Client Portals

Week 8: When Policies Act Like Taxes, Introducing AI, and NFTs4 min read

Feb 24, 2022 - Max Osbon ( 6 mins to read)

Briefing: Covid policies act as an additional tax on the global economy. Reducing restrictions should reduce the inflation print, which is vital to the Fed’s raising rates. | AI is now helping to advance Fusion energy development. | NFTs are polarizing.

When policy acts as a tax

I can’t remember a time in the last ten years when there wasn’t a solid rational reason for public market investors to be fearful. Every quarter there is at least one existential crisis for investors to stomach. Ukraine is the latest topic-du-jour. It’s not that it’s not a severe issue (it is), but it also doesn’t compare to what we faced in March 2020. With the onset of COVID, we shut down every facet of society for the first time in modern history and had little to no information on the potential health impact. Two years later, we are dealing with the emotional, physical and financial after effects, but the worst is clearly behind us.

Markets today move faster than ever in both directions, and this latest correction has been particularly nasty, but there are so many reasons to be optimistic. Why is it reasonable to be optimistic? Today, the US market has a Price to Earnings ratio of 16x, the same as ten years ago. Over those ten years, total earnings more than doubled from $800B to $1.9T, indicating reasonable growth and advancement in the face of persistent challenge.

Of the higher valuation sectors, application software is now at nearly the same valuation (35 PE) as the lowest point in the March 2020 crash. Revenues are 55% higher, while earnings are lower. Earnings could be lower due to a higher cost of doing business or due to reinvestments that further growth. Most people would agree that it’s the latter, but it doesn’t matter right now because this market rewards current earnings results above all else, which is both reasonable and fair. If software CEOs wanted to juice their stock prices in the short term, they would cut reinvestment to increase earnings, with detrimental long-term effects. We want long-term-oriented management teams even when it introduces volatility.

All eyes are on the Fed’s policy. Currently, the futures market is pricing in seven to eight .25% rate hikes over the next year. The last time we added eight rate hikes, it took 4+ years from 2015 to 2019, and we started cutting them again just one year later. A rate hike is like a tax in that the cost of capital increases, reducing earnings. Higher oil and commodity prices are like a tax, increasing the cost of doing business. Policy also works as a tax, increasing the cost of remaining compliant in the face of ever-changing requirements. Rate hikes, commodity price increases (inflation), and excessive Covid policy are heavy burdens on the economy at the moment. Ukraine is undoubtedly an important issue, but it’s not responsible for the market correction. Look for markets to rebound as COVID restrictions are eased heading in Spring, reducing at least one direct significant burden. Given the faster pace of the market today, the rebound could be equally dramatic.

Introducing AI

Deepmind successfully optimized voltage delivered to magnets inside an experimental fusion reactor using reinforced learning AI techniques. In this case, the voltage is adjusted thousands of times per second to prevent suspended plasma from touching the tokamak walls. Fusion will revolutionize the world once it’s solved, but it’s still very much in the experimental stage.

AI is a new tool like the invention of the railroad, lightbulb or transistor. By applying new AI to old problems (we’ve been working on Fusion for 100+ years), we can unlock new levels of progress. AI may result in a step-change in our current innovation cycle, quickly unlocking technology and efficiency previously considered unreasonable or decades out of reach. The pace is certainly picking up. While the Ukraine conflict dominates headlines, AI tech continues to march forward. Don’t get too distracted while the world’s brilliant minds continue to innovate and break new barriers.

NFTs are polarizing, and they are here to stay

Some people are getting upset about NFTs. The first NFT vending machine opened in NYC just as hundreds of workers at Salesforce threatened to quit over the company’s new NFT initiative. NFTs have been a remarkably successful creative outlet for artists. One of the most innovative and successful contemporary artists in the world right now is Pak, who received $91.8m for his NFTs sold to 28,000 buyers in December. Pak’s NFTs are dots that automatically merge when you own more than one. The largest dot is labeled the “alpha.” Musician Steve Aoki recently said he made more from his NFT drop last year than what record labels paid him to produce six albums over the past ten years.

Successful people are naturally competitive, especially in the finance world. Many people are upset about the environmental impact of NFTs, and then there are the competitive people who are just plain upset at the financial success of this new sector that sprung out of nowhere last year. The list of fair arguments against NFTs is extensive, but it has been a remarkably creative and persistent growth engine that has effectively pushed the status quo.

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