Singularity... or Extinction?
Apparently the Fed believes there is a non-zero chance AI kills us all
Special announcement: I’ll be giving a presentation on Thursday with my partner and co-manager in the Blue Orbit Capital Fund, Mario Randholm: “Double, Double Toil and and Trouble… Are We In An AI Bubble?”
We’ll be covering signs that the AI bubble is reaching its climax and explain how we’re positioning ourselves to profit from the blow-off top while also protecting from the inevitable fallout. Registration is free. See you on Thursday!
Singularity... or Extinction?
According to Mark A. Wynne and Lillian Derr, researchers at the Federal Reserve Bank of Dallas, AI will radically transform the economy and create virtually infinite wealth.
Or it will mildly bump GDP growth by 0.2% per year.
Or the technology goes rogue and kills us all, like something out of The Terminator.
Awesome. Thanks for clearing that up!
If you have nothing to do this morning, you can read the full report here. But I’ll save you the headache and give you the highlights.:
Artificial intelligence (AI), like many technologies before it, offers the potential to improve people’s living standards. Such advances can be approximated by changes in gross domestic product (GDP) per capita over time—the rate of change in the amount of output per person.
Chart 1 shows GDP per capita from 1870 to 2024 along with scenarios, some of them extreme, depicting what could happen to living standards between now and 2050.
What is remarkable over this 150-year-plus period is the relatively steady increase in living standards over time… U.S. GDP per capita has advanced at an annual rate of approximately 1.9 percent a year, despite two world wars, the Great Depression, the Great Recession and major technological advances (such as electrification, the internal combustion engine and computerization) that were viewed as at least as important in their day as the advent of AI is today…
Under one view of the likely impact of AI, the future will look similar to the past, and AI is just the latest technology to come along that will keep living standards improving at their historical rate. (Emphasis mine - CLS) With this expectation, living standards over the next quarter century will follow something close to the orange line in Chart 1, extending past 2024.
However, discussions about AI sometimes include more extreme scenarios associated with the concept of the technological singularity. Technological singularity refers to a scenario in which AI eventually surpasses human intelligence, leading to rapid and unpredictable changes to the economy and society. Under a benign version of this scenario, machines get smarter at a rapidly increasing rate, eventually gaining the ability to produce everything, leading to a world in which the fundamental economic problem, scarcity, is solved. Under this scenario, the future could look something like the (hypothetical) red line in Chart 1.
Under a less benign version of this scenario, machine intelligence overtakes human intelligence at some finite point in the near future, the machines become malevolent, and this eventually leads to human extinction.
Wynne and Derr aren’t crackpots or sci-fi doomsdayers. They don’t believe it’s all that likely that AI creates utopia or that it leads to the destruction of the human race. Their most-likely scenario is that AI boosts productivity and adds a couple thousand dollars to per capital GDP (we all get a couple thousand dollars richer, but we’re not exactly living like royalty.)
I agree.
I wrote as much earlier this month in What If AI Ends Up Being a Nothingburger.
I use AI almost daily. It saves me time and money. I can translate complex things into Spanish without having to bother my wife to help me with the grammar. It really does make me more productive.
But has it revolutionized my life?
No.
And I am under no illusions that I’m going to be living the life of a Roman Emperor with AI-powered robots fanning me with palm branches and feeding me grapes while other AI-powered robots run my business affairs for me. That’s laughably absurd.
It’s also laughably absurd that investors continue to bid up the share prices of AI stocks given that there is no compelling proof that any of the trillions of dollars being invested will ever translate into actual profits.
Remember, technology is democratizing. It has a way of breaking down traditional monopolies and punishing rent-seeking behavior. Once the technological cat is out of the bag, it can be copied. OpenAI can spend a trillion dollars building the latest iteration of ChatGPT… and then the next DeepSeek can come out of China and copy it for a fraction of the cost.
I don’t know how any tech company will be able to sustain high margins in the AI era given that their innovations can be quickly cloned or replicated. Why would you buy a subscription to Duolingo to learn a language if you could use ChatGPT to replicate it for free?
This doesn’t mean that the tech behemoths go out of business. But it does suggest that their crazy-high profit margins will get chopped down to something that looks a lot more like legacy brick-and-mortar businesses.
Great.
AI stocks are in a bubble, and that bubble is destined to end badly. When do we pull the ripcord and get out of tech stocks?
That’s a far harder question to answer. It’s worth noting that former Fed Chair Alan Greenspan correctly noted that the stock market was showing “irrational exuberance” as early as December 1996. The dot-com bubble didn’t hit its eventual peak until the first quarter of 2000. And even though the S&P 500 fell by nearly half, at its 2002 bottom it was still (marginally) above the “irrationally exuberant” price that Greenspan noted in 1996.
I want to continue riding this bubble as long as I can. But I also want to protect myself from the inevitable collapse when it happens. So… what do we do? How do we have our cake and eat it too?
Diversify. I realize this sounds like the kind of cheesy, generic “advice” you’d get off of a glossy brochure handed out by an Edward Jones advisor. But it’s the only real move here. Dial back your stock exposure to something like 50%-60%. Keep most of the rest in cash or short-term bonds. And be willing to actively rebalance after major moves. (I covered this in more detail in my Model 401(k) Allocation.)
Again, I don’t expect the market to crash tomorrow (although let me be clear, it’s clearly possible and all it would take would be a negative announcement from Open AI or Nvidia to make it happen). My best guess is that we still have at least several more months before the bull market runs out of gas. But you want to get ahead of it, and the best way to do that is to simply dial back your risk a little.
Speaking of that… If you’d like a second set of eyes on your portfolio, please contact my office. I’m happy to give you a no-strings-attached portfolio review.
To good investing,
Charles Sizemore