A key question that has to be addressed is whether generative artificial intelligence is a breakthrough technology – and the answer is obviously affirmative. But is it a major game changer on par with the internet, the personal computer, the microprocessing chip, electricity, the steam engine, the cotton gin or even the wheelbarrow?
The answer is a definitive no.
Advancements in AI technology, and its knock-on effects on profitability and productivity, is a legitimate investment thesis. But Microsoft’s expansion of its investment in ChatGPT back in January has kicked off an “arms race,” with mega-cap competitors quickly following suit in announcing their own plans. As a result, companies are now taking advantage of investors’ appetite for news on how management teams are utilizing (or planning to utilize) the technology – creating an environment that echoes the dot-com craze back in 2000.
It is hard to miss the “bubbly” feel of the price run-up that started at the beginning of the year – first with Microsoft and now spreading to Nvidia, Google and beyond. Indeed, Meta (parent company of Facebook) has stated it plans to launch a similar product later this year, while just recently Amazon said it is developing a “ChatGPT-style” product to use in the search function of its online store.
This AI arms race has spilled over to the broader market, with seemingly more and more companies issuing news releases on their plans to capitalize on the technology. In recent weeks we have seen Kraft Heinz play up its use of AI in boosting sales productivity and Wendy’s publish a press release stating it will revamp its drive-through process to incorporate the technology (the stock went on to outperform the broader S&P 500 by nearly one percentage point that day).
For investors wanting to look into this theme for their portfolios, caution is warranted at this time given the seemingly euphoric environment.
I actually have been bullish on the adoption of AI and robotics – broadly referred to as the “fourth industrial revolution” – for some time. Even this permabear is no Luddite. There is no doubt that advancements in these technologies will help drive efficiencies in all sectors, flowing into wider profit margins and corporate profitability.
But the type of corporate behaviour we are witnessing is eerily similar to what transpired at the peak of the dot-com bubble, when company after company satisfied investors’ appetite for news on how they planned to incorporate the internet into their business (or added “.com” to their name to boost stock values). So, while I am a believer in the long-term benefits of AI, from an investor standpoint, the current environment almost has the appearance of a mania.
The implications of this new inflection point in the technology curve will undoubtedly exert tremendous benefits for the economy (though likely perverse effects on society if not left unsupervised), by reducing corporate costs and enhancing productivity and operational efficiencies.
If you are of the view that we have headed into some sort of brand spanking new post-COVID-19 world of labour power and wage inflation, my advice would be to revisit this thesis. There is no denying that one side effect of generative AI becoming more ubiquitous is labour market displacement and potentially higher levels of unemployment on the horizon. On a more optimistic note, however, it should be noted that the internet sparked similar fears decades ago and actually ended up creating millions of jobs when all was said and done – though it is unlikely the path taken by AI will be as rosy.
The AI technology of today has much more acute labour displacement characteristics because we are talking about a generation of analysts in any profession, for example, being totally replaced. And the cost savings will be incredible.
The implications of generative AI on the labour market will be one of upheaval and one of escalating job uncertainty. In addition to the productivity benefits, there is nothing in theory or practice that should lead one to be believe enhanced technological innovation will lead to inflation. If history has taught us anything, this is it.
In terms of supply-side dynamics, if generative AI follows in the footsteps of the internet, human labour could be augmented by its implementation, paving the way for the creation of more high-skill/high-paying jobs. This would be a boon for potential GDP growth – disinflationary.
On the aggregate demand front, widespread labour replacement could lead to a wave of unemployment, depressing consumption spending in the process. Again, disinflationary.
David Rosenberg is founder of Rosenberg Research, and author of the daily economic report, Breakfast with Dave.
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David Rosenberg