Scary smart

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I was staying with my mum on the weekend in Melbourne, and she had this book in her study. I was super excited, as I knew it was precisely the kind of book I was keen to sink my teeth into. It was written in 2021, which made me somewhat worried that it would not be up to date with the incredible progress AI has made since the launch of ChatGPT on 30 November 2022.

Mo Gawdat was the Chief Business Officer of Google [X], which is Google’s innovation arm focusing on moonshot technology breakthroughs. Mo is an engineer with a 30-year career in technology at the top end of town. In short, he is a subject matter expert, beyond just the academic sphere. He is a practitioner and businessman. The kind of person I like to learn from.

I will save you the effort of reading the whole book and focus on his key concern, which is exactly how I have been feeling about the whole AI complex.

The AI industry is not as new as you think it might be; I was even developing neural network models back in 2005. In fact, I was a co-founder of an AI university in Ukraine in 2018, so one should not think this technology or industry is new. I was early once again. The story of my life.

People close to the industry understood what machines were capable of many years ago. I think we just never anticipated the speed at which the industry would continue to grow and the power of the models available to the man in the street to accelerate this growth. Moore’s Law is alive and well.

There is no going back; we have entered a very powerful new era where the machines will soon (in a decade or so) become a billion times cleverer than us. This is where he worries, as do I. AI is a reflection of humanity’s good and bad qualities amplified beyond our imagination. It is not hard to picture a very dystopian view of our future.

Over the last couple of months I have been contacted by a number of former work colleagues who are excellent programmers. They are struggling to find work. I have been saying it for some time, and Mo Gawdat agrees with me, as do Elon Musk and many other big players in this space. The market is currently too focused on the upside potential and not focused enough on the economics and socio-economic impacts of this technology revolution.

The above chart is doing its rounds and speaks to the circular nature of the capital flows in the industry at the moment. Be on high alert for the accounting shenanigans when the main players are both customer and supplier to one another. Value is simply the discounted cash flow of future returns. As Jerry Maguire famously said, “Show me the money!”

I am not going to sit on the fence for this one. It is too important. We have an industry that has gotten ahead of itself on the valuation, ethical, and governance fronts. We will likely experience a generational shakeup in the job market that will no doubt have severe economic ramifications. We will see wealth inequality the like of which we have never seen before; we will see bad actors exploit the power of the machines available to them. Society will be very fractious, with conflict even greater than what we see today.

On the positive side, this will not be the end of the world. It will not see life on earth become an endless misery. We the humans will dig deep and fight back for something better, and we will somehow form alliances and cooperate for the greater good of society. This is not a rosy picture, as there needs to be darkness before the light shines bright again.

As a macro strategist, I am considering playing defence as much as possible. I am not necessarily suggesting the S&P 1500 Aerospace and Defence Industry; as you can see below, it is already very much a part of the endless growth scenario.

The next chart is what I foresee playing out for today’s major technology stocks enjoying AI ego inflation. The chart below shows how an index based on exciting future promises extrapolated to eternity behaves. You get an index that grows from 150 to 850 in a year and then crashes back to 120 a couple of years later.

S2N Observations

Boy I didn’t expect to come across as so bearish, but this is my honest assessment of how I see things playing out. I see two potential major threats from an excessive valuation perspective. The AI and crypto industries are in bubble territory. Residential property may be as well. The present is a time for conservative portfolios focused on asset protection and strong cash flows. Too many bubbles make for a very fragile environment.

I have so much more to say today, but I am going to stop, as I need to reflect on my current mindset; my thinking could be triggering circular loops of negativity. I am more than happy to get pushback if you disagree with my assessment.

S2N screener alert

Gold had a 6-sigma up day for the 19th time in 47 years. Remember, a normal distribution of returns would expect this to happen about once every 1.4 million years. I don’t know about you, but I don’t find too many things normal about the financial markets.

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