AI 2023, Automation, Rates

December 21, 2022 - Max Osbon (3 mins to read)

Rates

The driving forces of this market boil down to a handful of factors we’ve been tracking all year. Short-term rates are now 4.5%, up from .25% in February 2022, meaning you can earn 3.5%-4.5% on your cash alone. Higher rates make risk assets like equities far less attractive. Why risk anything when you can earn 4% guaranteed? The problem is that high rates won’t last forever, and it’s probably headed toward 2% or below within the next few years. Falling rates are a positive catalyst for equities.

The median US home price has dropped to a 1% annualized growth rate, down from +14% in June 2022 and +24% in May 2021. That should go into negative territory next year. With no changes from here, we’re already down -9% from the peak. Lagging shelter costs are a significant inflation holdout driving the Fed’s rate decisions. Inflation is heading in the right direction in all major categories.

Being out of the market risks missing a significant upward market move, but for many, 4% on cash is a nice return while we wait for healthier economic signals. As for risk management, when you use a liabilities based risk framework, you ensure you will not run into the forced sale of assets during market lows. The end of the rate hikes is coming up.

 

AI in 2023

Carrying over into 2023, I expect AI to be the major theme for the year. DallE-2’s generative image tool was announced in April, followed by rapid iterations produced by dozens of providers. ChatGPT was released just last month and, despite obvious shortcomings, is a glimpse at a revolutionary tool. The hype around AI is making many people reflexively cynical, which is understandable given its obvious flaws.

The neat thing about these generative AI tools is simply that they work better than they should. This is a classic example of emergence: novel and complex behavior arising from the interactions of simple elements. I’d argue that the tools are ready for prime time essential office work but have not been rolled out yet. Very soon, these AI-based tools will become incredible productivity enhancers to nearly every industry. They are perfect for non-critical rote tasks that take up a lot of time – which is a lot of the business world in general. A manager or employee can oversee results produced by generative AI to double-check the work, just like a lawyer does with a paralegal.

 

Robotics in 2023

Robotics are another productivity enhancement tool in 2023. As labor and skills shortages persist the incentives to implement robotics increases. At the same time, robotics performance, sophistication, ease of use and cost are improving at a dramatic rate. Since 2015, we’ve doubled the annual number of industrial robotics installations from 254k to 517k. While the global population growth has slowed dramatically, industrial robotic population growth is approaching its parabolic phase. From robotics to cars to data centers to networking equipment we’ll need a lot of advanced semiconductors to power the near future.

Have a joyous and restorative holiday season – from the Osbon Capital team!

Previous:

Next:

Weekly Insights

delivered to your inbox

DISCLAIMER

This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”

“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.

Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.

Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.

This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.

While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.

Adviser does not endorse the statements, services or performance of any third-party vendor.

Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.

Any IPO alerts are purely informational and should not be construed as recommendations to invest.

Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.

Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.

Weekly Articles by Osbon Capital Management: