by Franklin J. Parker, CFA
The Summary
- So… the debt ceiling debate is still going on. Janet Yellen, US Treasury secretary, has warned that cash could run out as soon as June 1; Goldman Sachs suggests the drop-dead date is June 8. Predicting exactly when is tricky since the income/outflow of Treasury is lumpy. Progress is being made, and investors will continue to watch the negotiations with baited breath. As it stands, traders have bid up insurance policies that protect investors against bond defaults. The US is now more expensive to insure against a default than any other G7 country.
- This is a light data week (other than the debt ceiling negotiations). We see data on personal consumption expenditures, which is an important figure, both economically and to the Federal Reserve. We see orders for durable goods, which are expected to decline by 1% month-over-month, and consumer sentiment which is expected to continue declining.
- As I have repeatedly talked about, the economic news has been deteriorating — all except employment. Employment, and by extension the US consumer, has remained strong and is pretty much keeping the economy out of recession. Unemployment is typically the last domino to fall, however. There are a couple of other signals that tend to indicate when a recession is imminent, and those have not triggered just yet. With current market complacency, there is a great opportunity to lighten a portfolio’s risk load and/or hedge. Of course, your goals will determine what is an appropriate course of action.
The Details
Let’s talk AI, specifically how it may reshape our economy.
AI has been in the news quite a lot lately, with the roll-out of ChatGPT and Google’s Bard. While they have captured most of the attention, AI has also entered other historically human domains, such as art. Back in September, an AI-generated piece won first prize at the Colorado State Fair.
With AI tools becoming ubiquitous, and whether you love them or hate them, it is hard to deny that they are likely to make an impact on our economy. But how? And how can investors profit from this trend?
First of all, AI is, to me at least, a foundational technology, not too dissimilar from the internet. No one invests in “the internet,” we invest in companies that make use of the internet. So it is with AI — companies will emerge that leverage AI into new products/services and create efficiencies in old products/services. And, just like the internet revolution, it is very hard to see which company will be the big winner.
Second, there is no magic. Just like anything else, saying “AI” doesn’t magically make a company more valuable. How the company adds value to people’s lives is the relevant question with regard to AI, just as it has always been the relevant question in investing.
Finally, the disruption AI may bring will probably be offset by increasing standards of living — just as all technological tools have tended to do. The difference this time around is that many white-collar jobs are to be disrupted. The consequences for attorneys, accountants, copywriters, and (gasp) financial advisors is sure to be significant, and, thus, carry some political repercussions.
For investors to profit from the trend, the same critical questions need to be asked. And, finding the ultimate winners will be difficult, especially as the gold rush begins. In the end, there is plenty of money to be made, but a keen eye and a focus on investing basics will help keep investors away from the Pets.com of the AI age.
Chart of the Week
This week, the US officially began to spend more on interest payments than on the military — a milestone, to be sure. In that vein, this week’s chart looks at interest costs, but adjusted for GDP over time. As we can see, despite interest costs increasing considerably, the US actually spent more in the 1980s, at least as a percentage of her economy.
This is both good news and bad news. On the upside, we have been in this situation before and made it through okay. On the downside, we are clearly breaking from the norm, and that likely comes with consequences that we do not fully understand. The early 1980s were a painful time for lots of people. The next few years are going to require careful thought and diligence.
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