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!
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