AI Integrations, Debunking, Fed Fights
Let’s start with the bright spots
NReal is an augmented reality glasses company from Beijing that’s reminiscent of the success of DJI, the dominant consumer drone company. NReal’s augmented reality glasses look like regular sunglasses, which makes them attractive for public use. The combination of NReal’s AR glasses, Amazon’s Alexa tools powered by AWS and a smartphone app allows deaf people to access live transcription of conversations right before their eyes. The software that makes this all happen is called XRai, and it can also be used for real-time language translation. This wouldn’t be possible without hundreds of billions of dollars invested in smartphone and AR hardware and software, cloud computing, edge computing, networking and app ecosystem developer tools. New technologies pave the path for new solutions and business models.
AI – The fastest path to the marginal dollar while providing real value
Many crypto enthusiasts have jumped to AI, and understandably so. Crypto is not dead, but it’s on hold for obvious reasons. Talented solo engineers and small teams are spinning up AI-powered applications left and right with great success, and so are large institutional players. Lensa.ai which makes the AI-generated profile pictures you’ve likely seen all over social media, went from negligible revenue in November to a peak of $2.5m per day in December. Money attracts talent at all levels.
Microsoft plans to roll out OpenAI tools to its MS Office suite of applications as well as Bing search. OpenAI is built on Microsoft’s Azure cloud platform, which provides a natural and obvious synergy between the two companies. If you haven’t tried ChatGPT you’re missing out. The important read of the day on this topic is Stratechery’s latest AI and the Big Five.
Prior to 2022 Meta(Facebook) had an incredible ad-targeting business until Apple killed access to individual user level targeting. This also killed the stock, for now. Meta has the biggest budget of all the social media companies to invest in probabilistic targeting models as a solution to not being able to track individual users. In other words, they don’t need Apple to track users, they are going to use AI to figure out the right content to deliver to the right person either way. That’s extremely valuable to advertisers who gladly spend when there is a high ROI.
With these three examples, it’s clear that AI will unlock tremendous value at an increasingly rapid pace.
Debunking a cynical anti-progress narrative
This week a few friends sent me articles on the Nature research paper about the reported decline in disruptive innovation. The paper is titled “Papers and patents are becoming less disruptive over time.” ********The articles written about it have provocative and misleading titles like “Major scientific breakthroughs have ground to a halt, study finds.” The study is being reported on incorrectly and it gives cynics permission to lean further into “declinist” narratives – narratives that hint at an all-consuming global decline.
What the study says is there is less disruptive science, meaning science that proves a previously held belief to be incorrect. It doesn’t mean we’re not making new breakthroughs or not making incremental forward progress. The paper is not the problem, the reporting on this paper is as good as clickbait. We might not be disproving previous research as often, but we are certainly creating new breakthroughs. Don’t take the bait!
The technology trends shaping the world and unlocking incredible value for consumers and businesses remain intact. It’s a necessary trend given demographic challenges globally. The challenge we’ve been collectively facing for the past year in markets is driven by the Fed, specifically the mantra “don’t fight the Fed.” The M2 money supply is still contracting – you can think about this as the opposite of money printing, it’s shrinking the supply of total dollars. If money printing leads to inflation, what does the opposite produce? The good news is that we’re close to the end of this rate hike saga. The Feb 1 meeting will likely bring a .25% hike, followed by another .25% on Mar 22. The Fed wants CPI (inflation) at or below 2%. Almost certainly, the Fed is going to wait too long to stop or cut rates. An important moment will be when the Fed rate is higher than the inflation rate, which is probably a few months away. This is the dominant force in capital markets globally so until something changes the breaks are still on just about everywhere.
Earning 4.5% risk-free while you wait for that to happen is an excellent option and I’m inclined to believe that most investors are taking that option today. The problem with that strategy is that it doesn’t last very long. When 4.5% falls below 3%, investors won’t be satisfied and will once again be forced to look elsewhere. These changes will be here sooner rather than later so it’s a great time to prepare for that turning point.
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