“The S&P 2”: Micron And Nvidia Alone Will Deliver A Third Of Q3 Earnings Growth As Median Stock Barely Grows
Robert Solow, some time in the ’90s, famously said “I see computers everywhere but in the productivity numbers.” It takes time to reorganize work to take advantage of really new tech. I expect a crash before we get there, likely emanating from credit.
It’s always the debt. Until recently, most of “hyperscaler” capital spending was financed with organic cash flows. Now it’s dipping into borrowing – hundreds of billions of it. At some point rock meets hard place.
Stock buyback scam hits new records
“The AI-chip giant Nvidia (Nasdaq:NVDA) announced this week that it was launching the biggest share buyback in U.S. history, at $150 billion, taking its authorized buybacks to $235 billion by January 2028”
“For tech companies like NVDA, the fairly feeble arguments for stock buybacks by mature industry corporations do not apply. Far from having excess cash flow, tech companies must invest gigantic amounts of money to keep up with their competition and markets in a rapidly expanding field.”
And reinvestments needed just to maintain competitive position aren’t true profits, they’re a cost of doing business. Besides the disproportionate benefit to insiders from share buybacks, this is another reason why dividends are relatively low. Dividends tend to reflect the earnings a shareholder can sustainably expect.
“The SEC should repeal Rule 10b-18, adopted in 1982, which “clarified” the stock buyback rules in favor of greedy management and against ordinary shareholders.”
Will AI Really Raise Productivity?
“And it’s going to have to extract a lot more from me and thee to justify its market valuations.”
We are witnessing the stock market do something for only the 3rd time in 156 years
“A recent Wall Street Journal study found that American businesses and consumers would have to spend the equivalent of 8.8% of the country’s GDP annually on AI to justify the industry’s immense spending. This sounds like a tall order, which raises the possibility that many current data center investments will never pay off.”
The Financial Times reports that OpenAI’s revenues fell about $20B short of previous expectations. OpenAI’s stock doesn’t publicly trade, but AI related stocks like Nvidia and Micron are down sharply.
Your Stake In The Biggest Economic Bet In US History
“Economist Stijn Van Nieuwerburgh estimates investment in data centers, power systems, networking infrastructure, specialized chips and other AI-related equipment will total an astonishing $10.3 trillion from 2025 through 2032. That works out to an average of 3.63% of U.S. GDP every year.”
So let’s see … it’s spending a whopping 3.63% of US GDP and would require 8.8% of GDP for it to pay off.
This is bigger than railroads, electrification and highways put together.
Whether you live in America or Timbuktu, there’s no way you won’t be affected.
As a young engineer I worked with an old guy near retirement. I was gushing about how great my PC was for working. He smiled and asked a question: ” Will computers do for engineering what typewriters did for poetry?”
Around 1980 or so I was an engineering student learning to use a mainframe to run FORTRAN and run CADCAM on desktop workstations. We enjoyed it. We didn’t have a home PC until the early or mid 1990s. Even the old i386 was pretty capable for doing actual computing. PCs started to slow down a lot though once we started connecting them to the internet.
At first it was great. But soon you had to start updating regularly to maintain internet compatibility. And every new software iteration slowed your machine down and the skills you developed became obsolete. Having to learn and relearn sapped most of the productivity benefit.
Having tried later versions, I’m still using Excel 95 to run Synthetic Systems. Another desktop is a Mac Pro I use for music. I’ve kept it unplugged from the internet and it’s just as fast as the day I set it up over a decade ago. Few get to appreciate the benefit of not having the constant drain of overhead just to keep up and being able to get really good at using certain operating systems and applications.
One worry I have about AI is that it will completely displace traditional computing. We’re already seeing AI features being added everywhere they can fit and some places they don’t. That would be a loss inasmuch as it’s very useful to have machines with a stable and defined input-output relationship. You can perform a given task on a given set of data and get the same reliable answer each time you do it. Losing that will result in unanticipated consequences that won’t be fully appreciated until they’re gone, but it’s apt to happen anyway.