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We’ve had an economic boom in the US over the past 18 months. The boom has been fueled by investment, in AI obviously, but also in manufacturing and infrastructure. Additionally, deferred budgetary spending at the state and local government level has added to the strength of the economy.The capital fueling the investment boom is primarily from government borrowing during the pandemic that accumulated as excess private savings post-pandemic. There is also foreign capital flowing into the US, as evidenced by a strong Dollar. Some of the capital coming in is foreign direct investment and some is the re-shoring of capital by domestic companies.There are 3 characteristics observable in most economic booms and we have all 3 today. First is technological advances (AI). Second is asset price appreciation (Nasdaq, cryptocurrencies, and to a certain extent residential real estate). Third is capital investment (debt raised at the federal level, reshoring, foreign capital flows). I’m sure there is some leverage leaking into the system from appreciated assets, but this seems tame today relative to past economic booms.Some notable periods of past game-changing economic advances are global trade: (1720’s—South Sea Company), railroads (1840’s UK, 1880’s US), assembly lines (1910’s US), internet (late1990’s), AI (2023-present).Some notable periods of asset appreciation, which can fuel economic booms through leveraged investment and malinvestment: Tulips (1630’s), real estate (1920’s, 1980’s, 2002-2008), Japanese assets (1980’s), oil (Kuwait 1980’s), cryptocurrencies (2016-2024), Nasdaq (1997-2001, 2023-present).The economic activity involved in the buildout of new technological advancements is huge. Asset appreciation that coincides with this investment can be leveraged to fuel market advances, which tend to become extended. But, if these are truly game-changing economic advances, they should prove to be deflationary in the long run.
Where We Stand
Companies are paying billions to a select group of companies for products such as chips. Firms are building new data centers and infrastructure to run AI. At the same time, you have companies onshoring or relocating manufacturing to de-risk supply chains as China’s competitive advantage in wages has all but disappeared. This investment has been large and persistent.In the lifecycle of new technology adoption, crude hardware acquisition comes first to create the means to participate in the new advancement. In the case of the dot com boom, it was in the form of servers, fiber optics, and other hardware. In the case of AI, we see this in (obviously) Nvidia’s chips (and others to a lesser degree) and data centers (servers from SMCI, HP). We believe that we are at or near peak valuations for some of the companies involved in selling the hardware and hard goods accompanying this boom. Next will come implementation, support and optimization. We have allocated some capital and are still researching companies that will get paid to implement, formalize and measure the results of AI projects. We are also allocating capital (where it makes sense) to companies that we believe will reap the greatest gains from successfully integrating AI to drive revenue growth and/or margin expansion.In the short run, the economic activity surrounding acquisition of AI technologies coupled with infrastructure investment is causing scarcity of materials (ex: copper) and workers at a time of already low unemployment (Item IV below). But, in the the longer run, the incorporation of AI processes should reduce the demand for labor while also increasing the efficiency of resource extraction, whether here on earth or, potentially, in space (asteroid mining). This has the potential to create abundance where scarcity now exists and is why AI should ultimately prove deflationary. That is exactly what we should expect – and have seen in the past – from technological innovation. The current frenzy of investment in this new economy is paying dividends to a narrow slice of the economy but its successful implementation and optimization should spread the benefits more widely. As the initial surge of investment subsides, there is also the potential for a bust among today’s boom beneficiaries. Cisco, a major beneficiary of the initial buildout of the internet, still trades for a price less than its peak in early 2000. Meanwhile, the stock of Amazon, a major beneficiary of the buildout, is up a mere 5000% since 2000. Cui bono? is a question with many answers, the current winners barely scratching the surface.We are respectful of the recent positive market appreciation correlating to the investment boom we are having. The leverage in the system is mostly on the balance sheet of the federal government. But we are also wary that these type of economic environments tend to coincide with valuations that can look silly in hindsight. As asset valuations appear extended and immediacy is the flavor of the day, we must remember, “nature does not hurry, yet everything is accomplished.”Secular Themes:I. Deglobalization and rewiring of global commerce
II. Decarbonization and the transition to clean energy
III. Rapid technology diffusion across sectors
IV. Shift from abundance to scarcity
V. Rise of state-sponsored capitalism and fiscal dominance
We believe an analysis such as this can be useful for investors but there are inherent limitations in trying to extrapolate current trends far into the future. Having been through a number of technological paradigm shifts in our lifetimes, we know that they rarely evolve in a predictable fashion and this latest one will be no different. In the case of AI, we believe that merely digesting the changes to date will likely have a dramatic impact on the global economy, but there will be surprises, negative and positive, along the way. This is a trip to an unknown destination on a road still under construction and we expect a lot of “recalculating” along the way. Stay tuned.More By This Author:Buying Gold To Protect From Falling Dollar Gold Signaling Dollar WeaknessQ3 Cyclical Outlook
