Hikes, Productivity, Leaps

December 14, 2022 - Max Osbon (4 mins to read)

Rate Hikes

The Fed is doing exactly what it said it would do: raising interest rates rapidly to get inflation under control. This week’s 50 basis point hike brings us to 4.5%, the fastest rate hike in modern history.

Notably, the futures market says this could be the final rate hike, with now just an outside chance of reaching a 5% interest rate. Powell said in his statement this week that rate cuts are off the table in 2023, but the futures market expects them as early as Sept 2023. If the unpredictability of 2022 is any guide, Powell’s comments on what they will or will not do by the end of 2023 are unreliable at best.

In the meantime, treasuries are paying a risk-free 4.5% which is a meaningful expense for the US Government. Of course, the priority is to beat inflation, but keeping rates high was never part of the US gov budget forecast and will be increasingly difficult to maintain. The WSJ had an article that estimated US savers are leaving nearly $42b per quarter on the table by not moving into higher-yielding treasury assets. Savings accounts at major banks pay almost no interest and most people are used to that. People are not familiar with TBills because, except for a brief period in 2018, they haven’t been relevant for over a decade. That unfamiliarity is resulting in a missed opportunity for many.

 

Productivity acceleration via AI

GDP and economic growth are a function of population and productivity growth. With population growth much lower than in previous decades due to declining birth rates and unfavorable immigration policy, there is more pressure on productivity to pick up the slack.

We’ve mentioned in the past how robotics innovations will help with productivity gains. Today the biggest productivity boost is coming from generative AI tools like ChatGPT.

It’s true that ChatGPT has many shortcomings and produces confidently incorrect results more often than not. However, models will improve over time, as they already have. In certain areas, AI will likely become a top performer. ChatGPT has already passed entry level AWS engineering tests and practice bar exams. Google’s DeepMind recently placed in the top 50% in the Codeforces coding competition. It’s still early, but AI performance achievements are stacking up.

Companies and people don’t change unless or until they are forced to, so there will have to be real economic pressure for incumbents to move AI from curiosity to core function. The next crop of companies will leverage AI tools in as many areas as possible to gain an edge.

This field is ready to move extremely fast and AI-based productivity tools are clearly a theme to watch in 2023. Leading VC firm NFX uses a FAST funding framework that invests in generative AI companies within 9 days of applying and delivers the money within three weeks. Examples of productivity improvements will come from: writing, editing, formatting, app design, website design, architecture, emailing, coding, debugging, client service, generating reports, powerpoint, running analysis, creating sales emails and so on. The FT recently wrote about how ChatGPT “can probably already write the routine earnings preview and review as well as many sellside analysts”

This is an improvement across the board and feels similar to our leap into early computers.

 

Some Other Leaps Forward

Solar. A team at MIT made a thin printable solar panel fabric, capable of producing 370 watts-per-kilogram, 18x more efficient by weight than conventional solar cells. Energy always boils down to cost, but since most solar panels are produced in China, shipping costs would be improved dramatically.

Fusion. There are currently 59 operational fusion experiments globally. One of them, the National Ignition Facility in California, achieved a net energy gain from a fusion reaction for the first time in history. It’s the first time a fusion experiment has produced power. At some point, we start producing useful fusion energy and the timeline keeps accelerating. In 2017 that expectation was 30+ years away, and now it’s within 10 years.

Blockchains. Goldman Sachs CEO David Solomon wrote an op-ed about blockchains for the WSJ titled, “Blockchain Is Much More Than Crypto.” He used an example of how they arranged a €100 million bond transaction on their private blockchain. Typically that transaction would take five days to settle and instead took 60 seconds. Also, SBF is finally in jail, which thankfully indicates that our justice system is operational.

2022 has been one of the worst investment years on record, but meaningful progress continues to march forward on a regular basis. That progress compounds and many attractive opportunities lie ahead. Many of those opportunities will directly benefit from these daily and weekly leaps forward.

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