What if AI Ends Up Being a Nothingburger?

What if AI DOESN'T Revolutionize the World?

Artificial intelligence could revolutionize the economy and give us the greatest productivity boost since the onset of the Industrial Revolution. It could automate broad swaths of the economy and free up humans to do more fulfilling work.

On the downside, it could also lead to massive unemployment and create the greatest gulf between rich and poor since the feudal age.

But what if it doesn’t actually do any of that.

What if AI ends up being a massive nothingburger that doesn’t revolutionize the economy?

What if it’s a dud?

I pondered this recently when I asked ChatGPT to do a simply time value of money calculation and it whiffed. And it seems I’m not the only one asking these questions.

Per Bloomberg:

Nobel Prize-winning economist Daron Acemoglu’s worst fear isn’t a future where artificial intelligence has taken over everyone’s jobs. AI that powerful may be unnerving, but at least it would uncork a tremendous amount of productivity. No, what Acemoglu finds truly terrifying is a future full of “so-so automation”: the kind that does allow companies to cut jobs but doesn’t deliver any real productivity boost. The tools are OK (at best) but never great — think self-checkout kiosks or automated customer service phone menus…

If AI performance were to stall now, we might be left with bots that are just good enough to encourage business leaders to settle for so-so automation rather than genuine innovation.

I sincerely hope that AI ends up being more than the equivalent of the self-service kiosk at the grocery store. But the comparison isn’t completely off the mark. Grocery stores still employ cashiers. They just employ fewer than they used to. And the experience of shopping for groceries isn’t materially different. The lines might (in theory) move a little faster. But it’s hardly a revolutionary transformation.

With AI in its current form, a law firm might hire a few less paralegals or entry-level associates. And legal research should definitely be faster now. But is this revolutionary? Or simply evolutionary like the self-service kiosk?

That’s harder to say.

Why Does This Matter?

Here’s the problem.

If AI isn’t the productivity miracle it’s hyped up to be, then we have a future of stagflation to look forward to.

Remember, the United States working age population is projected to grow at a paltry 0.3% per year over the next 10 years. And those Census projections were made in 2024, before immigration went into sharp reversal.

This means there isn’t a wave of young workers coming down the pipeline. They don’t exist. They were never born. And they won’t be available to reply to “help wanted” signs in shop windows.

There’s only three ways to grow an economy. You can throw labor at it, you can throw capital at it, or you can squeeze more productivity out of your existing capital and labor.

Well, the bump in labor isn’t coming. And capital spending involves spending money that, as a country $37 trillion in debt, we likely don’t have.

That leaves productivity. If we want meaningful GDP growth, we need an AI-fueled productivity revolution. If that’s not coming, then we have a future of slow growth and a perpetual labor shortage that fuels inflation.

Will AI Fuel Profits?

It remains to be seen how truly transformative AI will be in the broader economy. I’m optimistic, but the jury is still out.

Let’s get more granular and talk profits.

The AI economy is minting money right now. But as I discussed last week, it’s also mostly circular. The largest tech companies are all essentially buying hardware, software and processing compute from each other in a closed loop.

It’s wildly profitable. But we’ll see how long it’s sustainable. This bubble may still have months or even years left to run. Or we may look back a year from now and realize it peaked today.

But outside of the loop, it’s not entirely clear that many companies are really benefitting. A study by MIT found that 95% of companies implementing AI had failed to see meaningful financial results. It’s even less clear how durable any competitive advantage from AI will be from the 5% of the companies that.

Think about it.

High profit margins are extraordinarily hard to sustain over the long term in a competitive capitalist economy. If Walmart adopts some amazing cost-cutting strategy to get an advantage over Amazon or Target, it’s only a matter of time until they copy it and the advantage dissipates. If Ford has some incredible engineering breakthrough, General Motors and Toyota will inevitably copy it.

This competition is good for the consumer, of course, as it drives prices lower and boosts quality. It’s the “invisible hand” Adam Smith wrote about. But any investor expecting AI to lead to permanently higher profit margins will almost certainly be disappointed. If anything, competitive pressure from AI will likely reduce profit margins by commoditizing more and more business.

That matters when the S&P 500 is priced at a nosebleed valuation of 30 times earnings and 3.4 times sales. The market is priced for a profit miracle. And it’s generally a poor idea to invest hoping for a miracle.

I realize I sound exceptionally bearish here. I should be clear that I actually am a believer in AI and that I use it almost daily. And I’m genuinely excited about the possibilities for self-driving vehicles and other innovations.

But then I see Palantir (PLTR) trading at 584 times earnings and 137 times sales and I realize investors have collectively lost their minds and this is destined to end extraordinarily badly.

So… what do you do about it? Sell everything and hide in a bunker in Idaho?

That’s generally a terrible idea. But I would recommend dialing back the risk a little. Keep a little extra cash on hand, and hold on to non-market hedges like gold. And be willing to keep at least part of your portfolio in shorter-term active strategies.

And speaking of your investments…

If you’d like for me to take a look at your portfolio and give you a second set of eyes on it, please reach out. We may be able to reduce your portfolio’s risk and give you some real diversification.