A"I" am inevitable... and necessary
This week we discuss the necessity of AI, breakdown this crazy Nasdaq rally, and define value investing.
Dear Clients and Friends of Farrer Wealth Advisors, we are pleased to bring you the Farrer Wealth newsletter, which includes our latest blog posts, fun facts, and general articles we find interesting. Happy reading and happy investing!
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Latest Blog Post
A “I” am inevitable… and necessary
I’ve been thinking a lot about AI recently, and not just how it might affect our portfolio companies (which frankly – still seems unclear to me) but how it might affect the world at large. With any new ground-breaking technology, there is opportunity, wonder, fear, and possibility. Currently, the conversation about AI is centered around efficiency and how it will augment/replace white-collar workers. There is fear here about the inevitability of this. As any new technology has typically replaced some form of labour, I certainly understand this fear. But what if the evolution of AI is not just inevitable, but necessary?
Regular readers of this blog will know I’ve on several occasions commented on the fact that we have a significant population crisis on our hands, but not in the way most people think. It’s not overpopulation that is an issue, but rather, one of depopulation. Besides a few (and I mean few) countries in Africa, every country in the world is experiencing declining birth rates. The West has completely capitulated with most countries sporting birth rates far below the replacement rate of 2.1 (replacement rate is the number of children a woman needs to have on average to replace the population). Even countries like India have a birth-rate just shy of the replacement rate. China’s rate? 1.15.
This fundamentally means that some time in the future (projections are now somewhere between 2080-2100), we will start to see a global population decline. But note this is in aggregate, whereas countries such as Japan and several European countries are already in this mode.
Whenever I bring this issue up with people, the first question is inevitably “Well why is that a bad thing? We have too many people anyway.” To answer this, I always pose a thought experiment.
Imagine Thanos was successful. For those who don’t follow the Marvel cinematic universe he is a villain who almost wiped out 50% of the Earth’s population. You are one of the lucky ones and wake up the morning after “the blip” (the movie event where 50% of the population disappeared). Initially everything is fine, the sun is still shining, and birds are still chirping. You get yourself dressed for work, eat some breakfast, and then head out the door. It’s a bit quieter than normal, but with your headphones on, you barely notice. Then you get to your regular bus stop (or train station) and you discover people are more irate than usual. You ask someone what’s going on, and they exasperatedly reply that the buses are taking twice the normal time – something about half of all bus drivers not showing up for work that day. You find this strange, but assume it’s a strike, and do eventually get on a crowded bus that takes you to work. Work is routine, but you were expecting some replies from your team so you could finish that very important task, but most haven’t come through. You think perhaps there are an inordinate number of colleagues on holiday, just like during the Christmas week, so you shrug it off. Lunch time hits, you go to grab food at your local spot, but half the menu items aren’t available – the staff mentions that they didn’t get their supplies delivered this morning so couldn’t offer several of their fresh dishes. Weird you think – not only did I not get my favourite sandwich, but it took forever considering there was only one person working behind the counter. You go back to work and realize you can’t get much done as you’re waiting on some replies, so decide to call it early. You’re tired as you didn’t sleep well last night and decide to call a cab. Funny, prices are surging and you’re struggling to get a ride at all.
You wrap up your day with your usual dinner, TV, attempt to read that book you’ve had open for four months, and fall asleep. The next day continues much the same, again minor annoyances, but nothing so bad you can’t get through the day. The following day you decide to stop by the supermarket during lunch so you can have food for dinner, but as you get there you find shelves mostly empty. You ask an employee when they might get more supply and she throws her hands in the air and informs you that not only do their suppliers have no supply, but their supplier’s suppliers have no supply.
The week progresses with a certain set of panic setting in. By the end of the week, there are protests outside government offices as food shortages become more severe, hoarding goes into overdrive, and soon food supply is very limited. The government says they’ve secured food from a trading partner but are struggling to get them to the country/city as half the truck drivers/train operators/ship captains/pilots are gone.
You’re ok though as you’ve always had a survivalist mindset and have half your net worth in cup noodles. But as you’re at home at the end of the month your lights start to flicker, and then go out. The city is reporting wide-spread power shortages. Your grid is powered by coal and again with half the ships/trains running there is no supply. Even if they were running, there are not enough coal miners to meet the demand. In two months, electricity becomes a luxury. Eventually basic goods like toilet paper, soap, running water, etc all become scarce. Even if companies that produce/supply these products have the labour, demand has collapsed, making their unit economics unviable. Industries need to essentially restart with new fixed costs and unit economics, the economy generally comes to a halt. Inflation goes nuts as money is worthless, gold becomes standard, and the bitcoin on your hard drive can’t be accessed anymore. Even though the population has halved, supply is close to zero. War, famine, are all likely occurrences. Human existence has essentially regressed several centuries.
What I’m describing here is an extreme scenario – the depopulation bomb will not hit overnight. But similar trends will happen slowly over time (and then all at once). We’re already seeing these effects in Japan which has a crisis on its hands with an aging population, a swathe of generational shut-ins and a society that does not integrate immigrants well (if at all). The country is suffering from severe labour shortages.
The point here is whether we like it or not, AI is necessary. Clearly I am talking about AI in conjunction with robotics. Or rather, using AI to provide robots with adequate ‘vision’ and motion control to better understand their environment and adjust accordingly. Think, a robot bus driver who knows how to react when there is excessive traffic on the road (or an unruly passenger). Or a robot chef who is powered by AI can create new dishes to differentiate one restaurant from another.
Now some might think about this and say – well we could just have more kids. The problem with that though is even if we started pumping out babies now (and that’s a big if) most countries will see a few decades of gap where the amount of people leaving the labour force will far exceed those entering it. Further, unless we enter some sort of Handmaid’s Tale future, it’s almost impossible to implore younger generations to have more babies. A general negative outlook on the world, priority of work/enjoyment over children, environmental concerns, cost of living/schooling all play a factor. I’m neither saying all these concerns are valid nor am I saying we should blame millennials. I am saying however, we can for now forget about ‘organic’ repopulation.
Advances in AI will cause several problems, but also have the possibility to solve just as many. Assuming AI is not Thanos in disguise (and turns against us) its potential is quite mind boggling. Development has been rapid, but it needs to continue this pace should we need to stave off the inevitable labour shortage most countries will face.
Btw... none of the above is a recommendation to buy Nvdia’s stock 😉
Thanks for reading, and happy investing - Pratyush
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Farrer Fun Fact
Lopsided-Rally This chart is a bit dated (as of end of March) but based on the recent rallies in mega-caps this disparity has only gotten worse. The top 10 stocks are responsible for almost all the gains in the Nasdaq this year (source). In fact, if we look at the equal-weighted returns of most major indices, they are all negative as of Friday (source).
Links of the Week
Asian Century Stocks had this great thought-piece on how value investing is essentially long-term front-running. One of the clearest descriptions of the strategy behind value investing I’ve read in a while.
This post was a efficient (and fun) summary of the wisdom dolled out at previous Berkshire AGM’s using quotes from Munger and Buffett.
A succinct infographic on what drives stock prices over various time periods.
Seems like Nvidia sneakily filed to raise up to $10bn in capital late Friday evening. If this goes ahead (its just a shelf-registration so they may not take action) it might be one of the greatest ninja corporate moves we’ve seen in a while.
Sam Zell passed away recently. He will be remembered as one of the greatest real estate investors of our time. He wrote a piece in 1982 about distressed real estate investing called “The Grave Dancer” - you can read it here.