Only human

The next few months are important for a range of reasons. By Christmas, we’ll know whom the next US President will be for a start. We should also have a significantly better grasp on where generative AI is heading next, and whether payback for the giant outlays on data centre and other related infrastructure is realistic. We might even have a better grasp on whether we can finally stop talking about soft/hard landings for the economy.

Soft landing

There continues to be much debate about the health of the US economy. Incoming economic data, including the latest revisions, point in several different directions. The various data on jobs are always noisy, with last year’s immigration surge helping to make them particularly so at the moment. As usual, too much analytical weight is being loaded on data unable to bear the strain.

Elsewhere, the mosaic of data and newsflow is most plausibly organised into a broadly positive outlook for growth and inflation. Jobs growth does look to be slowing and manufacturing remains in the doldrums. However, the positives column is weightier and longer. The private sector is in good health and productivity statistics are arguing increasingly forcefully that we are in a very different world to pre-2020.

The latest on generative AI

Generative AI remains the story of the moment in markets. From the mostly superficial parallels with the last major technology bubble, to the familiar worries about imminent human obsolescence, large language models are rarely out of the news.

Quivering market prices mostly reflect the many barriers to objective analysis on a topic so big and so fast moving. The major US companies are already planning for generative AI to be transformative and are investing in the necessary data centre and wider infrastructure accordingly. Some are openly wondering how on earth such giant outlays can realistically generate a return.

If past is prologue, the gains may not accrue to those expensively paving the way, but rather to ‘free riders’ further down the track, able to take advantage of where this new technology can take us (Figure 1).

Figure 1: US RoE looks elevated compared to the World ex-US

Source: FactSet, Barclays

As for where that might be, the answer remains highly uncertain. As one industry CEO has recently pointed out, while the scaling laws still hold, the sky is literally the limit. There are concerns for sure. Around half of the world already carries a supercomputer around in their pocket, with this stellar capability mostly used to spew bile at each other. The addition of a Nobel prize winning AI to those pockets doesn’t have to end well.

Moreover, there are justifiable worries about mass unemployment as technology marauds ever further into areas of long-term human monopoly. There may be some answer though in the growing dissatisfaction with VFX-heavy films. The fact that we can now relatively realistically depict various monsters, aliens, and superheroes trampling cities and planets has been flogged hard over the last couple of decades. However, are the beginnings of a backlash suggesting that we are looking for something else?

Generative AI has produced some startling results in the art and literature spheres. However, something may be missing. Why do we travel in such numbers to see paintings or other artworks? There is surely something beyond the bland aesthetic. The same is often true of films, books and the wider arts.

Yes, much is mimicable, but would it speak to us as eloquently about aspects of the human condition if it were a function of a machine? Perhaps, but as machines reach further into our comparative advantages as humans, it is possible that they help us locate what it is about each other that is so unique, and what remains as such.

Our ability to relate to each other, to find common ground through shared experience, good and bad, is one important part of what sets us apart. That also suggests that we want to spend as much time doing, seeing, and reading interesting stuff as possible.

Investment conclusion

In order to allow you the freedom to pursue such interesting and fulfilling lives, we feel strongly that you should try and ignore the daily hurly burly of capital markets as much as possible. We have teams of tragics eager to do that on your behalf. Others offer similar of course.

The most important lesson from the above, and indeed the important quarter ahead, is diversification. The future can extend in many different ways from this point in time. Most should yield inflation-beating returns for a well-diversified investor. Some will involve hair loss and sleepless nights for those watching closely. We would save you the trouble.