Economic Theory
AI could be as transformative as the Agricultural or Industrial Revolutions. However, the fact that you are reading these words at the dawn of the AI age hints at a darker possibility, which is that AI will lead to humanity's demise. Fortunately, the most straightforward interpretation of quantum mechanics suggest you will only be conscious in those timelines where the world survives.
Most of the increase in S&P 500 earnings estimates this year has stemmed from shortages. The oil shortage, which has pushed up estimates for energy companies, will fade once the military conflict is resolved. However, the shortage of semiconductors and other AI paraphernalia could persist for a while longer. As such, we are moving our recommended 12-month equity allocation from a slight underweight to neutral. We are already neutral on a 3-month horizon.
Tech companies have historically generated profits from three main sources: 1) economies of scale; 2) network effects; and 3) proprietary technologies. AI threatens to undercut all three sources.
The neutral rate in the US is being propped up by a variety of forces that are at risk of reversing. These include the AI capex boom, large budget deficits, and the extraordinarily high level of household wealth. As such, interest rates are likely to surprise to the downside over the next few years.
The fact that the US economy has been slower to deteriorate than in past cycles is entirely consistent with our kinked Phillips curve framework. We will be looking to our MacroQuant model for guidance on when to turn fully defensive.
Provided that humanity can overcome the existential risks posed by AI, real incomes will rise. Although most workers will ultimately gain from the transition to an AI-dominated economy, the biggest winners will be those who control the land and the natural resources beneath it.
